31 March 2005
NELSON RESOURCES LIMITED REPORTS ANNUAL RESULTS,
SUBSTANTIAL INCREASES IN PRODUCTION, REVENUE AND RESERVES
Nelson Resources Limited ("Nelson" or the "Company", TSX / AIM: NLG), a leading
independent oil exploration and production company operating in Kazakhstan,
today reports its final results for the twelve months ending December 31, 2004.
All amounts are expressed in U.S. dollars unless otherwise indicated. Production
amounts are expressed net to Nelson's equity interest in the fields unless
otherwise indicated.
HIGHLIGHTS
==========
Financial
---------
- Oil Revenue up 497% year-on-year to $242.4 million (2003 $40.6 million)
- Profit from operations of $61.7 million, compared with a loss of
$7.0 million in 2003
- Net profit of $3.7 million, which has been impacted by hedging costs and
non-cash compensation charges, compared with a loss of $11.0 million in 2003
- Net cash flow increases thirty-fold to $84.9 million (2003 $2.9 million)
- Average price per barrel sold $32.62 (2003 $26.51)
- Successful $110.8 million placing and admission to trading on London Stock
Exchange's AIM
Operational
-----------
- Total annual production of 6.1 million barrels net to Nelson -
an increase of 277% (1.6 million bbls in 2003)
- End of year production rate net to Nelson increasing 205% to 22,213 bopd
(End 2003 7,279 bopd)
- Nelson's net Proved plus Probable Reserves increased 25% to
234.9 million barrels (independently assessed by McDaniel & Associates)
- Ambitious field development with 51 new wells drilled
and 129 producing wells at end of year
- KOA - Strong growth in production at Alibekmola field,
initiation of pilot production at Kozhasai field
- North Buzachi - 50% acquisition completed in February 2004,
accelerated development plan approved
- Karakuduk - acquisition of a net 36% stake in the field in May
and a further 40% stake in December 2004
- Arman - acquisition of a 50% stake in this mature producing field
after year end, in February 2005
Nick Zana, Nelson's Chief Executive Officer, commented:
"I am proud of the achievements of our Company and its subsidiaries during
2004. Operationally, we have dramatically increased production and proved
ourselves as an effective operator in Kazakhstan. Strategically, we have
demonstrated our ability to complete acquisitions on a commercially prudent
basis. Financially, we have achieved successful equity and debt capital market
fundings, which provide the Company with a solid base to build upon. While net
profit continues to be impacted by non-cash other compensation charges and
hedging costs, revenue and cash flow grew significantly and the Company is in a
strong position to finance continued growth in 2005 and beyond. I look forward
to creating further shareholder value through capitalising on opportunities
offered in Kazakhstan and the Caspian."
FINANCIAL REVIEW
================
================================================================================
(in thousands of U.S. dollars, Year Ended
except per barrel amounts) December 31
2004 2003
--------------------------------------------------------------------------------
Crude oil revenue $ 242,394 $ 40,591
Revenue per barrel 32.62 26.51
Profit/(loss) from operations 61,705 (6,962)
Net Profit/(loss) 3,695 (11,011)
Basic profit/(loss) per share 0.0046 (0.019)
Diluted profit/(loss) per share 0.0045 (0.019)
Net effect of operating activities on cash flows 84,884 2,864
================================================================================
All figures are for 50% of KOA, 50% of North Buzachi and 100% of Chaparral.
Revenue, Expense and Income
---------------------------
Revenue and profit from operations in 2004 have increased dramatically compared
with the previous year, due to a combination of substantial increases in crude
oil production - the result of both acquisitions and rapid field development -
and higher oil export prices. Average revenue per barrel sold during the year
was $32.62 compared with $26.51 in 2003.
Unit costs of production increased from $2.91/bbl to $3.79/bbl year on year.
This increase is due to the acquisition of North Buzachi, where unit production
costs are higher than those at Kazakhoil Aktobe (KOA) and Karakudukmunai (KKM).
Sales and transportation costs decreased from $6.68/bbl to $5.55/bbl year on
year, due to lower unit costs at newly acquired fields. Per barrel general and
administration (G&A) costs of Nelson's oil and gas operations decreased from
$1.72/bbl to $1.50/bbl, reflecting the achievement of internal growth objectives
of the Company, while corporate G&A increased due to greater administrative
costs of managing an expanded group as well as extraordinary accounting and
legal expenses relating primarily to acquisitions.
While Net Profit after tax increased to $3.7 million in 2004 from a loss of
$11.0 million in 2003, reported profit for the year was significantly reduced by
the following factors:
- Other Compensation Costs of $27.4 million arising from the intrinsic valuation
method of accounting for stock options. Under this method, the difference
between market price of the company's stock and the exercise price of the
options are recorded in the profit and loss account, resulting in an increased
expense as stock price rises. On a cumulative basis, options have been granted
equal to 6% of shares outstanding and charges to earnings occur as the stock
price rises. These accounting charges are non-cash.
- Derivative instrument charges of $23.0 million attributable to oil price
hedging contracts, $10.4 million of which arise from the fair value accounting
for the underlying derivative value of the contracts and are non-cash. These
contracts were entered into by KOA in November 2003 to mitigate price risk,
cover 270,000 barrels per month (32% of KOA's year end production) at a strike
price of approximately $30/bbl, and expire in August 2006.
- Income tax expense of $31.4 million as compared to $4.2 million in 2003. The
increase in income tax arises from the increasing profitability of the
company's oil field production. Tax liabilities in the country of operation
are not offset by the non-cash flow element in the above cited accounting
charges. Taxable income in Kazakhstan for Nelson's operating companies was
approximately $77.4 million. Reported tax expense includes the 30% Kazakh
income tax plus other taxes including use taxes, property taxes, withholding
taxes and other similar charges.
