15 August 2005
NELSON RESOURCES LIMITED REPORTS SECOND QUARTER RESULTS,
CONTINUED GROWTH IN PRODUCTION AND REVENUE AND
ADDITIONS TO RESERVES
Nelson Resources Limited (TSX / AIM: NLG), a leading independent exploration and
production company operating in Kazakhstan, today reports its results for the
three and six months ended June 30, 2005. All amounts are expressed in U.S.
dollars unless otherwise indicated.
HIGHLIGHTS
==========
Year on year, H1 2004 to H1 2005:
- Oil revenue up 191% to $222.2 million (H1 2004 $76.4 million)
- Oil production increased by 116% to 5.5 million barrels (H1 2004 2.5 million
barrels)
- Net profit increased to $60.1 million, from a H1 2004 loss of $6.6 million
Quarter on quarter, Q1 to Q2 2005:
- Production net to Nelson averaged 29,693 barrels of oil per day - up 8% from
27,439 bopd for Q1 2005
- Gross operating profit increased 16% to $77.0 million (Q1 2005 $66.6 million)
- Net profit after tax declined to $24.2 million from $35.8 million in Q1 2005,
due primarily to an increase in other compensation charges resulting from the
increase in the market price of the Company's common stock
Operations:
- Proved and probable reserves were increased by Nelson's independent petroleum
engineering advisor to 270 million barrels, up from 235 million barrels
previously, due to successful pilot wells at the Kozhasai field and the
assignment of an initial value to Nelson's interest in the Arman field
acquired in Q1.
- 19 new wells were added during the quarter to bring the well stock to 191
producing wells and 21 water injection wells across the group's five producing
fields.
- North Buzachi commissioned a new oil processing facility with 20,000 bopd
capacity.
Nick Zana, Nelson's Chief Executive Officer, commented, "Nelson continues to
make excellent progress in accordance with the very ambitious work programs we
have undertaken for 2005 in all our locations. We are making solid achievements
in all areas including drilling, water flood, expansion of processing capacity
and provisions for the utilization of associated gas. I am most gratified by the
two new wells that KOA has drilled and is testing in Kozhasai that have allowed
us to book additional reserves for this very prospective field. Our team is
working hard to realize the potential of the Nelson group's five producing oil
fields with the goal of adding value for our shareholders."
Mr. Zana further commented, "My 32 years in the oil industry compels me to
comment on the fact we are in a period of unprecedented high oil prices. This
is very fortuitous for a young oil company as it allows us to fund our field
development costs largely through operating cash flow. However, it is
accompanied by inflation in the costs of equipment, services and personnel as
well as tougher demands by governmental authorities. We in the oil industry have
seen these cycles before and recognize the demands of managing our businesses
through this exciting and challenging period."
FINANCIAL REVIEW
================
================================================================================
(in thousands of U.S. dollars, Three Months Ended Six Months Ended
except per barrel and June 30 June 30
share amounts) 2005 2004 2004 2003
--------------------------------------------------------------------------------
Crude oil prices ($/bbl)
Brent 51.61 35.40 49.67 33.65
Net realization 45.61 29.60 43.30 28.66
Revenues 123,700 49,994 222,168 76,392
Gross operating profit* 76,971 27,224 143,530 41,683
EBIT** 59,297 24,721 122,040 25,309
Net profit/(loss) after tax 24,207 3,262 60,052 (6,583)
Debt 184,431 226,808 184,431 226,808
Cash on hand 55,016 26,371 55,016 26,371
Net debt after cash 129,415 200,437 129,415 200,437
Not included in
gross operating profit:
Other compensation costs (2,792) 4,955 6,313 (4,774)
Derivative instruments (6,961) (12,267) (12,281) (16,286)
Depreciation and amortization (14,882) (7,458) (27,803) (11,600)
================================================================================
* 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
The first half of 2005 has seen continued improvements in both operating and
financial results, with significant increases in revenues, cash flow and assets.
Although the increase in the market price of crude oil over the past six months
has contributed to this growth, the improvements in the financial results are
due more to the successful realization of the Company's investment program than
they are to price increases: in the first half of 2005, Nelson's interest in
production of crude oil increased 116% to 5.5 million barrels from 2.5 million
barrels in the first half of 2004, whereas the average market price of crude oil
(Brent) increased 48% to $49.67/bbl for the first half of 2005 from $33.65/bbl
for the first half of 2004.
