14 November 2005
NELSON RESOURCES LIMITED REPORTS THIRD QUARTER RESULTS,
FURTHER GROWTH IN PRODUCTION AND REVENUE
Nelson Resources Limited (TSX / AIM: NLG), a leading exploration and production
company operating in Kazakhstan, today reports its results for the three and
nine months ended September 30, 2005. All amounts are expressed in U.S. dollars
unless otherwise indicated.
HIGHLIGHTS
==========
Year on year, nine months 2005 versus nine months 2004:
- Oil revenue up 160% to $401.1 million (9 months 2004 $154.1 million)
- Oil production increased by 79% to 8.6 million barrels (9 months 2004
4.8 million barrels)
- Net profit after tax increased ten-fold to $108.0 million (9 months 2004
$10.2 million)
Quarter on quarter, Q3 2005 versus Q2 2005:
- Oil revenue up 45% to $178.9 million (Q2 2005 $123.7 million)
- Production net to Nelson averaged 31,530 barrels of oil per day - up 6% from
29,693 bopd for Q2 2005
- Gross operating profit increased 77% to $136.4 million (Q2 2005 $77.0 million)
- Net profit after tax increased by 98% to $47.9 million (Q2 2005 $24.2 million)
Operations:
- At North Buzachi, new processing facilities have been completed and further
drilling rigs commissioned, which has substantially increased production rates
at the field
- At Alibekmola, the main pressure maintenance program has been initiated with
five wells converted to water injection
- 35 new wells were drilled during the quarter, with the total well stock
reaching 220 producing wells and 27 water injection wells across the group's
five producing fields
Nick Zana, Nelson's Chief Executive Officer, commented, "Throughout the first
nine months of 2005, the Company has benefited from the diversification that it
has achieved through acquisition of interests in multiple fields over the past
two years. The operating environment remains challenging in upstream business
worldwide. Nelson has benefited from higher oil prices, but this in itself has
created a number of challenges that need to be managed to maintain our
demonstrated success."
"As previously announced on October 13, Nelson has reached an agreement to
amalgamate with Lukoil Overseas Holding Ltd., and a shareholder's meeting to
consider the proposed amalgamation will take place on December 2. After careful
consideration, the Board of Directors of the Company unanimously recommend a
vote in favour of this amalgamation."
FINANCIAL REVIEW
================
================================================================================
(in thousands of U.S. dollars, Three Months Ended Nine Months Ended
except per barrel and September 30 September 30
share amounts) 2005 2004 2005 2004
--------------------------------------------------------------------------------
Crude oil prices ($/bbl)
Brent 61.53 41.36 53.67 36.24
Net realization - gross of royalties 56.09 36.46 48.85 32.33
Net realization - net of royalties 54.10 35.76 47.54 31.85
Revenues - net of royalties 178,887 77,683 401,055 154,075
Gross operating profit* 136,441 51,284 279,971 92,967
EBIT** 95,780 39,522 217,820 64,831
Net profit after tax 47,920 16,766 107,972 10,183
Debt 128,603 188,282 128,603 188,282
Cash on hand 40,034 106,868 40,034 106,868
Net debt after cash 88,569 81,414 88,569 81,414
Not included in
gross operating profit:
Other compensation costs (22,238) (3,898) (15,925) (8,672)
Derivative instruments (10,806) (2,835) (23,087) (19,121)
Depreciation and amortization (18,423) (7,864) (46,226) (19,464)
================================================================================
* 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
Nelson is pleased to report increase in unit sales, revenues and earnings in the
third quarter ended September 30, 2005.
For the nine months ended September 30, unit sales increased 74% to 8.4 million
barrels of oil, revenues (net of royalties) increased 160% to $401.1 million,
gross operating profit increased 201% to $280.0 million and net profit after tax
increased 960% to $108.0 million.
In the third quarter, Nelson realized production of 3.1 million bbls, unit sales
of 3.3 million bbls, revenues of $178.9 million (net of royalties), gross
operating profit of $136.4 million, and after tax profits of $47.9 million.
Some of these results are somewhat modest when measured against the prior
quarter - total gross production increased about 7% from quarter to quarter and
the 22% increase in unit sales, on this comparative basis, is attributable to
inventory work down.
Growth in revenues was driven largely by the global rise in crude oil prices
which, on a quarter to quarter basis, using dated Brent as a reference price,
increased 19% to average $61.53/bbl in Q3. Marketing activities again
meaningfully enhanced this exogenous market development by increasing net
realization by 23% to $56.09/bbl.