Investing Activities
--------------------
In February 2004, Nelson completed the acquisition of a 50% interest in North
Buzachi, paying $32.3 million in addition to the $58.0 million paid in December
2003. This represents an acquisition cost of $1.07 per barrel of proved plus
probable (2P) reserves. In May 2004, Nelson acquired a 60% interest in
Chaparral, giving the company an indirect 36% interest in KKM, for $16.9 million
or $0.76 per barrel of 2P reserves. This was followed in December by a 40%
direct interest in KKM for $34.6 million or $1.41 per barrel of 2P reserves.
Capital expenditures increased significantly year on year to $98.3 million, due
to increased investment in field development, in particular drilling new wells
and expanding field processing facilities.
Financing Activities
--------------------
In July 2004, Nelson issued 112 million shares at a subscription price of
Cdn$1.40 (�0.57) per share on the London Stock Exchange's Alternative Investment
Market. The new issue was subscribed to by both North American and European
institutional investors, with net proceeds of $110.8 million.
Also in 2004, Nelson significantly expanded its finance portfolio to include
expanded availability from European and Kazakh banks, various advance payment
arrangements from the major international independent trading companies
aggregating more than $70 million, $10 million of medium term financing from the
ECGD (the British government's export credit agency), increased vendor
financing, and acquisition financing arranged by a major international
investment bank. At year end 2004, financing arranged by Nelson from these
sources for Nelson companies aggregated approximately $187.2 million.
Restated Quarterly Information
------------------------------
Information previously reported in quarterly statements for the first three
quarters of 2004 has been restated due to a number of changes, notably the
retrospective adoption of the U.S. dollar as functional currency at KOA
(previously using the Kazakh Tenge) from January 1, 2004, a revision of the
marked-to-market valuation of derivative instruments, and a recalculation of
minority interest. A detailed analysis of these charges is in the Management
Discussion and Analysis document (see below).
================================================================================
(in thousands of As previously reported Restated
U.S. dollars) Total Net Total Net
Revenue Profit/(loss) Revenue Profit/(loss)
--------------------------------------------------------------------------------
2004, quarter ended
March 31 26,398 (4,725) 26,398 (9,845)
June 30 49,994 668 49,994 3,262
September 30 81,491 20,202 77,683 16,766
December 31 - - 88,319 (6,488)
================================================================================
MANAGEMENT DISCUSSION AND ANALYSIS
==================================
A full Management Discussion and Analysis document, along with the Company's
Annual Information Form, is available on SEDAR, www.sedar.com, and on the
Company's website, www.nelsonresources.com, as part of the Company's annual
filings. These documents can also be obtained on application from the Company.
REVIEW OF OPERATIONS
====================
In 2004 the Company had interests in four onshore producing fields in western
Kazakhstan, with a 50% interest in the Arman field acquired after year end.
During 2004, Nelson's share of production from its three operating entities KOA,
North Buzachi and KKM continued to grow. Production of crude oil net to Nelson's
share in the fields increased from 7,279 bopd at the end of 2003 to 22,213 bopd
at the end of 2004, an increase of 205%.
Nelson is pursuing ambitious development programmes for all its operating
properties. During 2004, 51 new wells were drilled across all fields, bringing
the total number of producing wells to 129 at the end of the year. Work to
increase oil processing capacities and to improve field facilities has also been
undertaken, including de-bottlenecking of existing facilities at Alibekmola to
38,000 bopd. Field development will continue throughout 2005, including a new
accelerated drilling programme now in place at North Buzachi and expected
further development of pilot production at Kozhasai.
According to independent estimates from McDaniel & Associates for the year 2005,
production net to Nelson's equity interest in its fields (excluding the recent
Arman acquisition) will be approximately 11 million barrels.
Production and sales for 2004 are summarised in the following table:
=====================================================
(in bbls) Year Ended
December 31
2004 2003
-----------------------------------------------------
Production
KOA 3,820,664 1,569,407
North Buzachi 1,556,243 41,896
Chaparral 1,883,005 -
--------- ---------
Total 7,259,912 1,611,303
-----------------------------------------------------
Sales
KOA 3,956,033 1,498,525
North Buzachi 1,639,989 -
Chaparral 1,834,576 -
--------- ---------
Total 7,430,598 1,498,525
=====================================================
All figures are for 50% of KOA, 50% of North Buzachi
and 100% of Chaparral.
Reserves
--------
Remaining oil reserves at each of Nelson's fields are assessed by independent
auditors McDaniel & Associates Ltd., Calgary, at the end of each year. Between
the end of 2003 and the end of 2004, Nelson saw a 32% increase in its share of
proved reserves, increasing from 123.4 to 163.4 million barrels. Proved plus
probable reserves increased by 25% from 187.2 to 234.9 million barrels. This
increase is predominantly attributable to the acquisitions of an additional 15%
interest in North Buzachi and a net 76% interest in KKM during 2004. The
acquisition of a 50% stake in the Arman field in February 2005 has increased
proved plus probable reserves net to Nelson further by an estimated 5.4 million
barrels (Kazmunaigas estimate as at 1 January 2004).
================================================================================
(in thousands of McDaniel & Associates Independent Reserves Report
barrels) December 31, 2004
Proved Total Proved +
Producing Proved Probable Probable
--------------------------------------------------------------------------------
Gross Reserves
Alibekmola 60,405 138,425 57,804 196,229
Kozhasai 1,300 2,885 7,755 10,640
North Buzachi 13,369 118,192 49,946 168,138
Karakuduk 11,685 44,274 18,034 62,308
------- ------- ------- -------
Total 86,759 303,777 133,538 437,315
--------------------------------------------------------------------------------
Nelson Net Reserves
Alibekmola 30,202 69,213 28,902 98,114
Kozhasai 650 1,443 3,877 5,320
North Buzachi 6,684 59,096 24,973 84,069
Karakuduk 8,881 33,648 13,706 47,354
------- ------- ------- -------
Total 46,418 163,400 71,458 234,858
================================================================================
Nelson Net figures are for 50% of Alibekmola and Kozhasai, 50% of North Buzachi
and 76% of Karakuduk.
More detailed information on independent reserves disclosure can be found in the
Company's Annual Information Form available on SEDAR, www.sedar.com.