Steady improvements in marketing activities have resulted in a 51% increase in
the net realization on crude oil sales achieved in the first half of 2005
relative to the first half of 2004, to $43.30/bbl, a healthy premium to the 48%
increase in the market price of crude oil mentioned above. This efficiency is
also manifest in realized price developments during the second quarter of 2005,
during which the net realization increased 12% (to $45.61/bbl), compared with a
8% increase in the Brent market price (to $51.61/bbl) obtained in the first
quarter of 2005.
Q2 2005 versus Q1 2005
----------------------
For the second quarter of 2005 ended June 30, revenues increased 26% over the
prior quarter on growth in production of 14%. Gross operating profit increased a
more modest 16%, on a Q2 to Q1 comparative basis, due to demand driven inflation
in the cost of oil field equipment and services, this at the operating company
level, an increase in general and administrative expenses related to investment
in accounting activities and systems, the costs of which are carried at the
holding company level, and accrual of an increase in environmental fees related
to flaring allocated to costs of production.
Despite improvements in operating results, net after-tax profit for the second
quarter declined to $24.2 million from $35.8 million for Q1, due in large part
to the requirement that, pursuant to U.S. GAAP FAS 123, changes in the value of
stock options held by employees and directors of the Company are recognized in
the profit and loss statement as additional compensation. Therefore, as the
result of an increase in the market price of the common stock of the company to
Cdn$1.97 as of June 30, 2005 from Cdn$1.85 as of March 31, 2005, the Company
reported a $2.8 million charge to earnings for the second quarter of 2005 (this
compared with a $9.1 million credit to earnings in the first quarter of 2005
attributable to a decline in the market price of the Company's common stock
during Q1). Should the appreciation in the market price of the Company's stock
realized since June 30 continue through Q3, there will be additional non-cash
accounting charges to earnings in the third quarter as a result of this
accounting convention.
Environmental issues
--------------------
A factor affecting future earnings in the near term is an increase in charges
for gas flaring imposed by the Kazakh Ministry of Ecology, the result of which
is an increase of levies for the flaring of gas by a factor of 10. Due to the
rapid development profile of the oil fields in which the Company has an
interest, associated gas production has only recently become a quantifiable
challenge. In response to this challenge, and prior to the promulgation of
increases in flaring levies, Nelson had articulated, and reviewed with its
equity partners, various programs for the commercial use of associated gas. The
programs for uses of associated gas - as fuel for the generation of electricity,
re-injection and/or sale to third parties - are on schedule and are expected to
be completed in stages over 2006. Completion of these gas utilization programs
is expected to relieve Nelson (and its partners) of gas flaring levies.
Financing activities
--------------------
During the course of the first half of 2005, Nelson concluded the renegotiation
of financing arrangements for funding of its investment obligations related to
its investments in the North Buzachi and Karakuduk fields on a medium term basis
at improved terms and expects to complete, in the near term, an increase and
extension, also on more favorable terms, of financing arrangements for its
funding obligations related to the Alibekmola and Kozhasai fields. An important
feature of the new financing arrangements has been the provision for multiple
buyers under an informal tender procedure, a feature which is expected to result
in further improvements in net realization on a $/bbl basis. Nelson continues
to examine other financing arrangements which may further reduce the cost of
financing and provide greater flexibility in the use of cash flow.
MANAGEMENT'S 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.
REVIEW OF OPERATIONS
====================
During the second quarter of 2005, further solid progress was made by Nelson's
operating subsidiaries, with the Company's share of production from its fields
increasing quarter-on-quarter, and 19 new wells drilled across all fields. In
particular, the pilot development program at Kozhasai, one of the two fields
operated by KOA, has made significant advances, with initial results from a test
well in the field's West Block allowing the Company's independent reserves
auditors, McDaniel & Associates Consultants Ltd, Calgary, ("McDaniel") to
increase their evaluation of the field's proved and probable reserves
seven-fold.
During the quarter, production of crude oil net to Nelson (with the KKM share
taken as 76%) averaged 29,693 barrels of oil per day (bopd), an increase of 8%
over the average rate for the previous quarter of 27,439 bopd, and a 92%
increase over the comparable quarter of 2004. Larger increases at KKM and KOA,
due to new wells commencing production, were offset by a temporary stop in
production growth at North Buzachi due to processing facility constraints. The
successful completion of the facility upgrade at the field in June has allowed
the field to reach 15,000 bopd by early August, compared with the Q2 average of
10,662 bopd (5,331 net to Nelson). Further production increases at the other
fields since the end of the quarter have brought Nelson's current share of
production to well over 32,000 bopd.
