16 May 2005
NELSON RESOURCES LIMITED REPORTS FIRST QUARTER RESULTS,
CONTINUED GROWTH IN PRODUCTION AND REVENUE
Nelson Resources Limited (TSX / AIM: NLG), a leading independent exploration and
production company operating in Kazakhstan, today reports its results for the
three months ending March 31, 2005. All amounts are expressed in U.S. dollars
unless otherwise indicated.
HIGHLIGHTS
==========
Financial
---------
Year on year:
- Oil revenue up 273% to $98.5 million (Q1 2004 $26.4 million)
Quarter on quarter:
- Operational profit increased 259% to $57.4 million (Q4 2004 $16.0 million)
- Cash flow from operating activities increased 126% to $35.1 million
(Q4 2004 $15.5 million)
- Average price per barrel sold $40.72 (Q4 2004 $34.06)
- Net profit after tax of $35.8 million, a ten-fold increase over the profit for
the full year 2004 of $3.7 million
Operational
-----------
- Average quarterly production net to Nelson's equity interest of 27,439 bopd,
an increase of 28% quarter-on-quarter (Q4 2004: 21,362 bopd) and
141% year-on-year (Q1 2004 11,374 bopd)
- Completion of acquisition of 50% stake in the Arman field,
in partnership with Shell
- 14 new wells drilled during quarter (four at Alibekmola, seven at North
Buzachi, three at Karakuduk) despite harsh winter conditions
- Total producing well fund of 171 wells, with 19 water injection wells across
all fields
- Since quarter end, gross production exceeding 30,000 bopd at Alibekmola and
10,000 bopd at Karakuduk
Nick Zana, Nelson's Chief Executive Officer, commented, "Nelson continues to
make excellent progress with its strategy of growth organically through field
development, and by acquisition. We completed the acquisition of the 50%
interest in Arman and received our first cash dividend from this investment
during the quarter. We welcome our new partnership with Shell and expect the
Arman field to be a steady cash flow and profit producer for the future.
"I am pleased with the progress of the Nelson Group towards establishing
ourselves as a leading independent oil company operating in Kazakhstan. I am
also encouraged by our recent discussions with Kazmunaigas, regarding converting
our option to an equity interest in Zhambai LLP, which holds the exploration
licence for two large offshore blocks in the Caspian Sea.
"I should also add that Nelson and all of our operating units work closely with
the relevant government regulatory bodies to receive and maintain approvals for
work programs for all of our properties. We expect that these programs will
continue to comply with all legislative and regulatory requirements, including
the requirements for utilization of associated gas. I am confident that Nelson
will be able to continue to operate its fields in accordance with national
regulations and to achieve continuing growth in value for our shareholders."
FINANCIAL REVIEW
================
================================================================================
(In thousands of U.S. dollars, Three months ended
except per barrel amounts) March 31
2005 2004
--------------------------------------------------------------------------------
Crude oil prices ($/bbl)
Brent 47.71 31.91
Net realization 40.72 27.04
Revenues 98,468 26,398
Gross operating profit* 66,559 14,459
EBIT** 62,743 588
Net profit/(loss) after tax 35,845 (9,845)
Debt 181,011 172,318
Cash on hand 62,593 45,539
-------- --------
Net debt after cash 118,418 126,779
Not included in gross operating profit:
Other compensation costs 9,105 (9,729)
Derivative instruments (5,320) (4,019)
Depreciation and amortization (12,921) (4,142)
================================================================================
* Gross operating profit is revenues less costs of production, sales and
transportation expenses and general and administrative expenses
** EBIT, earnings before interest and taxes, is gross operating profit less
other compensation costs and depreciation and amortization
Overview
--------
A comparison of Q1 2005 with Q1 2004 illustrates how significantly the Company
has grown in the past year through successful organic expansion and development
of its productive properties and through acquisition. The achievements were
manifested in significant increases in assets, production and revenues, and
profits over the year. Nelson has achieved excellent results in Q1, realizing a
cash flow surplus after investing activities, this despite the effects that
severe weather conditions during the first months of 2005 had on production and
marketing. This surplus has been applied to reduce outstanding debt.