Kazakhoil Aktobe (KOA)
----------------------
KOA has licences to develop the Alibekmola and Kozhasai oil fields located in
the Aktiubinsk region in northwest Kazakhstan, 200km south of the city of
Aktobe. During 2004, 18 new wells were drilled at Alibekmola, including one
exploratory well in the northern area of the field which confirmed the presence
of economically viable reserves. Four drilling rigs were in use at Alibekmola,
and a fifth rig started drilling in the Kozhasai field during the fourth
quarter. In addition, two work-over rigs were providing completion and re-entry
services in both fields. KOA plans to drill 16 new wells at Alibekmola and four
at Kozhasai during 2005.
Production at Alibekmola increased steadily for most of the year, reaching more
than 26,000 bopd (gross) by December. Kozhasai pilot production was maintained
at an average 835 bopd throughout the year.
Oil produced at Kozhasai is currently trucked to Alibekmola for processing. Oil
from Alibekmola is transported by pipeline direct from the field to Atyrau and
the CPC export pipeline. Exports via this route are expected to continue in
2005.
Other activities during 2004 include:
- Processing facilities: Existing facilities at Alibekmola debottlenecked to
38,000 bopd during 2004. Work is currently underway to further increase
capacity to 42,000 bopd. Work has also started on the construction of an
additional central processing facility (CPF) with a capacity of 30,000 bopd.
- Water injection: A programme to maintain reservoir pressure through water
injection at Alibekmola started in June 2004. At the end of 2004, two wells
were injecting water.
- Field infrastructure: A field camp to house 350 people is being constructed at
Alibekmola and is expected to be complete in early 2005. At Kozhasai, a field
camp was constructed in 2004, as well as new roads, processing facilities and
gathering systems.
Activities planned for 2005 include:
- Drilling: Plans to drill 16 new wells at Alibekmola and four at Kozhasai.
- Water injection: Four further wells expected to be transferred to water
injection.
North Buzachi
-------------
The North Buzachi oil field is located in the Mangistau region of western
Kazakhstan, approximately 180km north of the Caspian Sea port of Aktau. In July
2004, the government approved an accelerated development plan for the field,
with the numbers of wells planned to be drilled by the end of 2005 increasing to
115 (of which 20 are horizontal). Drilling started during the latter half of
2004, with 15 new wells being drilled by year end by one rig.
Production increased steadily during the second half of 2004 as new wells were
brought online, reaching 10,800 by the end of the year.
Oil from North Buzachi was transported via a number of different routes during
2004, including via the Russian Transneft pipeline system and by sea from Aktau.
Nelson maximises netbacks from oil sales through efficient marketing of
production, which includes flexible arrangements regarding offtakers and
transportation routes.
Other activities during 2004 include:
- Processing facilities: Facilities at the nearby Arman oil field, in which
Nelson acquired a 50% interest in February 2005, was used throughout 2004 to
process oil from North Buzachi, with processing capacity reaching 13,000 bopd
by February 2005.
- Water injection: Two wells were used continuously as injectors throughout
2004, with a third added in November. Four more wells are currently being
converted.
Activities planned for 2005 include:
- Drilling: Mobilisation of up to four further rigs by mid-2005 to meet the
accelerated drilling schedule.
- Processing facilities: Upgrading the processing capacities at North Buzachi
itself to 20,000 bopd, and construction of a new export pipeline from the
field. These projects are expected to be complete by third quarter 2005.
- Water injection: Plans for a further 31 water injecting wells by the end of
the year.
Karakudukmunai (KKM)
--------------------
The Karakuduk field is located in the Mangistau region of western Kazakhstan,
approximately 340km northeast of Aktau. During 2004, 17 new wells were drilled
at the field by one rig. In addition, three workover rigs were maintaining and
re-completing wells, several wells were converted to artificial lift, and a
hydraulic fracturing programme was started.
With each new well currently adding 150 bopd to field production, significant
development is now taking place at the field to increase production rates since
Nelson's acquisition of a controlling interest in May 2004.
The field is directly connected via the Kaztransoil system to the Transneft
export pipeline. During 2004, this route was used to transport the field's oil.
As KKM is not currently compensated for the positive quality differential
between its oil and the pipeline's Russian Export Blend, KKM plans to commission
a rail terminal at the field allowing export by ship from Aktau. This is
expected to be operational by mid-2006, and will allow the field to market its
own crude thus achieving better netbacks on sales.
Other activities during 2004 include:
- Processing facilities: In 2004, expansions to the processing facilities were
made to meet anticipated production increases. Work has also been completed to
boost throughput on the field export pipeline.
- Water injection: At the end of 2004, six wells were being used to inject water
into the reservoir. Producing wells in the vicinity of injectors have shown
increased production rates and well head pressure.
- Gas utilisation: During the year, the first phase of development allowing KKM
to use gas produced at the field to meet its own fuel needs was started.
Activities planned for 2005 include:
- Drilling and workovers: KKM expects to drill 18 new wells in 2005, including
two horizontal wells, and convert 16 wells to artificial lift using sucker rod
pumps.
- Processing facilities: Further upgrades to existing facilities will be made
during the year. Upgrading the processing capacities at North Buzachi itself
to 20,000 bopd, and construction of a new export pipeline from the field.
These projects are expected to be complete by third quarter 2005.
- Water injection: Number of injecting wells is expected to reach 18 by the end
of the year.
OUTLOOK
=======
Nelson has maintained a stated strategy of growth through the aggressive
development of its existing assets and through acquisition of new onshore and
offshore assets, when such acquisitions can be made on commercially attractive
terms. In 2004, the company has been able to execute this strategy and is
optimistic that its presence in Kazakhstan will provide continued opportunities
for further growth consistent with this strategy.
For further information, please contact:
----------------------------------------
Nick Greene, Chief Financial Officer Tel: 020 7495 8908
Nelson Resources Limited ngreene@nelsonresources.co.uk
Fred Hodder, Senior Vice President Tel: 020 7495 8908
Nelson Resources Limited fhodder@nelsonresources.co.uk
Investor Relations:
Ann-marie Wilkinson / Nick Lambert Tel: 020 7861 3232
Bell Pottinger Corporate & Financial (London)
Conference Call
---------------
The Annual Results Conference Call and Web Presentation will take place on
Monday 4 April 2005 at 2:30pm BST (9:30am EDT), and will be hosted by Nick Zana,
Chief Executive Officer.