Field development at the Company's three fields in their full field development
phase - Alibekmola, North Buzachi and Karakuduk - has made good progress during
this quarter, with drilling programs accelerating now that conditions have
improved following the adverse weather encountered during the previous quarter.
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% since May 17, 2004, and Arman at 50%
since February 14, 2005.
================================================================================
Production Production rate Sales
(bbls) (bopd) (bbls)
Q2 2005 Q2 2004 Q2 2005 Q2 2004 Q2 2005 Q2 2004
--------------------------------------------------------------------------------
KOA 1,322,576 813,510 14,534 8,940 1,271,975 906,573
North Buzachi 485,129 333,053 5,331 3,660 538,485 354,012
Chaparral/KKM 950,252 357,939 10,442 7,954 749,714 428,502
Arman 172,164 - 1,892 - 152,065 -
--------- --------- ------- ------- --------- ---------
Total 2,930,121 1,504,502 32,199 20,554 2,712,239 1,689,087
================================================================================
Reserves
--------
Following a mid-year update of the December 31, 2004 reserves figures carried
out by independent reserves evaluators McDaniel, proved and probable reserves
net to Nelson's equity interest in its fields has increased by 15%, from 234.9
million barrels to 269.6 million barrels. This increase is due to the
re-evaluation of the Kozhasai field following results from a test well, plus an
initial review of the newly-acquired Arman field.
Further to the press release of July 28, 2005, the following tables summarize
the Company's reserves at December 31, 2004, including the revised evaluation of
the Kozhasai field, but excluding the initial review of Arman.
================================================================================
Summary of Reserves(1) as of December 31, 2004
Constant(4) Prices and Costs
Reserves (mbbl)
Reserve Classification Light and Medium Oil Heavy Oil
Gross(2) Net(3) Gross(2) Net(3)
Proved:
Developed Producing 40,071 39,014 6,684 6,517
Undeveloped 67,037 64,481 52,412 51,083
------- ------- ------- -------
Total Proved 107,108 103,495 59,096 57,600
Probable 76,098 74,077 24,973 24,102
------- ------- ------- -------
Total Proved plus Probable 183,206 177,573 84,069 81,702
================================================================================
================================================================================
Summary of Net Present Values(1) after income taxes as of December 31, 2004
Constant(4) Prices and Costs
Reserve Classification Discounted at (%/Year) ($'000)
0% 5% 10% 15% 20%
Proved:
Developed Producing 552,330 473,866 416,050 371,891 337,151
Undeveloped 1,207,881 846,943 610,265 448,823 334,970
--------- --------- --------- --------- -------
Total Proved 1,760,211 1,320,809 1,026,315 820,714 672,122
Probable 1,053,400 704,763 498,611 368,956 283,026
--------- --------- --------- --------- -------
Total Proved plus Probable 2,813,611 2,025,571 1,524,927 1,189,670 955,148
================================================================================
================================================================================
Summary of Reserves(1) as of December 31, 2004
Forecast(5) Prices and Costs
Reserves (mbbl)
Reserve Classification Light and Medium Oil Heavy Oil
Gross(2) Net(3) Gross(2) Net(3)
Proved:
Developed Producing 40,071 39,013 6,684 6,517
Undeveloped 67,037 64,481 52,412 51,083
------- ------- ------- -------
Total Proved 107,108 103,494 59,096 57,600
Probable 76,098 74,070 24,973 24,102
------- ------- ------- -------
Total Proved plus Probable 183,206 177,564 84,069 81,702
================================================================================
================================================================================
Summary of Net Present Values(1) after income taxes as of December 31, 2004
Forecast(5) Prices and Costs
Reserve Classification Discounted at (%/Year) ($'000)
0% 5% 10% 15% 20%
Proved:
Developed Producing 454,687 398,088 355,245 321,784 294,960
Undeveloped 912,967 631,828 446,515 319,902 230,710
--------- --------- --------- --------- -------
Total Proved 1,367,654 1,029,916 801,761 641,686 525,671
Probable 935,151 619,355 433,981 318,250 242,096
--------- --------- --------- --------- -------
Total Proved plus Probable 2,302,805 1,649,271 1,235,741 959,936 767,766
================================================================================
(1) These tables show Nelson's share of the reserves and net present values
attributed to the fields. Numbers may not add due to rounding
(2) "Gross" means Nelson's total working interest and/or royalty interest share
before the deduction of royalties owned by others
(3) "Net" means Nelson's total working interest and/or royalty interest share
after deducting the amounts attributable to royalties owned by others
(4) Based on McDaniel constant price assumptions using December 31, 2004
closing prices
(5) Based on McDaniel forecast price assumptions at January 1, 2005 (see
www.mcdan.com or Nelson's Annual Information Form, available on
www.sedar.com)
The above tables do not include reserves attributable to the Arman field.