Operating Activities
--------------------
Net after-tax earnings increased to a profit of $35.8 million in Q1 2005
compared with a loss of $9.8 million in Q1 2004 and a loss of $6.5 million in Q4
2004. The comparison of net earnings is distorted by differences in the
statutory accounting treatment of derivative contracts and, more significantly
as discussed below, changes in the value of incentive stock options granted to
employees. Cash flow from operating activities rose to $35.1 million for Q1
2005, compared with $1.0 million for Q1 2004.
In comparison with Q1 2004, revenues in Q1 2005 increased 273% to $98.5 million,
reflecting both the 148% growth in quantities of crude oil sold and a 51%
increase in average realized selling price to $40.72/bbl, in Q1 2005, from the
$27.04/bbl average of Q1 2004. Gross operating profit (defined as revenues less
operating costs - production, transportation and marketing, and general and
administration costs) increased 360% to $66.6 million, due to the increase in
quantities sold, marginally reduced by an 8% increase in operating costs to
$13.04/bbl - the result of higher costs of production at new acquisitions
relative to KOA.
Net after-tax earnings increased to a profit of $35.8 million in Q1 2005
compared with a loss of $9.8 million in Q1 2004. Net after-tax profit for Q1
2005 is boosted by a non-cash credit to earnings of $9.1 million, related to a
change in the value of employee stock options, compared to the after-tax loss
for Q1 2004 that included a non cash charge related to employee stock options of
$9.7 million.
Revenues increased by 11% quarter-on-quarter from $88.3 million, reflecting a
21% increase in the average selling price realized to $40.72/bbl from the
$34.06/bbl average of Q4 2004, marginally enhanced by the inclusion of the Arman
field in Q1 2005, and partly negated by a 7% decline in the quantity of crude
oil sold between the periods. Gross operating profit for Q1 2005 of $66.6
million represented an increase of 24% from $53.7 million in the fourth quarter
of 2004, attributable largely to the increase in realized selling prices and the
non-recurrence of certain operating costs recorded in Q4 2004.
The net after-tax profit of $35.8 million in Q1 2005 compares with a loss of
$6.5 million in Q4 2004. This includes a $9.1 million non-cash credit related
to employee stock options, whereas in Q4 2004, net after-tax results included a
charge of $18.7 million related to these options.
Investing Activities
--------------------
In Q1 2005, virtually all of the $20.0 million cash used in investing activities
was applied to the gathering of seismic data, drilling, and development of the
field infrastructure, the purchase price of Arman having been funded in December
2004. The level of investment in field activities was somewhat constrained by
the inclement weather, but continued the trend of increasing investment in field
development - when compared with $23.5 million in the last quarter and $10.9
million in Q1 2004 - as the Company seeks to increase production through organic
growth, as well as selective acquisition.
Financing Activities
--------------------
For Q1 2005, the company realized a net surplus cash flow after investing
activities of $15.1 million. This surplus was applied to a reduction in funded
debt by $6.2 million after the payment of interest and cash amortization of call
options sold.
MANAGEMENT DISCUSSION AND ANALYSIS
==================================
A full Management's Discussion and Analysis document is available on the
Company's website, www.nelsonresources.com, and on SEDAR, www.sedar.com. The
document can also be obtained on application from the Company.
RESTATEMENT OF 2004 QUARTERLY REPORTS
=====================================
As announced by the Company on March 31, 2005, 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. The restated Q1 2004
statements and the accompanying Management Discussion and Analysis document are
being filed today, and will be available on the Company's website,
www.nelsonresources.com, and on SEDAR, www.sedar.com. They can also be obtained
on application from the Company.
REVIEW OF OPERATIONS
====================
At March 31, 2005, the Company has interests in five onshore producing fields in
western Kazakhstan.
During Q1 2005, Nelson continued the successful growth achieved in 2004, with
the Company's share of production from its fields increasing despite the adverse
conditions due to the unexpectedly long and harsh winter. During the quarter,
production of crude oil net to Nelson (with the KKM share taken as 76%) averaged
27,439 barrels of oil per day (bopd), an increase of 28% over the average rate
for the previous quarter of 21,362 bopd, and a 141% increase over the average
rate for Q1 2004 of 11,374 bopd.