To participate, please dial one of the following numbers:
From the UK 0845 245 0248
From North America 1-866-220-1452
From abroad +44 1452 556 620
If you would like to ask a question following the presentation, or require
operator assistance at any time during the call, please dial *1.
The results presentation will be given online during the call. To view it,
please go to www.meetingcentre.net (please note the European spelling!) and
click on 'Attend a Meeting'. Then enter the meeting number 701 979 301.
Alternatively, the results presentation will be available for download from
Nelson's website, www.nelsonresources.com, at 7:00am BST on 4 April.
The lines will be open 15 minutes before the meeting, so please join early to
ensure you have everything working before the start time. If you have difficulty
in setting up the software required for the online presentation, you can contact
technical support on +44 (0) 1452 556 226.
Notes
-----
Nelson Resources Limited is an oil exploration and production company with
operations in the Republic of Kazakhstan. The Company established its presence
in the Kazakhstan oil sector in 2000 and its management team, comprising both
international and Kazakh executives, has extensive experience of the Kazakh
operating and regulatory environment. The Company owns 50% of Kazakhoil Aktobe
LLP (KOA), a 50/50 joint venture between Nelson and Kazmunaigas, the national
oil company of Kazakhstan, which is developing the Alibekmola and Kozhasai
fields. The Company owns a 50% participatory interest in the North Buzachi oil
field located in western Kazakhstan (50% Nelson, 50% CNPC International
(Buzachi) Inc.). In May 2004, Nelson purchased 60% of Chaparral Resources Inc.,
which has a 60% interest in the joint stock company Karakudukmunai, operator of
and owner of a 60% interest in the Karakuduk field. In January of 2005, Nelson
acquired the 40% interest in this field previously owned by Kazmunaigas,
bringing the Company's aggregate ownership interest in the field to 76%. In
February 2005, the Company also acquired a 50% interest in the Arman field, with
the other 50% held by Shell. The Company also holds an option to acquire a
minimum 25% participatory interest in two Caspian Sea offshore blocks, Zhambai
South and South Zaburunye. The Company maintains its operational office in
Almaty, Kazakhstan, which oversees the field joint ventures in western
Kazakhstan. Nelson and its affiliated companies employ approximately 800 people.
Common shares of Nelson are listed on the Toronto Stock Exchange and London's
Alternative Investment Market under the symbol NLG.
Readers are cautioned that the preceding statements and information may include
certain estimates, assumptions and other forward-looking information. The actual
future performance, developments and/or results of the Company may differ
materially from any or all of the forward-looking statements, which include
current expectations, estimates and projections, in all or part attributable to
general economic conditions and other risks, uncertainties and circumstances
partly or totally outside the control of the Company, including oil prices,
imprecision of reserve estimates, drilling risks, future production of gas and
oil, rates of inflation, changes in future costs and expenses related to the
activities involving the exploration, development, production and transportation
of oil, hedging, financing availability and other risks related to financial
activities, and environmental and geopolitical risks. Discussion of the various
factors that may affect future results is contained in the Company's recent
filings with Canadian securities regulatory authorities. The Company disclaims
any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise.
The following financial statements should be read in conjunction with the full
financial statements and accompanying notes as filed on SEDAR, www.sedar.com.
The statements can also be found on the Company's website,
www.nelsonresources.com.
****
================================================================================
NELSON RESOURCES LIMITED
Consolidated Statements of Operations
--------------------------------------------------------------------------------
Expressed in thousands of Year Ended
U.S. dollars December 31
2004 2003
--------------------------------------------------------------------------------
Revenues
Crude oil $ 242,394 $ 40,591
Expenses
Cost of production 28,166 4,452
Sales and transportation 41,233 10,227
Depreciation and amortisation 34,592 5,537
General and administration 26,362 14,681
Derivative instruments 22,955 3,887
Other compensation costs 27,381 8,769
-------- --------
180,689 47,553
--------------------------------------------------------------------------------
Profit/(loss) from operations 61,705 (6,962)
--------------------------------------------------------------------------------
Other income/(expenses)
Foreign exchange (loss)/gain (1,550) 3,555
Interest and financing costs (20,396) (8,783)
Profit on sale of investment - 2,731
Interest and other income 4,673 2,683
Minority interest (9,372) -
-------- --------
(26,645) 186
--------------------------------------------------------------------------------
Profit/(loss) from continuing operations
before income taxes 35,060 (6,776)
--------------------------------------------------------------------------------
Income taxes (31,365) (4,235)
--------------------------------------------------------------------------------
Net profit/(loss) $ 3,695 $ (11,011)
--------------------------------------------------------------------------------
Basic profit/(loss) per share 0.0046 (0.019)
Diluted profit/(loss) per share 0.0045 (0.019)
================================================================================
****
================================================================================
NELSON RESOURCES LIMITED
Consolidated Balance Sheets
--------------------------------------------------------------------------------
Expressed in thousands of December 31 December 31
U.S. dollars 2004 2003
--------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 56,486 $ 43,246
Accounts receivable and prepaid expenses 57,693 19,546
Inventory 15,175 2,242
-------- --------
Total current assets 129,354 65,034
Oil and gas properties, full cost 297,879 108,963
Property, plant and equipment 20,119 11,750
Advances to oil and gas limited partnership 26,646 23,318
Deferred tax 9,359 -
Other non-current assets 3,871 384
--------------------------------------------------------------------------------
Total assets $ 487,228 $ 209,449
--------------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable $ 31,471 $ 18,765
Accrued liabilities 21,638 6,295
Income taxes payable 5,398 924
Derivative instruments 29,638 3,887
Bank loan - 58,000
Note payable to affiliate 23,912 -
Current portion of long-term debt 41,523 3,550
-------- --------
Total current liabilities 153,580 91,421
Long-term debt 121,776 66,923
Deferred tax 3,258 -
Other provisions and creditors 1,972 192
Minority interest 21,877 -
--------------------------------------------------------------------------------
Total liabilities 302,463 158,536
--------------------------------------------------------------------------------