McDaniel conducted an initial review of this field, in which Nelson acquired a
50% stake in February 2005, based on decline rate analysis of existing producing
wells, and has attributed 4.7 million bbls of remaining recoverable proved
producing reserves to the field at December 31, 2004 (2.4 million bbls net to
Nelson). Including this field, proved plus probable reserves before royalty
deductions, net to Nelson's equity interest in its fields, therefore total 269.6
million bbls.
Kazakhoil Aktobe (KOA)
----------------------
During the quarter, KOA continued with a four-rig drilling program at the
Alibekmola field, with just under four new wells drilled. At Kozhasai, the
one-rig pilot drilling program has finished the first new well in the field's
West Block and is making rapid progress with the second test well in the same
block. Further new wells are planned to be drilled in the field's Main Block
during the second half of the year, as well as four planned reactivations of
wells from the Soviet era.
Other activities at the field include:
- Processing facilities - existing facilities at Alibekmola have been
debottlenecked to a capacity of 42,000 bopd during the quarter. Plans to start
building a new processing facility at Alibekmola during the second half of
2005, for processing of oil from Kozhasai, have been amended. KOA is planning
a pipeline spur to the Kozhasai field from the nearby Laktybai - Kenkiyak
pipeline, and a processing facility at the field itself. This will allow oil
to be processed and exported from the field directly.
- Water injection - The water injection scheme at Alibekmola has been expanded,
with significant work during the second quarter to prepare for the transfer of
up to five current producing wells to injection by the end of August. This
transfer may cause a temporary halt in the field's production growth during
the second half of the year.
- Gas utilization - the program to utilize gas and thus eliminate flaring at
Alibekmola, for which KOA pays significant permit costs, is progressing as
planned. Plans for gas injection and power generation are expected to be
submitted to the Kazakh government for approval during the third quarter.
North Buzachi
-------------
During the quarter, 11 new wells were drilled at the field in an average time of
less than 10 days per well. One rig operated continuously at the field during
the quarter, and a second started in mid-June. Two additional rigs are
mobilizing to start drilling in the second half of the year, and the Company is
currently considering deploying a fifth rig before the end of the year.
Other activities at the field include:
- Processing facilities - Work to upgrade processing facilities at the field to
handle 20,000 bopd was completed during June. Previously, North Buzachi oil
was processed at the nearby Arman field, which can handle 13,500 bopd. A
temporary decline in production in June due to the facility changeover has
been offset by large increases in production since the end of the quarter due
to the increase in available processing capacity. Arman facilities can still
be used to process oil from the field as anticipated growth in production
continues.
- Water injection - Work to upgrade injection facilities from 12,000 to 23,000
barrels of water per day continued throughout the quarter and are scheduled
for completion in August.
- Gas utilization - With the commissioning of the new processing facility at the
field during the quarter, utilization of gas for heating purposes has
increased to 30%. Additional gas-powered heater units have been purchased for
a hot water injection pilot program which will commence in the third quarter.
A project to generate power from the remaining gas is currently being
developed and is expected to be submitted for approval before the end of the
year.
Karakudukmunai (KKM)
--------------------
Just under four new wells were drilled at the Karakuduk field during the
quarter, with a closed circulation system (which prevents potentially harmful
substances from entering the environment during drilling) now fully implemented.
In addition, two workover rigs are operating at the field.
Other activities at the field 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.
- Gas utilization - The second phase of this program, which will allow gas not
used in field operations to be sold, was started in April. A pipeline
connecting the field to the Central Asian gas transit pipeline is being
constructed and is approximately 50% complete.