This increase was due primarily to the acquisitions of a further 40% stake in
KKM and a 50% interest in the Arman field, but also reflects increases in total
field production from the Alibekmola, North Buzachi and Karakuduk fields.
Nelson is continuing to make good progress with its field development programs
at Alibekmola, North Buzachi and Karakuduk fields, with additional wells
drilled, rigs mobilized, processing facilities expanded and further wells added
to the water injection fund. At Kozhasai, the pilot production program has seen
the first new well completed, with initial test results expected during the
second quarter of 2005.
The following table details production amounts, production rates and sales
volumes over the quarter, as given for financial reporting purposes - KOA and
North Buzachi at 50%, Chaparral/KKM at 100%, and Arman at 50% since February 1,
2005.
================================================================================
Production Production rate Sales
(bbls) (bopd) (bbls)
Q1 2005 Q1 2004 Q1 2005 Q1 2004 Q1 2005 Q1 2004
--------------------------------------------------------------------------------
KOA 1,181,991 725,683 13,133 7,975 1,176,118 656,383
North Buzachi 508,519 309,388 5,650 3,400 510,703 319,709
Chaparral/KKM* 779,290 - 8,659 - 642,943 -
Arman** 93,386 - 2,075 - 88,518 -
--------- --------- ------- ------- --------- ---------
Total 2,563,186 1,035,071 29,517 11,374 2,418,282 976,092
================================================================================
* Nelson had no interest in Chaparral in Q1 of 2004
** Production and sales from Arman are included as of the registration date of
February 14, 2005
Kazakhoil Aktobe (KOA)
----------------------
During the quarter, KOA continued with a four-rig drilling program at the
Alibekmola field, with four new wells drilled. At Kozhasai, a one-rig pilot
drilling program is underway and the first new well has been completed, with
test results expected during the second quarter of 2005. Although no increases
in production occurred during the quarter due to the severity of the winter
weather, since the end of the first quarter, production from Alibekmola has
reached 30,000 bopd, up from 27,000 bopd at the end of 2004.
Other activities during the quarter include:
- Processing facilities - existing facilities at Alibekmola are being
debottlenecked to reach a capacity of 42,000 bopd by the end of May.
- Water injection - pilot water injection at Alibekmola was expanded, with four
wells injecting at the end of March and work continuing to bring a further six
wells onto injection by August.
- Field facilities - new field camp completed during the quarter; oil gathering
system expanded and the gas processing facility design was submitted to KOA
for approval.
North Buzachi
-------------
During the quarter, seven new wells were drilled at the field with an average
well depth of 1,600 ft - each taking approximately 12 days to drill. Two
additional rigs are mobilizing to start drilling in the second quarter. Field
production increased throughout the quarter to 12,000 bopd in March.
Other activities during the quarter include:
- Processing facilities - facilities at the nearby Arman field, currently used
to process North Buzachi oil, have been expanded to handle 13,500 bopd. Work
to upgrade North Buzachi's own processing facilities to handle 20,000 bopd is
continuing and scheduled for completion in June.
- Water injection - two further wells were added to the injection fund, bringing
the total to five. Injection rates reached 10,000 barrels of water per day by
the end of March.
Karakudukmunai (KKM)
--------------------
Three new wells were completed during the quarter, increasing the field well
count to 69 (excluding abandoned wells). A total of 50 wells were active at the
end of the quarter, and production has increased steadily due to new wells
online, recompletion of existing wells to more production zones, and increased
application of artificial lift. Since the end of the quarter, production has
exceeded 10,000 bopd.
Other activities during the quarter include:
- Water injection - an additional well was transferred to injection during the
quarter, and the injection program is continuing to have positive results on
oil production rates.
- Field facilities - the first phase of the gas utilisation project has been
completed, allowing gas to be used for heating purposes thus reducing
operating costs. Work on the second phase, allowing the sale of excess gas,
will commence in the second quarter.
Arman
-----
The acquisition of the 50% stake in the Arman field was successfully finalized
on February 14, 2005. The field continues to be operated by Shell, Nelson's
joint venture partner. During the quarter, work continued to maintain production
levels through well services and workovers, with the field producing 4,200 bopd
at the end of the quarter.