Shareholders' equity
Share Capital 8,620 7,392
Additional paid in capital 294,462 176,247
Other compensation costs 31,221 9,161
-------- --------
334,303 192,800
Accumulated deficit (136,960) (140,655)
Other comprehensive loss (12,578) (1,232)
--------------------------------------------------------------------------------
Total shareholders' equity 184,765 50,913
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 487,228 $ 209,449
--------------------------------------------------------------------------------
================================================================================
****
================================================================================
NELSON RESOURCES LIMITED
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
Expressed in thousands of Year Ended
U.S. dollars December 31
2004 2003
--------------------------------------------------------------------------------
Cash Flows from continuing operations
Net profit $ 3,695 $ (11,011)
Adjustments to reconcile net profit/(loss) to
net cash provided by operating activities:
Deferred tax (2,633) -
Profit on sale of investment - (2,731)
Interest income (3,328) (2,933)
Other compensation costs 27,381 8,769
Exchange rate loss/(gain) 2,073 (610)
Depreciation and amortisation 34,592 5,537
Discount accretion 1,370 1,211
Derivative instruments 10,444 3,887
Retirement obligation accretion 106 20
Amortisation of note discount 327 -
Interest on shareholders' equity advance - 431
Loan arrangement fee amortised 1,485 177
Debenture cost amortised - 117
Minority interest 9,372 -
-------- --------
Net effect on cash flows 84,884 2,864
(Increase)/decrease in working capital (23,075) (2,692)
--------------------------------------------------------------------------------
Net cash provided by operating activities 61,809 172
--------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditure on oil and gas properties (93,415) (28,876)
Acquisition of subsidiary - (58,348)
Acquisition of participatory interest in North Buzachi (32,250) -
Acquisition of KKM (34,611) -
Acquisition of Chaparral (net of cash acquired) 3,153 -
Proceeds from sale of investment - 6,337
Purchase of property, plant and equipment (4,934) (7,294)
--------------------------------------------------------------------------------
Net cash used in investing activities (162,057) (88,181)
--------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from exercise of stock options 3,299 2,505
Proceeds from private placement/rights offerings 110,814 37,074
Net proceeds from exercise of warrants less
shareholders equity advances - 6,661
Bank loans received 190,215 78,000
Bank loans paid (189,259) -
Other non-current assets (1,581) (492)
--------------------------------------------------------------------------------
Net cash provided by financing activities 113,488 123,748
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 13,240 35,739
Cash and cash equivalents at beginning of year 43,246 7,507
--------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 56,486 $ 43,246
================================================================================
Movements in respect of advances to oil and gas limited partnership in 2003 have
been reclassified to conform with current year presentation.
****
================================================================================
NELSON RESOURCES LIMITED
Consolidated Statements of Cash Flows (cont.)
--------------------------------------------------------------------------------
Expressed in thousands of Year Ended
U.S. dollars December 31
2004 2003
--------------------------------------------------------------------------------
Changes in components of working capital
Accounts receivable and prepaid expenses (30,545) (16,025)
Inventory (9,685) (1,685)
Accounts payable 861 14,967
Accrued liabilities 9,108 (545)
Income taxes payable 7,186 596
-------- --------
Increase in working capital (23,075) (2,692)
--------------------------------------------------------------------------------
Supplemental information
Taxes paid during the year (29,524) (3,639)
Interest paid during the year (14,941) (6,287)
================================================================================
During 2004, the Company acquired a 60% controlling interest in Chaparral
Resources, Inc. This was a non-cash acquisition in 2004.
****
================================================================================
NELSON RESOURCES LIMITED
Consolidated Statements of Shareholders' Equity
--------------------------------------------------------------------------------
Expressed in thousands of Other
U.S. dollars, except Additional Compen-
share amounts Number of Common Paid in sation
Common Shares Shares Capital Costs Total
--------------------------------------------------------------------------------
Balance December 31, 2002 446,659,860 4,467 115,358 817 120,642
Exercise of stock options 12,620,000 126 2,957 - 3,083
Debentures converted 9,979,558 100 2,755 - 2,855
Exercise of warrants 196,062,000 1,961 18,841 - 20,802
Rights offering 73,839,417 738 36,336 - 37,074
Movement in other
compensation costs - - - 8,344 8,344
----------- ------- ------- ------- -------
Balance December 31, 2003 739,160,835 7,392 176,247 9,161 192,800
Exercise of stock options 10,731,132 107 8,522 - 8,629
Private placement 112,144,128 1,121 109,693 - 110,814
Movement in other
compensation costs - - - 22,060 22,060
----------- ------- ------- ------- -------
Balance December 31, 2004 862,036,095 8,620 294,462 31,221 334,303
--------------------------------------------------------------------------------
Share- Other Total
holders Accum- Compre- Share-
Equity ulated hensive holders
Total Advance deficit Income Equity
--------------------------------------------------------------------------------
Balance December 31, 2002 120,642 13,710 (129,644) 2,506 7,214
Exercise of stock options 3,083 - - - 3,083
Debentures converted 2,855 - - - 2,855
Exercise of warrants 20,802 (14,141) - - 6,661
Rights offering 37,074 - - - 37,074
Movement in other
compensation costs 8,344 - - - 8,344
Interest on shareholders'
equity advance - 431 - - 431
Net loss for the year (11,011) - (11,011)
Release of revaluation of
investment held for sale - - - (2,705) (2,705)
Cumulative translation
adjustments - - - (1,033) (1,033)
------- ------- ------- ------- -------
Balance December 31, 2003 192,800 - (140,655) (1,232) 50,913
Exercise of stock options 8,629 - - - 8,629
Private placement 110,814 - - - 110,814
Movement in other
compensation costs 22,060 - - - 22,060
Net profit for the year - - 3,695 - 3,695
Unrealised losses on
oil and gas cash flow
hedges, after tax - - - (10,715) (10,715)
Cumulative translation
adjustments - - - (631) (631)
------- ------- ------- ------- -------
Balance December 31, 2004 334,303 - (136,960) (12,578) 184,765
================================================================================
****
NELSON RESOURCES LIMITED
Selected Notes To Consolidated Financial Statements
December 31, 2004 and 2003
Tabular amounts are expressed in thousands of U.S. dollars, except share amounts
These notes should be read in conjunction with the full financial statements and
accompanying notes as filed on SEDAR, www.sedar.com.
