22
Nov 2013
Interim report January-September 2013

(For full report, including tables, please see attached file)

Successful drillings and record production increase operating margin to 32%

July – September 2013

  • Revenue during the quarter: SEK 26 (24) million
  • Operating result during the quarter: SEK 8 (5) million
  • Operating margin 32% (22%)
  • Basic earnings per share: SEK 0.53 (0.32)
  • Diluted earnings per share: SEK 0.30 (0.32)
  • Record production of 627 barrels per day during the quarter and 1,039 barrels per day in October
  • Well #12 in Russia successfully drilled and put into production

 

January – September 2013

  • Total revenue for the period: SEK 72 (76*) million
  • Operating result for the period: SEK 19 (23*) million
  • One-off item increased revenue and profit for 2012 by SEK 7* million
  • Basic earnings per share: SEK 0.14 (1.70)
  • Diluted earnings per share: SEK 0.14 (1.63)

 

Oil production

Q3 2013

Q3 2012

Q1-Q3 2013

Q1-Q3 2012

2012

2011

Barrels

57,700

46,400

156,810

128,700

177,850

77,300

Barrels per day

627

504

574

470

486

212

Statement from CEO Robert Karlsson

Shelton Petroleum reached a record production of 627 barrels per day during the third quarter and over 1,000 barrels per day in October, the highest in the company’s history. The operating margin of 32 per cent is strong and a significant improvement compared to previous quarters. This is the direct result of the high level of activity at the Rustamovskoye field in Russia. The results from the recent #12 well are very encouraging. The well came on stream with an initial flow rate exceeding 300 barrels per day, which is significantly higher than the field’s previous wells. The reservoir properties are of high quality with a net pay almost three times higher than in the previous wells.

From a financial point of view, the additional cash flow from the incremental oil produced and sold will contribute to further investments in the field. Increased production also means economies of scale with higher profitability per barrel. The results provide stability and flexibility in the further development of the company’s assets. From an operational point of view, higher production leads to higher efficiency in transportation and sales. Increased volumes open up opportunities for pipeline sales instead of the current trucking system. Also of great importance is that the larger net pay facilitates horizontal drillings with superior economics due to fewer wells, lower operating expenditure as well as greater and faster recovery of oil in the ground. Finally, the larger net pay and extended oil column show potential for a substantial increase of the estimated oil reserves. Further drillings, which we plan to initiate in 2014, will give evidence to the extension of the additional pay found in the new well.

The recent results provide a new and improved view on the ultimate potential of Rustamovskoye and the two adjacent licenses the company holds in Russia. I am looking forward to pursuing the opportunities that lie ahead.

January - September 2013

Financial development

Revenue from oil sales amounted to SEK 72 (69) million. During the period, Shelton Petroleum sold 151,580 (129,100) barrels of oil and the production in the period amounted to 156,810 (128,700) barrels of oil. The production has increased in both Russia and Ukraine compared to last year. The price of oil in USD in both Russia and Ukraine in the nine months 2013 were relatively stable compared to the same period last year. The strengthening of the Swedish Krona against the Russian Rouble and the Ukrainian Hryvna had a negative effect on the net revenue in the consolidated accounts.

The average daily production during the first nine months 2013 amounted to 574 barrels compared to 470 barrels the same period in 2012.

(The production in October 2013 increased to 1,039 barrels per day as a result of taking well #12 on stream)

Operating expenses in the first nine months amounted to SEK 56 (56) million and consist primarily of production costs, personnel costs and other external expenses.

The operating result for the period January – September 2013 amounted to SEK 19 (23). Revenue and result for 2012 include a positive one-off item of SEK 7 million relating to the shareholding in Tomsk Refining, and excluding this amount both revenue and operating result increased compared to last year.

In April Shelton Petroleum divested its holding in PAN European Terminals plc (PAN, previously Baltic Oil Terminals). The transaction strengthened the company’s cash position by SEK 27 million and resulted in a gain of SEK 4 million compared to the book value as of 31 December 2012. This gain was recorded as financial cost of SEK -12 million (currency exchange and market price losses compared to the original cost) and as other comprehensive income of SEK 16 million (reversal of accumulated adjustments to fair value).

