VGAS.L Regulatory News (VGAS)

17 September 2013

Volga Gas plc

('Volga Gas' or 'the Company' or 'the Group')

RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2013

Volga Gas, the oil and gas exploration and production group operating in the Volga Region of Russia, is pleased to announce its results for the six months ended 30 June 2013.

HIGHLIGHTS

FINANCIAL

· Revenues increased by 15.8% to US$15.4 million (H1 2012: US$13.3 million).

· EBITDA up 32.6% to US$5.7 million (H1 2012: US$4.3 million).

· Profit before tax of US$4.3 million (H1 2012: loss before tax of US$5.0 million)

· Net profit of US$3.4 million (H1 2012: net loss of US$5.6 million).

· Net cash flow from operations before working capital movements of US$6.4 million (H1 2012: US$2.8 million).

· Cash at 30 June 2013 of US$4.8 million (US$7.0 million at 31 December 2012) and debt outstanding as at 30 June 2013 of US$4.8 million (US$8.0 million at 31 December 2012).

OIL, GAS AND CONDENSATE PRODUCTION

· Group production increased 28.1% to average 2,550 barrels of oil equivalent per day ("boepd") in H1 2013 (H1 2012: 1,990 boepd).

· Production is currently averaging 3,263 boepd.

· Steady production from five wells, three on the Vostochny Makarovskoye ("VM") field and two on the Dobrinskoye field during H1 2013, limited by permitted process plant capacity.

· Successful workover of the VM #1 well during H1 2013, increasing production capacity from that well alone to over 2,647 boepd.

· Estimate total Group production capacity from existing wells at 20 million cubic feet per day ("mmcf/d") of gas and 2,000 barrels per day ("bpd") of oil and condensate - a total of 5,300 boepd.

DOBRINSKOYE GAS PLANT

· Upgrade work to increase capacity is close to completion.

· Application to operate at the higher rates has been submitted.

· Significant savings on chemical consumables anticipated from recent successful trials.

UZENSKOYE OIL FIELD

· Average production during H1 2013 was 752 barrels of oil per day ("bopd") (H1 2012: 939 bopd) with increased weather related disruption during March and April 2013.

· Production has been choked back to prevent water cut, pending installation of water separation equipment.

UROZHAINOYE 2 LICENCE AREA

· Commenced production from the Sobolevskaya well in June 2013 and currently producing at 150 bopd.

Mikhail Ivanov, Chief Executive Officer of Volga Gas, said:

"Following completion of the first phases of the gas plant upgrade in October 2012, Volga Gas has achieved its initial aim of having its three main fields on full time production. We have added further production capacity with successful well recompletions and have brought additional, albeit modest, oil production on stream at Sobolevskoye.

"The remaining stages of the plant upgrade are close to completion, and pending receipt of the necessary authorization, we expect to more than double gas and condensate production from our existing wells. This would take the Group's total production to over 4,000 boepd. Once we have achieved the increased gas plant capacity, we plan to undertake further development drilling on the VM field with the aim of making full utilization of the higher capacity and to achieve a medium term target of over 7,000 boepd.

"In addition, we plan further exploration on our existing licences and will continue actively to search for opportunities to expand the Group's operations by value-accretive acquisitions."

For further information, please contact:

Editors' notes:

Volga Gas is an independent oil and gas exploration and production company operating in the Volga region of Russia. The company has 100% interests in its five licence areas.

The information contained in this announcement has been reviewed and verified by Mr. Mikhail Ivanov, Director and Chief Executive Officer of Volga Gas plc, for the purposes of the Guidance Note for Mining, Oil and Gas companies issued by the London Stock Exchange in June 2009. Mr. Mikhail Ivanov holds a M.S. Degree in Geophysics from Novosibirsk State University. He also has an MBA degree from Kellogg School of Management (Northwestern University). He is a member of the Society of Petroleum Engineers.

Interim Management Report

Volga Gas and its subsidiaries (together, the "Group") are involved in the exploration, evaluation and production of oil and gas in five licences in the Volga Region of Russia.

The key activity of H1 2013 was the continuation of the project to increase the processing capacity of the Dobrinskoye gas plant. The initial stages of this upgrade completed in October 2012, enabled the Group to have all three of its main fields in production during H1 2013. Other activities included the workover of the VM#1 well and the commencement of production from the Sobolevskoye field.