****
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)
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 1,100
people. Common shares of Nelson are listed on the Toronto Stock Exchange and
London's Alternative Investment Market under the symbol NLG.
Further information on Nelson Resources can be found on the Company's website at
www.nelsonresources.com.
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 can also be found on the Company's website,
www.nelsonresources.com.
================================================================================
NELSON RESOURCES LIMITED
Unaudited Consolidated Statements of Operations
--------------------------------------------------------------------------------
Expressed in thousands of U.S. dollars, Three months ended
except per share amounts March 31
2005 2004*
--------------------------------------------------------------------------------
Revenue
Crude oil $ 98,468 $ 26,398
Expenses
Cost of production 10,788 3,516
Sales and transportation 14,630 5,217
Depreciation and amortization 12,921 4,142
General and administration 6,491 3,206
Derivative instruments 5,320 4,019
Other compensation costs (9,105) 9,729
-------- --------
41,045 29,829
--------------------------------------------------------------------------------
Profit/(loss) from operations 57,423 (3,431)
--------------------------------------------------------------------------------
Other income/(expenses)
Foreign exchange loss (751) (937)
Interest and financing costs (5,484) (4,496)
Interest and other income 1,230 783
Minority interest (1,533) -
-------- --------
(6,538) (4,650)
--------------------------------------------------------------------------------
Profit/(loss) before income taxes 50,885 (8,081)
--------------------------------------------------------------------------------
Income taxes (15,040) (1,764)
--------------------------------------------------------------------------------
Net profit/(loss) $ 35,845 $ (9,845)
--------------------------------------------------------------------------------
Basic profit/(loss) per share 0.0415 (0.0133)
Diluted profit/(loss) per share 0.0406 (0.0133)
Weighted average common shares outstanding 863,090,139 742,758,882
Diluted weighted average common shares outstanding 882,009,251 742,758,882
================================================================================
* as restated
****
================================================================================
NELSON RESOURCES LIMITED
Consolidated Balance Sheets
--------------------------------------------------------------------------------
Expressed in thousands of U.S. dollars, March 31 December 31 March 31
except share amounts 2005 2004 2004*
unaudited audited unaudited
--------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 62,593 $ 56,486 $ 45,539
Accounts receivable and prepaid expenses 64,413 57,693 24,685
Inventory 16,718 15,175 7,737
-------- -------- --------
Total current assets 143,724 129,354 77,961
Oil and gas properties, full cost 313,719 297,879 141,750
Property, plant and equipment 20,630 20,119 16,765
Advances to oil and gas limited partnership 27,052 26,646 24,635
Derivative instruments 197 - -
Deferred tax 17,750 9,359 -
Other non-current assets 6,142 3,871 328
--------------------------------------------------------------------------------
Total assets $ 529,214 $ 487,228 $ 261,439
--------------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable $ 40,477 $ 31,471 $ 18,847
Accrued liabilities and deferred income 18,742 21,638 8,497
Income taxes payable 11,557 5,398 631
Derivative instruments 55,134 29,638 7,838
Note payable to related party 23,912 23,912 -
Bank loan - - 90,000
Current portion of long-term debt 40,674 41,523 8,967
-------- -------- --------
Total current liabilities 190,496 153,580 134,780
Long-term liabilities - debt 116,425 121,776 73,350
Deferred tax 3,201 3,258 -
Other provisions and creditors 2,945 1,972 276
Minority interest 23,409 21,877 -
--------------------------------------------------------------------------------
Total liabilities 336,476 302,463 208,406
--------------------------------------------------------------------------------
Shareholders' equity
Share capital 8,634 8,620 7,452
Additional paid in capital 295,317 294,462 183,777
Other compensation costs 21,650 31,221 13,744
-------- -------- --------
325,601 334,303 204,973
Accumulated deficit (101,115) (136,960) (150,500)
Other comprehensive loss (31,748) (12,578) (1,440)
--------------------------------------------------------------------------------
Total shareholders' equity 192,738 184,765 53,033
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 529,214 $ 487,228 $ 261,439
--------------------------------------------------------------------------------
Outstanding share capital
--------------------------------------------------------------------------------