As a result of the above transactions, the company’s result before tax decreased to SEK 7 (24), despite an increase in profitability from the production and sale of oil.

The group held SEK 35 million in cash and cash equivalents at the end of the period compared to SEK 31 million at 31 December 2012. In addition, the group held SEK 185 million on a blocked account representing the proceeds from Convertible 2 issued to Petrogrand AB, for further details see section Issue of convertible bonds. Cash flow for the period was SEK 4 (4) million. Cash flow from operational activities was SEK -7 (11) million in January to September and SEK 1 (11) million during the third quarter, which is below the operational profit for the periods. The lower cash flow is related to the Ukrainian operations, where the buyer of the group’s oil pays for sold and delivered oil with delays. Accounts receivable, included in Other current receivables in the balance sheet, have therefore increased during the year. At the beginning of the year accounts receivable amounted to SEK 28 million and at 30 September 2013 they amounted to SEK 47 million. The outstanding amount and the validity of the receivable have been confirmed by the counterparty.

Investments in exploration and development activity amounted to a total of SEK 46 (18) million, mainly related to the two new wells that were drilled in Russia and that encountered oil.

Financial fixed assets amounted to SEK 0 million at the end of the period compared to SEK 23 million at 31 December 2012. The decrease is related to the sale of the holding in PAN.

Shareholders' equity per share at 30 September 2013 was SEK 26.09 (24.54) and the equity to assets ratio was 49 (80) per cent. The decrease is a result of the issued convertible bonds to Petrogrand AB.

Issue of convertible bonds

In June, the company announced that the management of Shelton Petroleum and Petrogrand had decided to enter into an agreement regarding two directed issues of convertible debentures. The agreement was signed in July and extra general meetings in both companies approved the transaction in August and September respectively. Both convertibles were fully subscribed and paid for.

The first convertible, which was unconditional, amounted to SEK 30 million. This convertible had a zero coupon rate and was intended to quickly progress Shelton Petroleum’s operations through production increasing measures such as further drilling and fracking in the Rustamovskoye field among others. At the request of Petrogrand, the convertible was converted into 1,500,000 million B shares in October 2013.

The second convertible amounts to approximately SEK 185 million and is conditional upon certain events. In addition to raising production, it is Shelton Petroleum’s strategy and focus to expand its operations. Shelton Petroleum has identified several attractive opportunities on the markets in Russia and Ukraine. Petrogrand can call for conversion at a conversion price of SEK 20 given that certain activities deemed to create substantial value in Shelton Petroleum are pursued and completed. The second convertible has a market based coupon rate corresponding to the deposit rate, in essence making the net interest rate zero for Shelton Petroleum. Convertible 2 expires on 31 December 2013.

If the second convertible is converted into shares, Petrogrand’s ownership in Shelton Petroleum would amount to 50 per cent plus one share. Petrogrand has committed to distribute its shares in Shelton Petroleum to its shareholders by a Lex Asea dividend if the second convertible is converted into shares.

July - September 2013

Russian operations

Shelton Petroleum’s production of oil in Russia during the third quarter amounted to 25,620 (14,150) barrels. Production per day amounted to 278 (154) barrels, which is an increase of 81 per cent compared to the same quarter last year. The fourth well on Rustamovskoye, #12, was successfully drilled but contributed only marginally to the production in the third quarter as it started producing towards the very end of the quarter. Revenue in the third quarter for the Russian segment amounted to SEK 6.1 (3.2) million and operating profit to SEK 2.4 (0.9) million, corresponding to an operating margin of 40% (28%). This marks an increase in the operating margin compared to the first six months of the year due to the economies of scale that the incremental production provides.