1. Organisation and Basis of Presentation
Nelson Resources Limited (the "Company" or "Nelson") was incorporated as an
exempted company under the laws of Bermuda on March 31, 1993. The Company is
involved in oil & gas exploration, development and production in Kazakhstan.
The consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles ("U.S. GAAP"). All amounts are stated
in U.S. dollars thousands unless otherwise indicated.
10. Bank Loan
On December 15, 2003, NPB BV entered into a credit facility agreement with CSFB
("Credit Suisse First Boston"). The maximum principal amount available under
the facility was $90 million, of which $58 million was drawn down in 2003 in
connection with the purchase of NPBH BV and the first 35% interest in the
licence to develop the North Buzachi field in Kazakhstan. The remaining $32
million was drawn down in February 2004 when the transfer of the additional 15%
interest in the licence to NPB BV was approved by the Kazakh government.
Loans under the facility bore an annual interest of 8% payable on the
termination date. The facility terminated on June 4, 2004. Repayment of the
facility was partly financed by the new financing obtained under the crude oil
advance payment agreement with Vitol (see Note 13 e) and existing cash funds.
The obligations of NPB BV under the facility were guaranteed by a security
interest over the issued share capital of NBHL, NBL and NPBH BV. In addition,
CSFB had a security interest over the rights under the North Buzachi Hydrocarbon
Contract. HSBK had guaranteed the obligations of NPB BV under the facility up
to $45 million.
11. Note Payable to Related Party
On May 17, 2004, the Company bought a 60% controlling interest in Chaparral. In
consideration for the Chaparral Shares, the Warrant and the CAIH Note (see Note
4), Nelson has issued a promissory note in the principal amount of $23.912
million payable to CAIH a related party to Nelson (see Note 23). The Nelson Note
has a term of one year and bears interest at 10.5% per annum, payable at
maturity.
14. Deferred Tax
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred income taxes are as follows:
2004 2003
$'000 $'000
--------------------------------------------------------------------------------
Deferred tax assets:
Oil and gas assets 1,279 708
Sales of assets 25 -
Obsolete inventory 82 -
Compensation and accrued expenses 517 -
Capital loss on transfer of net profits interest 1,529 -
Net operating loss carry-forwards 8,528 -
Derivative instruments 9,894 -
Other 958 -
------- -------
Total deferred tax assets 22,812 708
Valuation allowance (13,453) (708)
------- -------
Total deferred tax assets 9,359 -
Deferred tax liabilities:
Depreciation and other basis differences (3,258) -
======= =======
Net deferred tax assets/(liabilities) 6,101 -
======= =======
According to FAS No. 109, deferred tax assets are only reported if it is more
likely than not that some portion or all of the deferred tax assets will be
realised. After consideration of all the evidence, both positive and negative,
management has determined that a $13.453 million valuation allowance at December
31, 2004 (December 31, 2003 $0.708 million) is necessary to reduce the deferred
tax assets to the amount that will more likely than not be realised. The change
in the valuation allowance for the current year is $12.745 million.
As of December 31, 2004, the Company has estimated tax loss carry-forwards of
$24.766 million. These carry-forwards will expire at various times between 2005
and 2022.
1 Year 2-3 Years 4-5 Years Later Years Total
--------------------------------------------------------------------------------
Tax loss carry-forward 433 520 1,137 22,676 24,766
17. Stock Options
The Company maintains a stock option plan (the "Plan") pursuant to which the
Company may grant options to directors, officers and employees. Share options
are exercisable at prices not less than the closing market value of the shares
on the date of grant and are permitted to have a maximum term of ten years. The
maximum number of shares reserved for issuance under the Plan is 70,000,000
common shares. The following table summarises stock option activity during 2003
and 2004 under the Plan:
Weighted Weighted
Average Average
Number Cost Cdn$ Cost US$
--------------------------------------------------------------------------------
Outstanding at December 31, 2002 17,270,000 0.41 0.26
Options granted 13,286,465 0.67 0.52
Options exercised (6,080,000) 0.36 0.28
Options lapsed (450,000) 0.33 0.25
----------
Outstanding at December 31, 2003 24,026,465 0.57 0.44
Options granted 30,787,541 2.03 1.68
Options exercised (6,153,132) 0.54 0.45
----------
Outstanding at December 31, 2004 48,660,874 1.50 1.25
================================================================================
Exercisable at December 31, 2004 26,407,000 0.88 0.73
================================================================================
The following table summarises information about the Plan's stock options
outstanding at December 31, 2004:
Exercise Weighted average
Price Number of options Remaining Life Number of options
Cdn$ outstanding (years) exercisable
--------------------------------------------------------------------------------
0.30 50,000 1.30 50,000
0.40 2,330,000 2.83 2,330,000
0.45 2,330,000 2.83 2,330,000
0.50 2,330,000 2.83 2,330,000
0.63 1,333,333 3.63 666,667
0.67 9,500,000 3.32 9,500,000
1.45 11,867,000 4.63 9,200,333
2.40 12,930,541 5.00 -
2.40 5,990,000 4.88 -
----------- -----------
48,660,874 26,407,000
--------------------------------------------------------------------------------
From December 31, 2004 to date, the Company has granted 900,000 options to key
employees or directors of the Company.
The Company accounts for the stock options issued under the Plan under APB No.