Operating costs declined on a $/bbl basis when compared with the previous
quarter; however, this decline is attributable more to the non-recurrence in Q3
of certain expenses recognized in Q2; notably, the levy and recognition in Q2
of the increased gas flaring charges for the first quarter of 2005 and in Q3 a
reduced level, relative to Q2, of investment in corporate infrastructure. As
noted in the MD&A, a court has ruled that the levels of flaring are within
limits approved by the Kazakh Central Development Committee and therefore not
subject to additional levies. While this ruling is subject to appeal, if
ultimately confirmed by the Kazakh courts levies paid to date will be refunded
or offset, and further increased levies will not be applicable during the
period granted for the implementation of gas utilization programs.
Gross operating profit, defined as revenues less costs of production, sales and
transportation, and administration, improved 77%, in comparison to the prior
quarter, to $136.4 million.
Net profit after tax increased by 98% over the prior quarter. The improvement in
operating profitability more than offset a rise in certain financing costs and
non-cash accounting charges, notably, a $3.8 million increase in the cost of
written puts due to the rise in market price of crude oil, and $19.4 million
increased other compensation costs, attributable to the increase in the share
price by Cdn$0.70 or 36%, from the end of the second quarter, to Cdn$2.67 at the
end of the third quarter.
Driven by improved profitability, cash flow from operating activities in Q3
increased more than 300% to $79.7 million, supporting both a meaningful increase
in capital expenditures, with net cash used in investing activities almost
doubling to $45.0 million, compared with $29.0 million in Q2, and a significant
reduction in funded bank debt by $56.2 million, compared with a net increase of
debt of $3.0 million in Q2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
====================================
Management's Discussion and Analysis of the consolidated financial statements
for the third quarter 2005 will be 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 third quarter of 2005, further progress was made by Nelson's
operating subsidiaries, with the Company's share of production from its fields
increasing quarter-on-quarter, and 35 new wells drilled across all fields.
Highlights include:
- The completion of new processing facilities and the commissioning of further
drilling rigs at North Buzachi, which have substantially increased production
rates at the field.
- The initiation of the main pressure maintenance program at Alibekmola.
- The start of construction of a rail loading facility at Karakuduk which will
allow higher netbacks from crude oil sales from this field to be achieved.
During the quarter, production of crude oil net to Nelson (with the KKM share
taken as 76%) averaged 31,530 bopd, an increase of 6% over the average rate for
the previous quarter of 29,693 bopd, and a 62% increase over the comparable
quarter of 2004. Larger increases at North Buzachi and KKM, due to new wells
commencing production, were offset by a decline in production at KOA due to a
delay in water injection project completion and the transfer of five producing
wells to injection wells at the beginning of September.
The following tables detail production volumes, 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 14, 2005.
================================================================================
Production Production rate Sales
(bbls) (bopd) (bbls)
Q3 2005 Q3 2004 Q3 2005 Q3 2004 Q3 2005 Q3 2004
--------------------------------------------------------------------------------
KOA 1,292,618 1,085,261 14,050 11,796 1,433,869 1,047,839
North Buzachi 674,657 434,664 7,333 4,725 702,412 450,351
Chaparral/KKM 1,020,165 762,993 11,089 8,293 984,364 674,445
Arman(1) 158,160 - 1,719 - 185,670 -
--------- --------- ------- ------- --------- ---------
Total 3,145,600 2,282,918 34,191 24,814 3,306,315 2,172,635
================================================================================
(1) Nelson had no interest in Arman prior to February 2005
Kazakhoil Aktobe (KOA)
----------------------
During the quarter, KOA continued with a four-rig drilling program at
Alibekmola, with four new wells drilled. At Kozhasai the one-rig pilot drilling
program finished drilling the second test well in the field's West Block. This
well is now under completion, while drilling is continuing on the third test
well.
Two additional drilling rigs have also been contracted at KOA - one additional
for Kozhasai and one for Alibekmola. Both are expected to be mobilized to the
field and operational by the end of the year, thus increasing the total number
of drilling rigs in operation to seven with five at Alibekmola and the other
two at Kozhasai.
