20
Feb 2015
Year-end report January – December 2014

January-December 2014

  • Total revenue for the period: SEK 113 (109) million
  • Operating result for the period: SEK 16 (30) million
  • One-off items during the year affected the operating result by SEK -12 (0) million
  • Operating margin excluding one-off items: 25% (28%)
  • Basic earnings per share: SEK 0.76 (1.14)
  • Diluted earnings per share: SEK 0.76 (1.13)   

 

October-December 2014

  • Revenue during the quarter: SEK 20 (37) million 
  • Operating result during the quarter: SEK 1 (11) million
  • Operating margin 3% (29%)
  • Basic earnings per share: SEK 0.06 (0.91)
  • Diluted earnings per share: SEK 0.06 (0.84)

 

Oil production

Q4

2014

Q4

2013

Q4 2012

Q1-Q4

2014

Q1-Q4

2013

Q1-Q4 2012

Q1-Q4 2011

Barrels

75,840

92,060

49,150

321,377

248,870

177,850

77,300

Barrels per day

824

1,001

534

880

682

486

212

Statement from CEO Robert Karlsson

Production during 2014 reached 880 barrels per day, which is an increase of 29 per cent compared to the previous year. The operating result in 2014, excluding one-off items in the second and third quarters, amounted to SEK 28 million, equivalent to an operating margin of 25 per cent.

In other words, Shelton Petroleum continued to deliver strong financial results during 2014. It has however become clear that the oil and gas sector will face a more challenging environment this year. The drop in the oil price, changes in fiscal regimes and complex geopolitics in Russia and Ukraine have brought a degree of instability to the market. OPEC’s measures are putting pressure on the whole industry, and especially on the North American high cost shale oil producers.

In order to adapt to the new market conditions, Shelton Petroleum has reviewed its cost base and investment program. The company is taking measures to significantly reduce the general and administrative expenses in 2015. Although Shelton Petroleum has relatively low production costs, new capital expenditures will be assessed carefully until the oil market has stabilized.

Although the environment we operate in is challenging, it is important to remember that Shelton Petroleum ended the year with a strong reserves report where the Russian oil reserves increased from 6 to 41 million barrels. In addition, we produced almost 900 barrels per day in 2014. The company is free from interest-bearing debt and relative to several peers our production costs are low, which is an advantage at current oil price levels. Furthermore, the depreciation of the Russian and Ukrainian currencies give support to operating margins as sales are based in dollars and several cost items are denominated in local currencies. On a final note, it is worth pointing out that the current oversupply of oil is only about 2 per cent of demand and it is therefore reasonable that it will fade away and that oil prices will recover in the medium to long term.

January - December 2014

Financial development

Revenue from oil sales amounted to SEK 113 (109) million. During the year, Shelton Petroleum sold 318,180 (229,280) barrels of oil and produced 321,377 (248,870) barrels of oil. The production has increased in Russia, but decreased slightly in Ukraine compared to last year. The prices of oil in USD in both Russia and Ukraine in 2014 were lower compared to 2013.

The average daily production during 2014 amounted to 880 barrels, compared to 682 barrels in 2013, 486 barrels in 2012 and 212 barrels in 2011.

The company reported an operating result for the period January – December 2014 of SEK 16 (30) million. One-off items for a write-down of exploration assets in Crimea by SEK 7 million and expenses for legal advice of SEK 5 million related to the dispute with Petrogrand had a significantly negative impact on the operating result. Excluding these one-off items, the underlying oil and gas business generated an operating profit of SEK 28 million and operating margin of 25 per cent.

The company held SEK 14 million in cash and cash equivalents at the end of the period. Cash flow from operations during the year was SEK 12 million, whereas cash flow from investing activities was SEK -29 million, of which SEK -24 million were related to the oil and gas operations. As of 31 December 2013, the accounts receivable amounted to SEK 49 million. All of these receivables have been settled through payments from the customers during the year. As of 31 December 2014 the company’s accounts receivable, included in other current receivables in the balance sheet, amounted to SEK 54 (49) million. SEK 53 million of the accounts receivable balance at the end of December is related to sale of oil from the Lelyaki field, where the buyer of the oil makes payments with delays. The validity of the receivables and the outstanding amount as of 31 December 2014 has been confirmed by the counterparty. Although the company believes that the receivables will be settled in full, the company has booked a reserve of SEK 1.4 million to reflect the cost of interest on older receivables. The company monitors the situation closely and has a continuous dialogue with the customer on settling the outstanding amounts as they become due.