25. Had compensation cost for these plans been determined consistent with FAS
No. 123, net income attributable to common stock and earnings per share would
have been reduced to the following pro forma amounts:
(in thousands, except per share amounts) 2004 2003
--------------------------------------------------------------------------------
Net profit/(loss) As reported 3,695 (11,011)
Reverse other compensation
costs per the intrinsic method 27,381 8,769
Other compensation costs per the
fair value method (38,956) (2,663)
------- -------
Pro Forma loss (7,880) (4,905)
Basic earnings/(loss) As reported 0.0046 (0.019)
per share Pro Forma (0.0099) (0.008)
Diluted earnings(loss) As reported 0.0045 (0.019)
per share Pro Forma (0.0099) (0.008)
--------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2004 and 2003, respectively: average risk-free
interest rates of 3.45 and 1.29 percent; average expected lives of 4.84 and 1.02
years; average expected volatility factors of 96.39 and 102.12 percent; and no
dividend yield. The estimated weighted average fair value of options to purchase
one share of common stock issued under the Plan was Cdn $1.52 in 2004 and Cdn
$0.26 in 2003.
The exercise price of all stock options granted under the scheme is denominated
in Canadian Dollars. Canadian dollars are neither the reporting currency of the
Company nor the currency in which the employees are paid. As such, on the date
of the grant the exercise price is not fixed and the plan is deemed to be a
variable plan under APB No. 25. Compensation cost is re-measured for each
reporting period using the intrinsic value method. The cost is reported as a
charge in earnings over the periods the service is provided by the employee.
The additional compensation cost, net of taxes, included in the net loss for
2004 and 2003 was $27,381,393 and $8,768,567 respectively.
In March 2003, as part of the settlement with Mr. Teck Soon Kong, a former
director of Nelson, 13,080,000 options at Cdn$0.21 was granted to him outside
the option plan. Mr. Kong exercised 4,578,000 options during 2004 and 6,540,000
options during 2003. As at December 31, 2004 and 2003, the remaining options
outside the plan were 1,962,000 and 6,540,000 respectively.
18. Income Taxes
The components of the income tax provision/(benefit) are as follows:
2004 2003
$'000 $'000
--------------------------------------------------------------------------------
Withholding tax 25 694
Kazakh tax 33,824 3,275
UK tax charge 149 266
------- -------
Total current tax 33,998 4,235
Deferred tax (2,633) -
------- -------
Total provision for income taxes 31,365 4,235
--------------------------------------------------------------------------------
The Company has income tax expense relating to withholding tax paid in
Kazakhstan on interest repayment and corporation tax paid in Kazakhstan and the
United Kingdom.
A reconciliation of the Company's expected tax benefit to the income tax expense
as reported in the consolidated statement of operations is as follows:
2004 2003
$'000 $'000
--------------------------------------------------------------------------------
Profit/(loss) from continuing operations
before income taxes 35,060 (6,776)
Statutory tax rate 0%, 30%, 0%, 30%,
34.5% and 50% and 34.5%
Income taxes computed at statutory rate
per individual companies* 25,106 3,553
Foreign exchange differences (136) (582)
Minority interest 1,694 -
Non deductible expenses 2,488 353
Increase in valuation allowance 2,592 -
Losses brought forward - 76
Withholding tax 25 694
Unrecognised deferred tax asset 103 124
Adjustment in respect of prior year (507) 17
------- -------
31,365 4,235
--------------------------------------------------------------------------------
* The income taxes calculated on a statutory basis is a charge rather than a
credit due to the taxable profits in Kazakhstan. These taxable profits cannot
be offset against losses elsewhere in the group.
The Company operates in various tax jurisdictions having varying statutory tax
rates. In Kazakhstan the tax rate is 30%. In the United Kingdom the corporate
tax rate is 30% (30% in 2003) and in the Netherlands the corporate tax rate is
34.5%. By agreement with the Bermudian tax authorities the Company's Bermudian
tax rate is nil in Bermuda, where the Company incurs corporate expenses and
significant compensation costs. These factors influence the Company's effective
tax rate.
According to the Contract between the Kazakh tax authorities and KOA, the
Company is liable to pay taxes under the tax regime existing as of the date of
signing the Contract, August 10, 1999.
The Company calculates its tax liabilities in accordance with the Contract;
however, Kazakhstan currently has a number of laws related to various taxes
imposed by both state and regional tax authorities. Applicable taxes include
value added tax, corporate income tax (profits tax), a number of turnover based
taxes, and payroll (social) taxes, together with others. Laws related to these
taxes have not been in force for significant periods, in contrast to more
developed market economies; therefore, regulations are often unclear or
nonexistent. Accordingly, few precedents with regard to issues have been
established.
Often, differing opinions regarding legal interpretation exist both among and
within government ministries and organisations; thus creating uncertainties and
areas of conflict. Tax declarations, together with other legal compliance areas
(as examples, customs and currency control matters) are subject to review and
investigation by a number of authorities, who are enabled by law to impose
extremely severe fines, penalties and interest charges. These facts create tax
risks in Kazakhstan substantially more significant than typically found in
countries with more developed tax systems.
The liability for income tax is provided for in the accrued liabilities in these
financial statements. Management believes that it has adequately provided for
tax liabilities in the accompanying consolidated financial statements. However,
the risk remains that relevant government ministries and organisations could
take differing positions with regard to interpretive issues and the application
of the provisions contained in the Contract and the resulting effect of such
positions on the Company's tax liability could be significant.
19. Basic and Diluted Profit/Loss per Share
The earnings/loss per share calculations are based on the weighted average
common shares outstanding during the periods as follows:
2004 2003
--------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 795,948,498 589,703,797
Weighted average diluted number of
common shares outstanding 813,635,450 589,703,797
Net income/(loss) ($'000) 3,695 (11,011)
Basic profit/(loss) per common share ($) 0.0046 (0.019)
Diluted profit/(loss) per common share ($) 0.0045 (0.019)
--------------------------------------------------------------------------------
The inclusion of unexercised options of 23,810,000 in 2003 would be
anti-dilutive.
21. Financial Instruments, Hedging and Trading Activities
The Company accounts for derivative financial instruments in accordance with FAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
statement requires that the Company recognise all derivatives on the balance
sheet at fair value and those derivatives not accounted for as hedges, are
reported in the statement of operations.