Arman
-----
The Arman field, a mature producing field, has 16 producing wells and five
injecting wells. Capital expenditure during the quarter was limited to
maintaining production levels from these wells through services and workovers.
Total production from the field was maintained at approximately 3,800 bopd.
****
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.
Reserves estimates require judgements and decisions based upon available
geological, geophysical, engineering and economic data. These estimates may
change, having either a positive or negative effect on the net earnings of the
company as further information becomes available and as the economic environment
changes. The estimates of reserves and future net revenue for individual
properties may not reflect the same confidence level as estimates of reserves
and future net revenue for all properties, due to the effects of aggregation.
Additional information on the Company's reserves may be obtained from the
Company's most recent annual information form, available at www.sedar.com.
****
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, except per share amounts
--------------------------------------------------------------------------------
Three months ended Six months ended
June 30 March 31 June 30 June 30 June 30
2005 2005 2004* 2005 2004*
--------------------------------------------------------------------------------
Revenues
Crude oil 123,700 98,468 49,994 222,168 76,392
Expenses
Cost of production 15,478 10,788 6,242 26,266 9,758
Sales and transportation 19,499 14,630 8,528 34,129 13,745
Depreciation and amortization 14,882 12,921 7,458 27,803 11,600
General and administration 11,752 6,491 8,000 18,243 11,206
Derivative instruments 6,961 5,320 12,267 12,281 16,286
Other compensation costs 2,792 (9,105) (4,955) (6,313) 4,774
------- ------- ------- ------- -------
71,364 41,045 37,540 112,409 67,369
--------------------------------------------------------------------------------
Profit from operations 52,336 57,423 12,454 109,759 9,023
--------------------------------------------------------------------------------
Other income/(expenses)
Foreign exchange gain/(loss) (749) (751) (907) (1,500) (1,844)
Interest and financing costs (6,232) (5,484) (5,531) (11,716) (10,027)
Interest and other income 3,658 1,230 1,326 4,888 2,109
Minority interest (2,470) (1,533) (1,945) (4,003) (1,945)
------- ------- ------- ------- -------
(5,793) (6,538) (7,057) (12,331) (11,707)
--------------------------------------------------------------------------------
Profit/(loss) before
income taxes 46,543 50,885 5,397 97,428 (2,684)
--------------------------------------------------------------------------------
Income taxes (22,336) (15,040) (2,135) (37,376) (3,899)
--------------------------------------------------------------------------------
Net profit/(loss) 24,207 35,845 3,262 60,052 (6,583)
--------------------------------------------------------------------------------
Basic earnings/(loss)
per share 0.0280 0.0415 0.0044 0.0696 (0.0088)
Diluted earnings/(loss)
per share 0.0275 0.0406 0.0042 0.0682 (0.0088)
Weighted average common
shares outstanding 863398095 863090139 745113967 863242758 743936424
Diluted weighted average common
shares outstanding 879535280 882009251 769727300 880429508 743936424
================================================================================
* as restated
****
================================================================================
NELSON RESOURCES LIMITED
Consolidated Balance Sheets
Expressed in thousands of U.s. dollars, except share amounts
--------------------------------------------------------------------------------
June 30 December 31 June 30
2005 2004 2004*
unaudited audited unaudited
--------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 55,016 56,486 26,371
Accounts receivable and prepaid expenses 83,108 57,693 37,401
Inventory 22,898 15,175 5,358
-------- -------- --------
Total current assets 161,022 129,354 69,130
Oil and gas properties, full cost 332,675 297,879 239,505
Property, plant and equipment 21,292 20,119 25,463
Advances to oil and gas limited partnership 27,713 26,646 25,530
Derivative instruments 143 - 5,073
Deferred tax 17,120 9,359 2,810
Other non-current assets 6,766 3,871 1,040
--------------------------------------------------------------------------------
Total assets 566,731 487,228 368,551
--------------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable 35,842 31,471 24,637
Accrued liabilities and deferred income 13,170 21,638 9,087
Income taxes payable 17,459 5,398 5,962
Derivative instruments 50,535 29,638 17,628
Note payable to related party - 23,912 23,912
Current portion of long-term debt 53,422 41,523 89,592
-------- -------- --------
Total current liabilities 170,428 153,580 170,818
Long-term liabilities - debt 131,009 121,776 113,304