Common shares, U.S.$0.01,
1,500,000,000 authorized 863,398,095 862,036,095 745,113,967
Preferred shares, U.S.$0.01,
50,000,000 authorized - - -
================================================================================
* as restated
****
================================================================================
NELSON RESOURCES LIMITED
Unaudited Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
Expressed in thousands of U.S. dollars Three months ended
March 31
2005 2004*
--------------------------------------------------------------------------------
Cash Flows from continuing operations
Net profit/(loss) from continuing operations $ 35,845 $ (9,845)
Adjustments to reconcile net profit/(loss) to
net cash provided by operating activities:
Deferred tax (214) -
Interest income (406) -
Other compensation costs (9,105) 9,729
Exchange rate loss 42 1,297
Depreciation and amortization 12,921 4,142
Discount accretion 369 327
Derivative instruments (1,881) 3,943
Retirement obligation accretion 47 6
Amortization of note discount 151 -
Loan arrangement fee amortized 733 648
Minority interest 1,533 -
-------- --------
40,035 10,247
Decrease/(increase) in working capital (4,966) (9,236)
--------------------------------------------------------------------------------
Net cash provided by operating activities 35,069 1,011
--------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditure on oil and gas properties (23,407) (4,544)
Acquisition of Arman 3,451 -
Acquisition of participatory interest in North Buzachi - (32,250)
Purchase of property, plant and equipment (15) (5,055)
Advances to oil and gas limited partnership - (1,317)
--------------------------------------------------------------------------------
Net cash used in investing activities (19,971) (43,166)
--------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from exercise of stock options 403 2,448
Bank loans received 26,366 42,000
Bank loans repaid (33,086) -
Other non-current assets (2,674) -
--------------------------------------------------------------------------------
Net cash provided by/(used in) financial activities (8,991) 44,448
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6,107 2,293
Cash and cash equivalents at beginning of period 56,486 43,246
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 62,593 $ 45,539
================================================================================
* as restated
****
NELSON RESOURCES LIMITED
Notes to First Quarter 2005
Interim Unaudited Consolidated Financial Statements
Note 1 Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements as of March 31, 2005 and for
the three month periods ended March 31, 2005 and 2004 are unaudited but include
all adjustments (consisting of normal recurring adjustments) that the Company
considers necessary for a fair presentation of the consolidated financial
information set forth therein and in accordance with generally accepted
accounting principles. The accompanying consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting principles
(U.S. GAAP). The auditor did not conduct a review of the original consolidated
financial statements as of March 31, 2004 and for the three month period ended
March 31, 2004. The auditor's review of the restatement of such March 31, 2004
financial statements was solely to review the impact of the restatements
identified during the 2004 year-end audit. All amounts are stated in U.S.
dollars unless otherwise indicated.
The accounting policies followed are consistent with those outlined in the
annual audited financial statements. These unaudited consolidated financial
statements do not include all disclosures normally provided in annual financial
statements and should be read in conjunction with the Company's audited annual
consolidated financial statements for the year ended December 31, 2004.
The consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries, Commonwealth & British Services
Limited ("CBS"), NRL Acquisition Corp. ("NRLAC"), Nelson Petroleum Buzachi
Holdings B.V. ("NPBH BV"), Nelson Petroleum Buzachi B.V. ("NPB BV"), Nelson
Buzachi Holdings Limited ("NBHL"), Nelson Buzachi Limited ("NBL"), Nelson
Petroleum (KKM) Holdings Ltd, Nelson Petroleum (KKM) Ltd, NR Exploration
Holdings Ltd and NR Exploration Ltd. NPB BV holds a 50% participatory interest
in the license to the North Buzachi field, which is reflected on a proportionate
gross basis.
The Company's interest in Kazakhoil Aktobe LLP ("KOA"), an oil and gas limited
partnership in which the Company has a 50% equity interest, is reported using
the proportional consolidation method under EITF 00-1 "Investor Balance Sheet
and Income Statement Display under the Equity Method for Investments in Certain
Partnerships and Other Ventures" as these operations are in the extractive
industry where there is a longstanding practice of this treatment.