Other activities at KOA include:
- Water injection - at Alibekmola the field-wide program to maintain reservoir
pressure was initiated in early September, when the new water injection
equipment was commissioned and five producing wells were converted to water
injection. As a result, water injection has increased from 700 cubic meters
per day under the pilot waterflood scheme to about 3,500 cubic meters per day
at the end of the quarter. The conversion of producing wells to injectors has
resulted in a decrease in production of approximately 5,000 bopd. This
decrease is expected to be made up as the wells begin to respond to the
pressure maintenance program, and as new producing wells are completed and
brought on-line. However, the pace of future production increase will depend
on the rate with which water injection supports reservoir repressurization.
- Gas utilization - plans to utilize gas for power generation and reinjection,
thus eliminating flaring at Alibekmola, have been submitted to the Kazakh
government and are awaiting approval. In September, the government changed
the law on gas flaring, giving oil companies until mid-2006 to gain approval
for their gas utilization plans. This overrules the previous law requiring
immediate 100% gas utilization.
North Buzachi
-------------
During the quarter, 27 new wells were drilled at the field, with three drilling
rigs in full-time operation by the end of September. Each well is taking less
than 10 days to drill. The operating company is tendering for an additional rig,
which if available will go into operation by the end of the year.
Other activities at the field include:
- Processing facilities - the new central processing facility (CPF) was
commissioned in mid-June and has increased the nameplate processing capacity
at the field from 13,000 to 20,000 bopd. Testing of the new CPF was completed
mid-September and, with additional small process changes, the facility is
currently capable of processing 24,000 bopd. As a result, back pressure on
existing wells was lowered, and with the addition of new wells, field
production increased to 20,000 bopd by the end of the quarter. With the
removal of processing capacity constraints, several low producing wells that
were shut down at the beginning of the year are being switched back on.
- Export routes - as a result of the increase in processing capacity, crude is
no longer processed at the neighboring Arman field as before, and the pipeline
from North Buzachi to Arman has been reconnected directly to the KTO export
pipeline. New tanks have been installed allowing 5,000 bopd to be trucked to
Arman for processing, and another pipeline connecting North Buzachi to the KTO
export pipeline is being constructed, due for completion by mid-2006, after
which the original pipeline to Arman will be restored. These measures allow
additional North Buzachi crude to be processed at Arman, thus further
increasing the total available processing capacity to meet the anticipated
increases in production.
- Gas utilization - 60% of gas produced is currently being used for heating
purposes at the new CPF. A hot water injection pilot program, further
increasing the use of gas for heating, has also been initiated.
Karakudukmunai (KKM)
--------------------
Three new wells were drilled during the third quarter, with one drilling rig and
two workover rigs continuing to operate at the field. An additional three wells
are expected to be drilled during the fourth quarter, including the field's
first horizontal well.
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.
- Export routes - construction of a rail loading facility commenced in
September. When completed in mid-2006, this will allow KKM to export crude by
rail to Aktau, thus reducing its dependency on the KTO export pipeline system.
KKM produces a higher quality crude than the blend exported via KTO, a quality
differential for which it currently receives no compensation. The rail loading
facility will offer the field alternative export routes and allow KKM to
market its crude independently, thus achieving better netbacks.
- Gas utilization - Construction of the gas pipeline connecting the field to the
Central Asian gas transit pipeline has been completed. After installation of
the necessary condensate traps and gas compressors, this will allow all gas
not used in field operations to be sold, thus eliminating gas flaring at the
field before the end of 2006.
Arman
-----
Production from Arman's 16 producing wells continued throughout the quarter,
with production from the field being maintained at approximately 3,700 bopd
average since acquisition in February 2005.
LUKOIL AMALGAMATION AGREEMENT
=============================
Under the terms of the previously announced Agreement to Amalgamate with Lukoil
Overseas Holding Ltd. ("Lukoil"), Lukoil proposes to acquire, though an
amalgamation of Nelson with and into Caspian Investments Resources Ltd.,
("Caspian") Lukoil's wholly-owned subsidiary (the "Amalgamation"), all of the
issued and outstanding common shares of Nelson it does not already own in
consideration for US$2.19162 per share in cash. Lukoil announced on October 14,
2005 that Caspian had acquired from four Nelson shareholders an aggregate of
566,393,162 common shares of Nelson representing approximately 65% of the
issued and outstanding common shares of Nelson.