Deferred tax 14,627 3,258 5,012
Other provisions and creditors 3,129 1,972 1,601
Minority interest 25,879 21,877 26,700
--------------------------------------------------------------------------------
Total liabilities 345,072 302,463 317,435
--------------------------------------------------------------------------------
Shareholders' equity
Share capital 8,634 8,620 7,452
Additional paid in capital 295,317 294,462 183,777
Other compensation costs 24,442 31,221 8,790
-------- -------- --------
328,393 334,303 200,019
Accumulated deficit (76,908) (136,960) (147,238)
Other comprehensive loss (29,826) (12,578) (1,665)
--------------------------------------------------------------------------------
Total shareholders' equity 221,659 184,765 51,116
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity 566,731 487,228 368,551
--------------------------------------------------------------------------------
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, except per share amounts
--------------------------------------------------------------------------------
Three months ended Six months ended
June 30 March 31 June 30 June 30 June 30
2005 2005 2004* 2005 2004*
--------------------------------------------------------------------------------
Cash flows from continuing operations
Net profit/(loss) from
continuing operations 24,207 35,845 3,262 60,052 (6,583)
Adjustments to reconcile net
profit/loss to net cash
provided by operating
activities:
Deferred tax 6,059 (214) (3,962) 5,845 (3,962)
Interest income (661) (406) - (1,067) -
Other compensation costs 2,792 (9,105) (4,955) (6,313) 4,774
Exchange rate loss 68 42 921 110 2,218
Depreciation and amortization 14,882 12,921 7,458 27,803 11,600
Discount accretion 380 369 338 749 665
Derivative instruments (1,898) (1,881) 9,155 (3,779) 13,098
Retirement obligation accretion 26 47 28 73 34
Amortization of note discount 71 151 59 222 59
Loan arrangement fee amortized 214 733 506 948 1,154
Minority interest 2,470 1,533 1,945 4,002 1,945
------- ------- ------- ------- -------
48,610 40,035 14,755 88,645 25,002
(Increase)/decrease in
working capital (30,437) (4,966) (6,809) (35,403) (16,045)
--------------------------------------------------------------------------------
Net cash provided by
operating activities 18,173 35,069 7,946 53,242 8,957
--------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditure on
oil and gas properties (27,579) (23,407) (23,592) (50,986) (28,136)
Acquisition of interest in Arman - 3,451 - 3,451 (32,250)
Acquisition of Chaparral
(net of cash acquired) - - 3,153 - 3,153
Purchase of property,
plant and equipment (1,427) (15) (5,255) (1,442) (10,310)
Advances to oil and gas
limited partnership - - (895) - (2,212)
--------------------------------------------------------------------------------
Net cash used in
investing activities (29,006) (19,971) (26,589) (48,977) (69,755)
--------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from exercise of
stock options - 403 - 403 2,448
Loans received 43,404 26,366 90,000 69,770 132,000
Loans repaid (16,523) (33,086) (90,000) (49,609) (90,000)
Note repaid to related party (23,912) - - (23,912) -
Other non-current assets 287 (2,674) (525) (2,387) (525)
--------------------------------------------------------------------------------
Net cash provided by/(used in)
financial activities 3,256 (8,991) (525) (5,735) 43,923
--------------------------------------------------------------------------------
Net increase in cash and
cash equivalents (7,577) 6,107 (19,168) (1,470) (16,875)
Cash and cash equivalents
at beginning of period 62,593 56,486 45,539 56,486 43,246
--------------------------------------------------------------------------------
Cash and cash equivalents
at end of period 55,016 62,593 26,371 55,016 26,371
================================================================================
* as restated
****
NELSON RESOURCES LIMITED
Notes to Second Quarter 2005
Interim Unaudited Consolidated Financial Statements
Note 1 Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements as of June 30, 2005 and for
the three month periods ended June 30, 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 June 30, 2004 and for the three month period ended
June 30, 2004. The auditor's review of the re-statement of such June 30, 2004
financial statements was solely to review the impact of the re-statements
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.
Acquisitions
------------
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.
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".
Certain data necessary to complete the Company's final purchase price allocation
is not yet available. The Company expects to complete its purchase price
allocation during 2005 at which time the preliminary allocation will be revised,
if necessary.