There has been a high level of activity on the Rustamovskoye field in Russia during the quarter. In addition to the fracking of two wells, the new #12 was drilled, tested and taken on production. The well is producing over 300 barrels per day, which is significantly higher than the field’s previous wells. The well encountered oil in the same sandstone formation from which three previous wells are producing. The oil-bearing formation came in deeper than expected, and as a result the well has significantly extended the known oil column. The reservoir properties are of high quality with almost 9 meters of net pay, compared to up to 3 meters in previous wells. The higher net pay allows for higher well productivity as well as better conditions for future horizontal drillings with superior well economics. Later this year, Shelton Petroleum intends to publish a geological update on the Rustamovskoye field, taking into account the new results from the successful drilling of the #12 well.

Ukrainian operations

Production in the third quarter amounted to 32,080 (32,250) barrels. Production per day amounted to 349 (351) barrels. Revenue in the third quarter in the Ukrainian segment amounted to SEK 19.8 (20.7) million and operating profit to SEK 8.8 (8.4) million, corresponding to an operating margin of 44% (41%).

Shelton Petroleum (Zhoda 2001 Corporation) and its partner Ukrnafta, Ukraine’s largest oil and gas company continue the field development program on the Lelyaki field. In September, the new well #310 was put into production. The objective is to step by step enhance productivity and increase production volumes through a program consisting of new wells, sidetracks and workovers.

Significant events occurring after the reporting period

Petrogrand AB called for conversion of Convertible 1, which amounted to SEK 30 million. The loan was converted at SEK 20 and Shelton Petroleum issued 1,500,000 new B shares in October 2013. The company’s share capital increased by SEK 7,500,000.

In October, holders of SEK 22,410 thousand of convertible 2011/2013, originally issued in 2009, accepted an offer to exchange the convertible for a new convertible loan, 2013/2014, with the same conditions, that is with interest rate of 10 per cent and conversion price of SEK 16. The new convertible 2013/2014 expires on 30 June 2014 and can be converted into B shares during the period 1 June – 15 June 2014. Holders of the remaining SEK 360 thousand of convertible 2011/2013 have called for conversion at a conversion price of SEK 16, and as a result Shelton Petroleum issued 22,500 new B shares in November 2013. The company’s share capital increased by SEK 112,500.

Following the above changes the number of A shares are unchanged, 170,580, the total number of B shares amount to 11,992,508 and the total number of votes amount to 13,698,308. The company’s share capital amounts to SEK 60,815,440.

In October, the company announced the results from the fracking program and the testing of the new well #12 in Russia.

The company reached an important milestone consisting of an average production of over 1,000 barrels per day in October.

The parent company

The parent company's total assets as at the period end amounted to SEK 515 (304) million. The increase in total assets is due to the convertible loans issued to Petrogrand. Cash and cash equivalents amounted to SEK 29 (32) million. The result after tax January – September 2013 was SEK -3 (-2) million.

Risk factors and uncertainties

A detailed account of the risks facing the company can be found in the 2012 annual report. Risks include exploration risk, oil price risk, exchange rate risk, liquidity risk, credit risk, interest rate risk and political risk, among others. During the period, there has been no major change in material risk factors or uncertainties for the group or the parent company except for the credit risk, which has increased. The company’s credit risk is mainly related to oil sales in Ukraine, a country where delayed payments in business transactions are not uncommon.

Upcoming financial reporting

Year-end Report January – December 2013 24 February 2014

Annual report 2013 April 2014

Interim Report January – March 2014 19 May 2014

Interim Report April – June 2014 22 August 2014

Interim Report July – September 2014 21 November 2014

Annual General Meeting 2014 20 May 2014

Publication under Swedish law

Shelton Petroleum is publishing this information in accordance with the Swedish Financial Markets Act (Sw. Lag om värdepappersmarknaden) and/or the Swedish Financial Trading Act (Sw. Lag om handel med finansiella instrument). This information was released for publication on 22 November 2013 at 08:30 CET.

This report has not been reviewed by the Company’s auditors.

For more information, please contact:

Robert Karlsson, CEO, +46-709565141

robert.karlsson@sheltonpetroleum.com

Shelton Petroleum AB

Swedish corporate identity number: 556468-1491

Hovslagargatan 5B

SE-111 48 Stockholm

Tel: +46 8407 18 50

www.sheltonpetroleum.com

info@sheltonpetroleum.com