The Management Information Circular (the "Circular") in connection with the
special general meeting of its shareholders (the "Meeting") called to approve
the Amalgamation describes the proposed transaction in detail. All shareholders
are urged to read the Circular in its entirety. As discussed in the Circular,
the Board of Directors of Nelson unanimously recommends that shareholders vote
in favour of the Amalgamation.
For the Amalgamation to be approved, the Amalgamation resolution must be passed
by at least 75% of the votes cast by shareholders present in person or
represented by proxy at the Meeting and entitled to vote thereon.
The Meeting will be held at 10:00 a.m. (UK time) on December 2, 2005, at the
London Hilton on Park Lane, Coronation Room, 22 Park Lane, London W1K 1BE,
United Kingdom. The Circular has been mailed to all shareholders of record as of
October 25, 2005. Interested parties may also view the Circular on the SEDAR
website at www.sedar.com and on the Nelson website at www.nelsonresources.com.
****
For further information, please contact:
----------------------------------------
Nick Greene, Chief Financial Officer Tel: 020 7495 8908
Nelson Resources Limited ngreene@nelsonresources.co.uk
Fred Hodder 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, except per share amounts
--------------------------------------------------------------------------------
Three months ended Nine months ended
Sept 30 June 30 Sept 30 Sept 30 Sept 30
2005 2005 2004* 2005 2004*
--------------------------------------------------------------------------------
Revenues
Crude oil 178,887 123,700 77,683 401,055 154,075
Expenses
Cost of production 14,773 15,478 8,159 41,039 17,917
Sales and transportation 18,767 19,499 11,263 52,896 25,008
Depreciation and amortization 18,423 14,882 7,864 46,226 19,464
General and administration 8,906 11,752 6,977 27,149 18,183
Derivative instruments 10,806 6,961 2,835 23,087 19,121
Other compensation costs 22,238 2,792 3,898 15,925 8,672
------- ------- ------- ------- -------
93,913 71,364 40,996 206,322 108,365
--------------------------------------------------------------------------------
Profit from operations 84,974 52,336 36,687 194,733 45,710
--------------------------------------------------------------------------------
Other income/(expenses)
Foreign exchange gain/(loss) (233) (749) (1,175) (1,733) (3,019)
Interest and financing costs (4,831) (6,232) (5,379) (16,547) (15,406)
Interest and other income 1,540 3,658 1,815 6,428 3,924
Minority interest (5,498) (2,470) (4,264) (9,501) (6,209)
------- ------- ------- ------- -------
(9,022) (5,793) (9,003) (21,353) (20,710)
--------------------------------------------------------------------------------
Profit before income taxes 75,952 46,543 27,684 173,380 25,000
--------------------------------------------------------------------------------
Income taxes (28,032) (22,336) (10,918) (65,408) (14,817)
--------------------------------------------------------------------------------
Net profit 47,920 24,207 16,766 107,972 10,183
--------------------------------------------------------------------------------
Basic earnings per share 0.0553 0.0280 0.0201 0.1249 0.0132
Diluted earnings 0.0542 0.0275 0.0194 0.1224 0.0127
Weighted average common
shares outstanding 866066303 863398095 834097895 864194282 774209619
Diluted weighted average common
shares outstanding 884575158 879535280 864057760 881771699 800396191
================================================================================
* as restated
****
================================================================================
NELSON RESOURCES LIMITED
Consolidated Balance Sheets
Expressed in thousands of U.s. dollars, except share amounts
--------------------------------------------------------------------------------
Septmber 30 December 31 September 30
2005 2004 2004*
unaudited audited unaudited
--------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 40,034 56,486 106,868
Accounts receivable and prepaid expenses 100,863 57,693 33,828
Inventory 29,103 15,175 6,264
Deferred tax 17,289 - -
-------- -------- --------
Total current assets 187,289 129,354 146,960
Oil and gas properties, full cost 355,748 297,879 257,899
Property, plant and equipment 23,375 20,119 24,355
Advances to oil and gas limited partnership 31,200 26,646 26,088
Inventory - - 3,942
Deferred tax 5,620 9,359 10,887
Other non-current assets 5,399 3,871 3,535
--------------------------------------------------------------------------------
Total assets 608,631 487,228 473,666
--------------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable 20,531 31,471 19,723
Accrued liabilities and deferred income 18,732 21,638 9,379
Income taxes payable 43,094 5,398 11,431
Derivative instruments 55,436 29,638 38,116
Note payable to related party - 23,912 23,912
Current portion of long-term debt 28,384 41,523 59,189
-------- -------- --------