Chaparral Resources, Inc. ("Chaparral") in which the Company bought a 60%
controlling interest on May 17, 2004 is fully consolidated. The consolidated
financial statements of Chaparral include the accounts of Chaparral and its
greater than 50% owned subsidiaries, Closed Type JSC Karakudukmunai ("KKM"),
Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Korporatsiya Mangistau
Terra International ("MTI"), Road Runner Services Company ("RRSC"), Chaparral
Acquisition Corporation ("CAC") and Central Asian Petroleum, Inc. ("CAP-D").
Chaparral owns 80% of the common stock of CAP-G directly and 20% indirectly
through CAP-D. Chaparral owns, through its subsidiaries, a 60% interest in KKM.
KKM was formed to engage in the exploration, development, and production of oil
and gas properties in the Republic of Kazakhstan. KKM's only significant
investment is in the Karakuduk field, an onshore oil field in the Mangistau
region of the Republic of Kazakhstan.
On December 27, 2004, Nelson acquired a 40% interest in KKM, a 60% owned
subsidiary of Chaparral from Kazmunaigas, the Kazakhstan state oil company. KKM
holds a 100% interest in the Karakuduk field. The acquisition increased
Nelson's effective interest in the Karakuduk field from its 36% effective
interest held through Chaparral, to an aggregate 76% effective interest in the
Karakuduk field.
KKM's rights to the Karakuduk field may be terminated under certain conditions
specified in the field agreement. The term of the agreement is 25 years
commencing from the date of KKM's registration. The agreement can be extended
to a date agreed between the Ministry of Energy and Mineral Resources and KKM as
long as production of petroleum and/or gas is continued in the Karakuduk field.
Acquisition of Arman
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
license 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. The
Company's interest in Arman is reported using the proportional consolidation
method under EITF 00-1.
The fair value of assets and liabilities of Arman included in the accounts for
the quarter ended March 31, 2005 will be subjected to further investigation and
review during 2005, as permitted by FAS No. 141 "Business Combinations". While
the effective date of acquisition of the interest in Arman is February 14, 2005,
for the purposes of the consolidated statements, the income statement figures
have been consolidated from February 1, 2005 given that currently it is not
practicable to perform a consolidation at the effective date of acquisition.
Consequent to the completion of further investigation and review during 2005,
the fair values of assets and liabilities will be adjusted to reflect the
consolidation from the effective date of February 14, 2005.
All material intercompany balances and transactions are eliminated.
Note 2 Economic and Operating Environments
The Company's continued business activities are located in Kazakhstan. As an
emerging market, Kazakhstan does not possess a well-developed business and
regulatory infrastructure that would generally exist in a more mature market
economy. Furthermore, the Government of Kazakhstan has not yet fully implemented
the reforms necessary to create judicial, taxation and regulatory systems that
function with the effectiveness often achieved in more developed markets. As a
result, operations in transitional countries involve risks that are not
typically associated with those in developed markets.
Uncertainties regarding the political, legal, tax or regulatory environment,
including the potential for adverse changes in any of these factors could
significantly affect the Company's ability to operate commercially. It is
difficult for management to estimate what changes may occur or the resulting
effect of any such changes on the Company's financial position or future results
of operations.
The accompanying consolidated financial statements do not include any
adjustments that may result from the future clarification of these
uncertainties. Such adjustments, if any, will be reported in the Company's
consolidated financial statements in the period when they become known and
estimable.
Note 3 Short-term and Long-term debt
At March 31, 2005 and December 31, 2004 short-term debt comprised:
--------------------------------------------------------------------------------
March 31 December 31
2005 2004
($'000) ($'000)
--------------------------------------------------------------------------------
BNP Paribas loan - KOA 25,000 25,000
ECGD Facility - KOA 745 745
Kazkommertsbank loan - Chaparral 14,929 15,778
------- -------
40,674 41,523
--------------------------------------------------------------------------------
At March 31, 2005 and December 31, 2004 long-term debt comprised:
--------------------------------------------------------------------------------
March 31 December 31
2005 2004
($'000) ($'000)
--------------------------------------------------------------------------------
Due to the Republic of Kazakhstan - KOA 12,545 12,175
Vitol loan - Buzachi - 23,837
Kazkommertsbank loan - Chaparral 10,000 12,000
BNP Paribas loan - KOA 10,418 16,667
BNP Paribas loan - Buzachi 26,365 -
ECGD Facility - KOA 4,097 4,097
HSBK - Buzachi 53,000 53,000
------- -------
116,425 121,776
--------------------------------------------------------------------------------
Note 4 Shareholders' Equity
As of March 31, 2005 the Company had 863,398,095 shares outstanding. As of such
date, the Company had the following contingently issuable shares.