Production Operations

Gas and condensate production - Dobrinskoye and VM fields

The Dobrinskoye and VM fields are managed as a single business unit. Production from the fields is processed at the gas plant located next to the Dobrinskoye field, extracting the condensate and processing the gas to pipeline standards before input into Gazprom's regional pipeline system via an inlet located at the plant. As the plant is currently permitted to operate at a capacity of 250,000 cubic metres per day (8.8 mmcf/d), the production from the fields does not currently reflect the underlying capabilities of the fields. Moreover, during H1 2013 continuing works to upgrade the plant to meet the requirements to be permitted to operate at the target capacity of up to one million cubic metres per day (35.3 mmcf/d) meant that the plant's downtime was slightly higher than would be expected under normal operations.

During H1 2013, production derived from both fields averaged 7.5 mmcf/d of gas and 540 bpd of condensate (H1 2012: 3.9 mmcf/d of gas and 328 bpd of condensate from the Dobrinskoye field alone). In total, there are three producing wells on VM (H1 2012: zero) and two producing wells on Dobrinskoye (H1 2012: one).

Gas continues to be sold to Trans Nafta at a fixed price equivalent to approximately US$2.54 per thousand cubic feet, net of VAT (H1 2012: US$2.35). An increase in the Rouble contract gas sales price took effect on 1 January 2013. During H1 2013 the average condensate sales price was US$50.72 per barrel (H1 2012, US$50.17 per barrel).

Unit production costs on the gas-condensate fields remains relatively high at US$8.94 per boe (H1 2012: US$8.10) primarily as a result of a significant element of fixed plant costs and chemicals consumed in the gas processing unit.

During the period, a workover was conducted on the VM#1 production well, perforating an additional 23 metres of the pay zone in the well. Following the successful workover operations, a production test on a 10 mm choke on the well achieved a higher than expected maximum flow rate of 274,000 cubic metres (9.7 million cubic feet) per day of gas and 794 barrels per day of condensate. This is approximately twice the production level that was previously achieved with the well. Estimated production capacity from the existing wells is now up to 20.0 mmcf/d of gas and over 1,000 bpd of condensate.

Oil production - Uzenskoye field

Weather related downtime in March and April had a greater impact on production from the Uzenskoye field in H1 2013 than in H1 2012. During H1 2013, production from the Uzenskoye area averaged 752 bopd (H1 2012: 932 bopd). Towards the end of 2012, the wells on the edge of the field demonstrated some water cut and in order for the production of water-free oil to be maintained, these wells were shut-in and the remaining wells choked back. Installation of water separation equipment on the field, an investment expected to cost less than US$1.0 million, will be considered.

Sales prices realised from the oil increased, averaging US$50.85/bbl net of VAT in H1 2013 (H1 2012: US$46.79/bbl), while production costs remained low at $2.41/bbl (H1 2012: $1.97/bbl). After providing for Mineral Extraction Taxes ("MET"), the cash margin per barrel in H1 2013 was US$27.63/bbl (H1 2012: US$23.73/bbl).

Urozhainoye-2 Licence area

During 2012, the Group acquired for a nominal sum the rights to produce from the Sobolevskaya #11 well, an oil discovery drilled by a former licensee, and conducted a successful workover of the well. In June 2013 the Sobolevskaya #11 well was put on production and made a very modest contribution to H1 2013 revenues. During August 2013 production from the well averaged 137 bopd.

Development

Gas plant upgrade

In 2012, the majority of the upgrade work on the Dobrinskoye gas plant was undertaken and completed. This involved the installation of additional sulphur absorption trains, expanded capacity for condensate separation and increased storage capacity. During H1 2013, the remainder of the upgrade work has been largely completed, including the upgrade to the required safety flare systems. Following the ongoing installation of further equipment at the plant, its effective processing capacity will increase from 250 thousand cubic metres per day (8.8 million cubic feet per day) to up to 1 million cubic metres per day (35.3 million cubic feet per day). The plan is to increase gradually the throughput of the plant to increase utilization of the production capacity of the existing gas/condensate wells. For the time being, the permitted working capacity will remain at 250 thousand cubic metres per day pending approval by the regulatory authorities. Application for the necessary approvals to operate at the higher rates has been lodged.

Meanwhile, the Group has also been investigating means of enhancing the gas processing by the use of alternative chemicals. Recent successful trials provide confidence in achieving material savings on the cost of chemicals used in the process.

Financial Review

Results of Operations

For the six months ended 30 June 2013 the Group recorded turnover of US$15.4 million (H1 2012: US$13.3 million) and a gross profit of US$6.7 million (H1 2012: US$5.6 million).