Total current liabilities 166,177 153,580 161,750
Long-term liabilities - debt 100,219 121,776 105,181
Deferred tax 13,205 3,258 6,501
Other provisions and creditors 3,701 1,972 1,703
Minority interest 31,377 21,877 30,963
--------------------------------------------------------------------------------
Total liabilities 314,679 302,463 306,098
--------------------------------------------------------------------------------
Shareholders' equity
Share capital 8,719 8,620 8,575
Additional paid in capital 312,729 294,462 293,658
Other compensation costs 33,916 31,221 12,512
-------- -------- --------
355,364 334,303 314,745
Accumulated deficit (28,988) (136,960) (130,472)
Other comprehensive loss (32,424) (12,578) (16,705)
--------------------------------------------------------------------------------
Total shareholders' equity 293,952 184,765 167,568
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity 608,631 487,228 473,666
--------------------------------------------------------------------------------
Outstanding share capital
--------------------------------------------------------------------------------
Common shares, U.S.$0.01,
1,500,000,000 authorized 871,943,094 862,036,095 857,458,095
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 Nine months ended
Sept 30 June 30 Sept 30 Sept 30 Sept 30
2005 2005 2004* 2005 2004*
--------------------------------------------------------------------------------
Cash flows from continuing operations
Net profit from
continuing operations 47,920 24,207 16,766 107,972 10,183
Adjustments to reconcile net profit
to net cash provided by
operating activities:
Deferred tax (6,103) 6,059 2,073 (258) (1,889)
Interest income (1,755) (661) - (2,822) -
Other compensation costs 22,237 2,792 3,898 15,924 8,672
Exchange rate (gain)/loss (10) 68 (43) 99 2,175
Depreciation and amortization 18,423 14,882 7,864 46,226 19,464
Discount accretion 392 380 347 1,141 1,012
Derivative instruments (1,861) (1,898) (1,951) (5,640) 11,147
Retirement obligation accretion 62 26 25 135 59
Amortization of note discount - 71 129 222 188
Loan arrangement fee amortized 790 214 101 1,738 1,255
Minority interest 5,498 2,470 4,264 9,501 6,209
------- ------- ------- ------- -------
85,593 48,610 33,473 174,238 58,475
(Increase)/decrease in
working capital (5,899) (30,437) 3,845 (41,302) (12,200)
--------------------------------------------------------------------------------
Net cash provided by
operating activities 79,694 18,173 37,318 132,936 46,275
--------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditure on
oil and gas properties (40,543) (27,579) (30,133) (91,529) (58,269)
Acquisition of interest in Arman
and North Buzachi - - - 3,451 (32,250)
Acquisition of Chaparral
(net of cash acquired) - - - - 3,153
Purchase of property,
plant and equipment (2,715) (1,427) 2,560 (4,157) (7,750)
Advances to oil and gas
limited partnership (1,732) - (558) (1,732) (2,770)
--------------------------------------------------------------------------------
Net cash used in
investing activities (44,990) (29,006) (28,131) (93,967) (97,886)
--------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from exercise of
stock options 4,734 - 46 5,137 2,494
Proceeds from equity offering
(net of fees) - - 110,774 - 110,774
Loans received 1,246 43,404 4,780 71,016 136,780
Loans repaid (57,446) (16,523) (44,229) (107,075) (134,229)
Note repaid to related party - (23,912) - (23,912) -
Other non-current assets 1,800 287 (61) (587) (586)
--------------------------------------------------------------------------------
Net cash provided by/(used in)
financial activities (49,686) 3,256 71,310 (55,421) 115,233
--------------------------------------------------------------------------------
Net increase/(decrease) in cash
and cash equivalents (14,982) (7,577) 80,497 (16,452) 63,622
Cash and cash equivalents
at beginning of period 55,016 62,593 26,371 56,486 43,246
--------------------------------------------------------------------------------
Cash and cash equivalents
at end of period 40,034 55,016 106,868 40,034 106,868
================================================================================
* as restated
****
NELSON RESOURCES LIMITED
Notes to Third Quarter 2005
Interim Unaudited Consolidated Financial Statements
Note 1 Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements as of September 30, 2005 and
for the three month periods ended September 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 September 30, 2004 and for the
three month period ended September 30, 2004. The auditor's review of the
re-statement of such September 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 Limited, Nelson Petroleum (KKM) Limited, NR Exploration
Holdings Limited and NR Exploration Limited 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 September 30, 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 $9.8 million and to decrease deferred tax liabilities by the
same amount.