--------------------------------------------------------------------------------
Number Weighted average
exercise price (Cdn$)
--------------------------------------------------------------------------------
Stock options oustanding 49,170,874 1.47
--------------------------------------------------------------------------------
Note 5 Commitments and Contingencies
a) Under the license for the Alibekmola and Kozhasai fields, KOA is required to
invest a minimum of $47.5 million and $24.5 million over the term of the
license, respectively. The license expires on October 19, 2023. As at March
31, 2005 the minimum investment requirement for Alibekmola has been met. All
minimum investment requirements under the license for the North Buzachi field
have been met.
b) A claim has been received from the Company's former Chief Operating Officer,
Mr. Roy Meade. Mr. Meade is demanding that the Company make a payment of
$2.8 million to him pursuant to a Stock Option Agreement concluded between
the Company and Mr. Meade on or about December 1, 1999. The company's
position is that no monies are due and owing to Mr. Meade. Mr. Meade has not
commenced proceedings in pursuit of his claim. If any proceedings are
commenced by Mr. Meade, they will be vigorously defended by the Company.
c) Extensive national, regional and local environmental laws and regulations
affect all of the oil operations conducted through the Company's joint
ventures in Kazakhstan. These laws and regulations set various standards
regulating certain aspects of health and environmental quality, provide for
user fees, penalties and other liabilities for the violation of those
standards and establish in some circumstances obligations to remediate
current and former facilities and off-site locations.
The Company believes it is currently in compliance with all existing Kazakhstan
environmental laws and regulations. However, in the future, compliance with more
stringent laws or regulations, or more vigorous enforcement policies of any
regulatory agency, could require material expenditures for the installation and
operations of systems and equipment for remedial measures, any or all of which
could have a material adverse affect on its business, financial condition and
results of operations.
Note 6 Reconciliation of results from U.S. GAAP to Canadian GAAP
These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the U.S. (U.S. GAAP), which conform
in all material respects with those applicable in Canada (Canadian GAAP), except
as described below:
(a) Stock-Based Compensation and Other Stock-Based Payments
Applicable for financial periods beginning on or after January 1, 2004, the
Canadian Institute of Chartered Accountants ("CICA") has amended CICA Handbook
Section 3870 "Stock-Based Compensation and Other Stock-Based Payments". This
Section requires stock-based compensation and other payments to be recognised in
the financial statements through expense, and share-based transactions to be
measured on a fair value method. Under U.S. GAAP, the Company values stock
options using the intrinsic value method (note 2(o)). Under Canadian GAAP, the
impact on net profit/(loss) of valuing stock options using the fair value method
would be as follows:
--------------------------------------------------------------------------------
Three months ended
March 31
($'000) except share amounts 2005 2004
--------------------------------------------------------------------------------
Net profit/(loss) Per U.S. GAAP 35,845 (9,845)
Reverse other compensation costs
per the intrinsic method (9,105) 9,729
Other compensation costs
per the fair value method (3,414) (70)
------- -------
Per Canadian GAAP 23,326 (186)
Basic earnings/(loss) Per U.S. GAAP 0.0415 (0.0133)
per share Per Canadian GAAP 0.0270 (0.0003)
Diluted earnings/(loss) Per U.S. GAAP 0.0406 (0.0133)
per share Per Canadian GAAP 0.0264 (0.0003)
--------------------------------------------------------------------------------
(b) Financial Instruments
In January 2005, CICA introduced three new Handbook Sections relating to
financial instruments, Section 1530 "Comprehensive Income, Section 3855
"Financial Instruments - Recognition and Measurement", and Section 3865
"Hedges". As permitted by these standards, the Company adopted these standards
as of January 1, 2004. As a result, the accounting for the Company's cash flow
hedges in 2004 and 2003 is consistent under U.S. GAAP and Canadian GAAP.
****
END
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