With very low exploration expenses of just US$28,000 (H1 2012: $7.4 million) and lower administrative expenses of US$2.4 million (H1 2012: US$2.8 million) there was an operating profit of US$4.3 million (H1 2012: operating loss of US$4.6 million). Net interest expense in H1 2013 was US$0.2 million (H1 2012: nil). After other net income of US$0.2 million (H1 2012: expenses of US$0.4 million), arising from a refund of Mineral Extraction Tax offset partly by foreign exchange losses, profit before tax was US$4.3 million (H1 2012: loss before tax of US$5.0 million). In H1 2013 there was a deferred tax provision of US$0.9 million (H1 2012: US$0.6 million). EBITDA, calculated as operating income before exploration expense, depletion and depreciation was US$6.7 million (H1 2012: US$4.3 million).

Oil and condensate sales are made respectively at the field facilities and the gas plant and are sold to domestic customers and account for US$12.2 million of sales (H1 2012: US$11.0 million). Net sales prices achieved during the six months to 30 June 2013 increased moderately. Average realizations for the six months to 30 June 2013 were US$50.80 per barrel of oil and condensate sold (H1 2012: US$47.96 per barrel). For the six months to 30 June 2013, MET accounted for 23% of revenues (H1 2012: 30%), reflecting relatively lower MET rates on gas and condensate compared to oil. Production costs were 24% of revenues (H1 2012: 17%), reflecting the fixed cost of operating the Gas Plant and consumption of chemicals in gas processing. The Depletion and Depreciation charge was 9% of revenues (H1 2012: 11%).

Cash inflow from operating activities before working capital movements in H1 2013 was US$6.6 million (H1 2012: $2.8 million). This is in line with the rise in EBITDA and reflects the US$1.1 million of loan repayments to Trans Nafta in H1 2012 by offset of gas sales which since April 2012 no longer apply.

Capital Expenditure

For the six months ended 30 June 2013, the Group incurred capital expenditures of US$3.1 million (H1 2012: US$5.8 million). The majority of capital expenditure in H1 2013 was incurred on the gas plant upgrade and the remainder on workovers on the gas wells and on completing the Sobolevskaya#11 oil well for production.

Borrowings

As at 30 June 2013, the Group had total borrowings outstanding of US$4.8 million (31 December 2012: US$8.0 million). During the six months ended 30 June 2013, the Group made repayments of US$3.4 million in accordance with the terms of its bank facility (during H1 2012 the facility was drawn down and repayments commenced in September 2012).

Cash Position

The Group's cash balances at 30 June 2013 were US$4.8 million (31 December 2012: US$7.0 million), resulting in a small positive net cash balance of US$61,000 (31 December 2012: US$1.0 million net debt).

Outlook

During August 2013, production averaged 3,263 boepd. Production from the wells on both the VM and Dobrinskoye fields remain constrained by the permitted throughput capacity on the gas plant. Management estimates that the existing wells on the two fields are capable of sustained production of 560,000 cubic metres per day (approximately 20 mmcf/d), which would be achievable once the plant is processing gas at higher rates. Production from the Uzen oil field continues to be choked back prior to the planned installation of water separation equipment. The Group anticipates that when the plant capacity is increased to the planned one million cubic metres per day, oil, gas and condensate production from the existing wells will increase to over 4,000 boepd.

For the second half of 2013, the Group's committed capital expenditure is expected to be less than US$3.0 million. Once the gas plant is operational at full capacity, further development drilling on the VM field is planned. This would include the drilling of a sidetrack to the existing VM#4 well as well as two new wells on locations denoted VM#3 and VM#5. The cost of these new wells will be funded from a combination of existing cash resources, cash generated from operations and new borrowings as necessary.

The immediate focus of management is on completing the development of the existing asset base so as to maximize the production and cash generation capabilities. This lays a foundation for sustainable production and cash flow which provides a strong platform for future growth. A key priority for the Group now is to secure opportunities to grow the Group's asset base by selective value-accretive acquisition.

Principle Risks and Uncertainties

The risks described on pages 10-11 of the 2012 Annual Report and in Note 3 - Financial Risk Management, a copy of which can be obtained from www.volgagas.com, remain extant.

Forward-Looking Statements

Certain statements in this interim report are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

VOLGA GAS plc

IFRS CONSOLIDATED INTERIM FINANCIAL INFORMATION

(UNAUDITED)

AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2013

Group Interim Income Statement (Unaudited)

(presented in US$000, except for profit per ordinary share and number of shares)

Group Interim Statement of Comprehensive Expenses (Unaudited)

(presented in US$000)

The accompanying notes are an integral part of this condensed consolidated interim financial information.