All material intercompany balances and transactions are eliminated.
Note 2 Economic and operating environments
The Company's continued business activities are located in Kazakhstan. As an
emerging market, Kazakhstan does not possess a well-developed business and
regulatory infrastructure that would generally exist in a more mature market
economy. Furthermore, the Government of Kazakhstan has not yet fully implemented
the reforms necessary to create judicial, fiscal and regulatory systems that
function with the effectiveness often achieved in more developed markets. As a
result, operations in transitional countries involve risks that are not
typically associated with those in developed markets.
Uncertainties regarding the political, legal, tax or regulatory environment,
including the potential for adverse changes in any of these factors could
significantly affect the Company's ability to operate commercially. It is
difficult for management to estimate what changes may occur or the resulting
effect of any such changes on the Company's financial position or future results
of operations.
The accompanying consolidated financial statements do not include any
adjustments that may result from the future clarification of these
uncertainties. Such adjustments, if any, will be reported in the Company's
consolidated financial statements in the period when they become known and
estimable.
Note 3 Short-term and Long-term debt
At September 30, 2005 and December 31, 2004 short-term debt comprised:
--------------------------------------------------------------------------------
September 30 December 31
2005 2004
($'000) ($'000)
--------------------------------------------------------------------------------
BNP Paribas loan - KOA 22,917 25,000
ECGD facility - KOA 745 745
Kazkommertsbank loan - KKM - 15,778
BNP Paribas loan - KKM 4,722 -
------- -------
28,384 41,523
--------------------------------------------------------------------------------
At September 30, 2005 and December 31, 2004 long-term debt comprised:
--------------------------------------------------------------------------------
September 30 December 31
2005 2004
($'000) ($'000)
--------------------------------------------------------------------------------
Due to the Republic of Kazakhstan - KOA 13,315 12,175
ECGD facility - KOA 3,725 4,097
BNP Paribas loan - KOA 1 16,667
BNP Paribas loan - KKM 12,278 -
Kazkommertsbank loan - KKM - 12,000
Vitol loan - NPB BV - 23,837
BNP Paribas loan - NPB BV 17,900 -
HSBK - NPB BV 53,000 53,000
------- -------
100,219 121,776
--------------------------------------------------------------------------------
Note 4 Shareholders' equity
As of September 30, 2005 the Company had 871,943,094 shares outstanding. As of
such date, the Company had the following contingently issuable shares.
--------------------------------------------------------------------------------
Number Weighted average
exercise price (Cdn$)
--------------------------------------------------------------------------------
Stock options oustanding 40,625,875 1.65
--------------------------------------------------------------------------------
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
September 30, 2005 the minimum investment requirement for Alibekmola has been
met. All minimum investment requirements under the license for the North
Buzachi field have also been met.
b) Mr. Roy Meade, the former President of the Company, has brought an action in
the Ontario Superior Court against Nelson with respect to stock options
issued by the Company to Mr. Meade in September 1999. In 2000, the Company
cancelled all of Mr. Meade's benefits, including stock options, on the basis
that Nelson found Mr. Meade to have intentionally and fundamentally breached
his employment contract and fiduciary duties to Nelson by certain omissions
and actions that he undertook prior to his departure from the Company.
Mr. Meade claims specific performance granting him 4 million shares as well
as a mandatory injunction requiring the Company to issue such 4 million
shares to be held in escrow. In the alternative to this relief, Mr. Meade
seeks damages in the amount of Cdn$10,080,000.
The substance of this matter, along with a related wrongful dismissal claim,
was raised by Mr. Meade and has been the subject of discussions between
Mr. Meade's UK counsel and the Company's UK counsel for some time.
The Company is of the view that this action is without merit and intends to
vigorously defend the action.
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.
d) Certain loans of KOA, NPB BV and KKM are secured against the export revenues
of those companies. Under these agreements cash from the export revenues must
be paid into "collection accounts" held at nominated banks. The balance of
funds in these accounts must not fall below the interest and principal
repayments due in the following month.