Commodity trading
KOA has entered into a risk management program where it is utilising derivative
instruments to manage the exposure to fluctuations in the price of crude oil.
KOA has entered into the following contracts with BNP Paribas:
Price Price
Contract amount Floor Ceiling
(bbls per month) Contract period Contract Type ($/bbl)* ($/bbl)*
--------------------------------------------------------------------------------
120,000 Sep 2003 - Aug 2006 Zero cost collar 18.00 30.00
150,000 Dec 2003 - Aug 2006 Zero cost collar 18.00 29.50
--------------------------------------------------------------------------------
*Brent price
If crude oil sales price falls below $18/bbl, the decline in value of revenue is
offset by gains in the value of the zero cost collars. Conversely, when crude
oil sales price exceeds $30/bbl and $29.5/bbl, the increase in the value of
revenues is offset by losses in the value of the zero cost collars.
Effective July 1, 2004 these derivative contracts were designated, and
qualified, as cash flow hedges under FAS No. 133. Prior to this date of
designation, changes in the fair value of these derivative instruments were
reported in earnings in the "Derivative instruments" line. The Company
recognised a charge of $16.286 million in current year earnings for the period
prior to this designation.
As a result of the instruments having an aggregate liability fair value on the
date of designation of $16.910 million, the Company has determined that this
represents an embedded financing element that gives rise to ineffectiveness.
This liability will be unwound over the remaining contract period of the
derivative instruments. The Company has recognised a reduction in fair value of
this financing element of $3.902 million through current year earnings, in the
'Derivative instruments' line, representing ineffectiveness.
Following designation, the effective portion of changes in the fair value of
these derivative instruments is reported as a component of other comprehensive
income. These changes are reclassified into earnings in the 'Derivative
instruments' line in the same periods during which the hedged revenues affect
earnings. The change in fair value of the derivative instruments recorded
through other comprehensive income amounted to $10.715 million, after tax
effect, for the year ended December 31, 2004.
Based on the assumptions used in the December 31, 2004 fair value assessment of
the derivative instruments, the estimated net amount expected to be reclassified
from other comprehensive income within the next twelve months would be $17
million as actual sales occur.
The cumulative derivative loss taken to other comprehensive income is $10.715
million, after tax effect, as at December 31, 2004 (December 31, 2003 $nil).
Financial Instruments
The Company does not use foreign currency contracts.
Fair Value Disclosure
The carrying amounts of cash and cash equivalents approximate fair value. The
Company estimates the fair value of its short-term and long-term debt generally
using discounted cash flow analysis based on current interest rates for
instruments with similar maturities.
The year-end fair values of short-term and long-term debt approximate their
recorded values as they carry interest rates that either are, or that
approximate market rates. See note 12 and 13 for the carrying value of debts at
December 31, 2004 and 2003.
Market and Credit Risks
The Company has significant credit risk exposure due to concentration of its
crude oil receivables with several significant customers. Three purchasers of
oil production accounted for all of the Company's total crude oil export sales
revenues in 2004. The capabilities of these oil trading companies are assessed
on a regular basis and the contractual arrangements can be changed as required.
The Company does not generally require collateral.
The Company's oil operations are exposed to oil price fluctuations. The Company
has begun to use price risk management contracts to limit its exposure to oil
price fluctuations, by protecting against the potential down side in oil prices.
Due to Kazakh regulations, there is a possibility, that the Company may be
required to sell some portion of its crude oil production to local markets at
prices lower than those achieved on the international market. There is
currently no requirement to make these sales to the local market, but the
Ministry of Energy can enforce them by controlling export pipeline access
quotas. The price realised for these sales was substantially lower than world
market prices. Government directed deliveries may disrupt customer
relationships, lead to delays in payments for crude oil or result in sale at
below market prices. Local market sales accounted for 2.3% of the total sales
revenues in 2004.
In addition, there is a concentration of risk in Kazakhstan, where all of the
Company's operations are located.
27. Subsequent Events
a) On December 23, 2004, the Company entered into a definitive sale and purchase
agreement to acquire a 50% participating interest in Arman Joint Enterprise
LLP ("Arman") from the Kazakh state oil company Kazmunaigas. Arman holds the
licence in the Arman field. Nelson paid a purchase price of $10.8 million
from existing cash resources. The government and regulatory approval was
obtained on February 14, 2005 from which date the acquisition becomes
effective and the results of operations will be included. The allocation of
purchase price to the net assets acquired is not practicable at the date of
these financial statements.
b) On January 5, 2005 NPB BV entered into a structured oil pre-export facility
with a principal amount of up to $40 million through the Commodity Structured
Finance Group of BNP Paribas. Proceeds of this financing have been used in
part to refinance the Vitol facility. The financing is structured as a $40
million revolving credit line available for two years. Thereafter, the
facility converts to an amortising term loan, with regular repayments being
made until the final repayment date 54 months after the initial advance.
Repayments are secured by offtake agreements under which NPB BV sells crude
oil from the North Buzachi field to one or several offtakers. Interest on
the facility will be paid on a monthly basis, at a rate of one month LIBOR
plus a 3.25% per annum, margin, increasing to a 4.25% per annum margin after
12 months. Nelson serves as financial guarantor of the facility.
c) On March 24, 2005, KKM signed a $40 million Structured Crude Oil Pre-export
Credit Facility Agreement with BNP Paribas (Suisse) SA and others (the "BNP
Credit Facility"). Subject to meeting conditions precedent within 30 days of
signing, funds from this facility will be available for use to cover any
short-term working capital deficiencies and to pay down the existing loan
with Kazkommertsbank. Amounts borrowed under the BNP Credit Facility are
repayable in 36 equal monthly installments commencing between six and seven
months after the signing date. The interest rate is LIBOR plus 3.25% for the
first 12 months and LIBOR plus 4.00% thereafter. The lenders also require
that KKM implement a crude oil price hedging program, in a form satisfactory
to the lenders.
****
END
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