Group Balance Sheet (Unaudited)

(presented in US$000)

The accompanying notes are an integral part of this condensed consolidated interim financial information.

Group Interim Cash Flow Statement (Unaudited)

(presented in US$000)

The accompanying notes are an integral part of this condensed consolidated interim financial information.

Group Interim Statement of Changes in Equity(Unaudited)

(presented in US$000)

The accompanying notes are an integral part of this condensed consolidated interim financial information.

Notes to the IFRS Consolidated Interim Financial Statements(Unaudited)(presented in US$000 unless otherwise stated)

1. General information

Volga Gas plc (hereinafter referred to as "Company" or "Volga") is a public liability company registered in England and Wales with registered number 05886534 and quoted on the AIM market of London Stock Exchange plc. The principal activities of the Company and its subsidiaries (hereinafter jointly referred to as the "Group") are the acquisition, exploration and development of hydrocarbon assets and production of hydrocarbons in the Volga Region of the Russian Federation. The Company's registered office is at Ground Floor, 17-19 Rochester Row, London SW1P 1QT. This condensed consolidated interim financial information was approved for issue on 16 September 2013.

2. Basis of presentation

This condensed consolidated interim financial information for the half-year ended 30 June 2013 has been prepared in accordance with IAS 34, 'Interim financial reporting'. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2012, which have been prepared in accordance with IFRSs as adopted by the European Union.

Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Financial Position and performance of the group since the last annual consolidated financial statements.

This condensed consolidated interim financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2012 were approved by the board of directors on 28 March 2013 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

Going-concern basis The group meets its day-to-day working capital requirements through its cash resources. After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated interim financial statements.

Exchange rates. The official rate of exchange of the Russian ruble to the US dollar ("USD") at 30 June 2013 and 31 December 2012 was 32.709 and 30.373 Russian rubles to USD 1.00, respectively. Any re-measurement of Russian ruble amounts to US dollars or any other currency should not be construed as a representation that such Russian ruble amounts have been, could be, or will in the future be converted into other currencies at these exchange rates.

Taxation. Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2010, as described in those annual financial statements. Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

Segmental reporting follows the Group's internal reporting structure. The operations of the Group comprise one class of business, being oil and gas exploration, development and production and the Group operates in only one geographic area - the Russian Federation.

3. Accounting policies

The principal accounting policies and methods of computation followed by the Group are consistent with those disclosed in the consolidated financial statements for the year ended 31 December 2012.

4. COST OF SALES

Cost of sales is analysed as follows:

5. GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses are analysed as follows:

Property taxes which hitherto were included in General and Administrative expenses under "Taxes other than payroll and MET" are now included within "Production expenses" under Cost of Sales. The numbers for 1H 2012 have been restated accordingly.

6. OTHER INCOME, NET

7. PROPERTY PLANT AND EQUIPMENT AND INTANGIBLE ASSETS

During 2012 the licence acquisition costs and other intangible assets associated with producing oil and gas fields were transferred to Property, plant and equipment. As a result of this transfer all producing assets are allocated to the same financial statement caption and are therefore consistent with how the results are monitored, and management consider to be the relevant cash generating units.

8. BORROWINGS

The short term and long term debt outstanding as at 31 December 2012 and 30 June 2013 are respectively the current and long term portions of repayments due under the Group's debt facility which was drawn down during H1 2012 less repayments made in the period between.

9. CONTINGENCIES AND COMMITMENTS

The Group has a commitment to drill one additional well on the Pre-Caspian Licence Area before 31 December 2013. There are currently no plans for drilling in the block. As of the balance sheet date all other licence commitments have been met.

10. RELATED PARTY TRANSACTIONS

The Group is controlled by Baring Vostok Private Equity Fund III and Baring Vostok Private Equity Fund IV, which own 58.66% of the Company's shares as at 30 June 2013. Baring Vostok Private Equity Funds III and IV perform their control through nominee holding companies. The remaining 41.34% of the shares are widely held.

Related party transactions are disclosed in Note 23 to the accounts for the year ended 31 December 2012. There were no material related party transactions in the six months to 30 June 2013.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors confirm that this consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

· an indication of important events that have occurred during the first six months and their impact on the set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

The directors of Volga Gas plc are listed in the Volga Gas plc Annual Report for 31 December 2012.

By order of the Board