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 of valuing stock options using the fair value method would be as
follows:
--------------------------------------------------------------------------------
Three months ended
September 30
($'000) except per share amounts 2005 2004
--------------------------------------------------------------------------------
Net profit Per U.S. GAAP 47,920 16,766
Reverse other compensation costs
per the intrinsic method 22,238 3,898
Other compensation costs
per the fair value method (3,321) (9,257)
------- -------
Per Canadian GAAP 66,837 11,407
Basic earnings Per U.S. GAAP 0.0553 0.0201
per share Per Canadian GAAP 0.0772 0.0137
Diluted earnings Per U.S. GAAP 0.0542 0.0194
per share Per Canadian GAAP 0.0756 0.0132
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nine months ended
Sepember 30
($'000) except per share amounts 2005 2004
--------------------------------------------------------------------------------
Net profit Per U.S. GAAP 107,972 10,183
Reverse other compensation costs
per the intrinsic method 15,925 8,672
Other compensation costs
per the fair value method (10,286) (9,391)
------- -------
Per Canadian GAAP 113,611 9,464
Basic earnings Per U.S. GAAP 0.1249 0.0132
per share Per Canadian GAAP 0.1315 0.0122
Diluted earnings Per U.S. GAAP 0.1224 0.0127
per share Per Canadian GAAP 0.1288 0.0118
--------------------------------------------------------------------------------
(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.
Note 7 Subsequent events and change of control
On September 30, 2005, the Company announced that it had entered into
negotiations with Lukoil Overseas Holding Limited ("Lukoil") regarding a
proposed acquisition of Nelson by Lukoil. On October 13, 2005, the Company
announced that it had entered into an agreement with Lukoil to effect an
amalgamation (the "Proposed Amalgamation") between Nelson and a wholly-owned
subsidiary of Lukoil. The Proposed Amalgamation is subject to the approval of
75% of the votes case by Nelson's shareholders at a special meeting of
shareholders expected to be held on December 2, 2005. Closing is subject to
certain other conditions, including the exercise, cancellation or termination of
all outstanding options to acquire shares of Nelson, the receipt of all
requisite regulatory approvals and consents necessary to consummate the Proposed
Amalgamation, and the resignation of each director and officer of Nelson
effective as of the effective date of the Proposed Amalgamation.
On October 14, 2005 Lukoil acquired approximately 65% of the shares of Nelson
and therefore became the Company's principal shareholder.
In connection with the Proposed Amalgamation, on October 13, 2005 all options in
the Company's Stock Option Plan vested. The additional charge to income as
calculated under the intrinsic value method in respect of the vesting of these
shares is approximately $1.8 million when calculated under US GAAP. The
corresponding figure under Canadian GAAP is $7.7 million.
The Company will incur significant expenditure in connection with the proposed
amalgamation including bankers' fees, legal counsel fees, other special fees and
payments for contractual matters that are not in the ordinary course of
business.
On October 26, 2005, the Company announced that the Ontario Securities
Commission ("OSC") is conducting an investigation of the trading in the shares
of Nelson. The OSC advised that the investigation is prompted by the
announcement of the Lukoil transaction on September 30, 2005.
On October 28, 2005, the Company announced that China National Petroleum
Corporation ("CNPC"), the Company's joint venture partner on the North Buzachi
oil field, intends to take the necessary measures to exercise its pre-emptive
right under the North Buzachi Joint Operating Agreement to acquire the
Company's 50% interest in the North Buzachi field, following the purchase by
Lukoil of a 65% controlling interest in the Company. Nelson takes the position
that no such pre-emptive right exists in the current circumstances.
While CNPC has advised the Company that it will take the necessary measures to
exercise its pre-emptive right in accordance with the Joint Operating Agreement,
to the knowledge of the Company, no formal legal proceedings have yet been
commenced.
The Company takes the position that Lukoil's purchase of the 65% controlling
interest in the Company on October 14, 2005, does not breach the subject
provisions of the Joint Operating Agreement and no pre-emptive right arises in
the current circumstances. The Company therefore intends to oppose any measures
taken by CNPC to prove and exercise this right.
On October 17, 2005 and October 18, 2005, respectively Paul Maxwell and Askar
Alshinbaev resigned as directors.
On November 4, 2005 KOA received a court ruling in its favour regarding the
Company's appeal against the increased levies for gas flaring in Kazakhstan.
This ruling is subject to further appeal by the Kazakh Ministry of Ecology on or
before November 19, 2005. If no appeal is made or any appeal is unsuccessful it
will result in the reversal of the excess charge for gas flaring during the
fourth quarter of 2005.
END
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