The Company has finalized the assessment of the fair value of assets and
liabilities acquired when the Company purchased a 60% controlling interest in
Chaparral on May 17, 2004 and when the Company acquired its 40% interest in KKM
on December 27,2004. The adjustment recorded during the quarter ended June 30,
2004 for Chaparral was to decrease oil and gas properties by $4.6 million and to
decrease deferred tax liabilities by the same amount. The adjustment recorded
during the quarter ended June 30, 2004 for KKM was to increase oil and gas
properties by $9.8 million and to decrease deferred tax liabilities by the same
amount.
All material intercompany balances and transactions are eliminated.
Note 2 Economic and operating environments
The Company's continued business activities are located in Kazakhstan. As an
emerging market, Kazakhstan does not possess a well-developed business and
regulatory infrastructure that would generally exist in a more mature market
economy. Furthermore, the Government of Kazakhstan has not yet fully implemented
the reforms necessary to create judicial, taxation and regulatory systems that
function with the effectiveness often achieved in more developed markets. As a
result, operations in transitional countries involve risks that are not
typically associated with those in developed markets.
Uncertainties regarding the political, legal, tax or regulatory environment,
including the potential for adverse changes in any of these factors could
significantly affect the Company's ability to operate commercially. It is
difficult for management to estimate what changes may occur or the resulting
effect of any such changes on the Company's financial position or future results
of operations.
The accompanying consolidated financial statements do not include any
adjustments that may result from the future clarification of these
uncertainties. Such adjustments, if any, will be reported in the Company's
consolidated financial statements in the period when they become known and
estimable.
Note 3 Short-term and Long-term debt
At June 30, 2005 and December 31, 2004 short-term debt comprised:
--------------------------------------------------------------------------------
June 30 December 31
2005 2004
($'000) ($'000)
--------------------------------------------------------------------------------
BNP Paribas loan - KOA 25,000 25,000
ECGD facility - KOA 745 745
Kazkommertsbank loan - Chaparral 21,455 15,778
BNP Paribas loan - Chaparral 6,222 -
------- -------
53,422 41,523
--------------------------------------------------------------------------------
At June 30, 2005 and December 31, 2004 long-term debt comprised:
--------------------------------------------------------------------------------
June 30 December 31
2005 2004
($'000) ($'000)
--------------------------------------------------------------------------------
Due to the Republic of Kazakhstan - KOA 12,924 12,175
ECGD facility - KOA 3,725 4,097
BNP Paribas loan - KOA 4,167 16,667
BNP Paribas loan - Chaparral 25,778 -
Kazkommertsbank loan - Chaparral - 12,000
Vitol loan - Buzachi - 23,837
BNP Paribas loan - Buzachi 31,415 -
HSBK - Buzachi 53,000 53,000
------- -------
131,009 121,776
--------------------------------------------------------------------------------
Note 4 Shareholders' equity
As of June 30, 2005 the Company had 863,398,095 shares outstanding. As of such
date, the Company had the following contingently issuable shares.
--------------------------------------------------------------------------------
Number Weighted average
exercise price (Cdn$)
--------------------------------------------------------------------------------
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 June
30, 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 recognized 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. 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
June 30
($'000) except share amounts 2005 2004
--------------------------------------------------------------------------------
Net profit/(loss) Per U.S. GAAP 24,207 3,262
Reverse other compensation costs
per the intrinsic method 2,792 (4,955)
Other compensation costs
per the fair value method (3,551) (64)
------- -------
Per Canadian GAAP 23,448 (1,757)
Basic earnings/(loss) Per U.S. GAAP 0.0280 0.0044
per share Per Canadian GAAP 0.0272 (0.0024)
Diluted earnings/(loss) Per U.S. GAAP 0.0275 0.0042
per share Per Canadian GAAP 0.0267 (0.0024)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Six months ended
June 30
($'000) except share amounts 2005 2004
--------------------------------------------------------------------------------
Net profit/(loss) Per U.S. GAAP 60,052 (6,583)
Reverse other compensation costs
per the intrinsic method (6,313) 4,775
Other compensation costs
per the fair value method (6,965) (134)
------- -------
Per Canadian GAAP 46,774 (1,942)
Basic earnings/(loss) Per U.S. GAAP 0.0696 (0.0088)
per share Per Canadian GAAP 0.0542 (0.0026)
Diluted earnings/(loss) Per U.S. GAAP 0.0682 (0.0088)
per share Per Canadian GAAP 0.0531 (0.0026)
--------------------------------------------------------------------------------
(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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