During 2014 Shelton Petroleum received approximately SEK 9 million in dividends from Kashtan Petroleum, operator of the Lelyaki field in Ukraine. The funds can be used freely within the Shelton Petroleum group for investments and working capital.

Investments in exploration and development activity amounted to a total of SEK 24 (57) million in the period.

Non-current financial assets consisting of shares in Petrogrand amounted to SEK 48 million at the end of the period compared to SEK 0 million at 31 December 2013. As of 31 December 2014 Shelton Petroleum held 11,585,308 shares in Petrogrand, see below.

In May 2014 Shelton Petroleum acquired SEK 9.5 million of the convertible bond 2013/2014 in exchange for 593,750 shares of series A. The remainder of the convertible bond, SEK 12.9 million, was converted into 806,875 shares of series B in June 2014. Following the acquisition and conversion Shelton Petroleum does not have any interest-bearing debt.

Shareholders' equity per share at 31 December 2014 was SEK 15.34 (26.20) and the equity to assets ratio was 85 (55) per cent. The improved ratio is due to the repayment of a convertible bond issued to Petrogrand.

As of 31 December 2014 the Ukrainian Hryvnia had weakened by 38% and the Russian Ruble weakened by 31% against the Swedish Krona compared to the exchange rate at 31 December 2013. As a result of the weakened currencies Shelton Petroleum reports translation differences in other comprehensive income of SEK -110 (-10) million during 2014. The translation differences arise when the income statement and balance sheet of foreign entities are translated from local currency to SEK. The translation differences, which do not affect cash flow, mainly relate to intra-group loans and fixed assets. See note 7 for a table of exchange rates that have been used. The depreciation of the Russian and Ukrainian currencies gives support to operating margins as sales are based in dollars and several cost items are denominated in local currencies.

Shelton Petroleum’s wholly owned subsidiary Shelton Canada Corp is party to a Joint Investment Agreement (JIA) with Chornomornaftogaz (CNG) regarding three licenses in the Azov Sea and Black Sea to which CNG is the license holder. Due to the political developments in Crimea described in previous interim reports, Shelton Petroleum perceives an increased risk regarding future financial benefit from the JIA. The value of these assets was therefore adjusted in the third quarter, which affected the operating result by SEK -7 million and tax by SEK 1 million. The JIA accounted for 0 per cent of Shelton Petroleum’s revenue in the period January – December 2014. The JIA’s carrying value net of deferred taxes was SEK 2 million as of 31 December 2014, equivalent to approximately 1 per cent of total assets in the balance sheet as of 31 December 2014.

In the fourth quarter 2014, two licenses in the JIA, Biryucha and North Kerchenskoye, expired. The license holder CNG has applied for extension of both licenses. Biryucha is on Ukrainian territorial waters and CNG is currently submitting required documents to the authorities, which have informed CNG that the license will be renewed later this year. Due to the geographical location of North Kerchenskoye in the Kerch Strait between Russia and Crimea as well as the limited resource number of 4 million barrels of oil equivalent, the prolongation of this license will not be prioritized and it is uncertain whether the license will be extended during the year.

Impairment test

The company has in accordance with IFRS performed its annual impairment test and concluded that no adjustment of the carrying value of the assets is required. The main assumptions used in the test were a Brent oil price of USD 50 per barrel for 2015 and USD 70 per barrel for periods after 2015, 2P reserves of 23 million barrels in Russia and 8 million barrels in Ukraine and a discount rate of 17% in Russia and Ukraine. Calculations based on lower oil prices and higher discount rates show significant headroom in the impairment test and justify the carrying values of the company’s oil and gas assets.

Agreement with Petrogrand

On 26 June 2014 Shelton Petroleum announced that it had entered into an agreement with Petrogrand that would facilitate for the companies to negotiate a breakup of the cross-ownership, which in turn would enable the companies to focus on the development of their operations and license portfolios. Following the signing of the agreement, neither company used its voting rights at the shareholders’ meetings in June. The agreement expired on 30 September 2014 and was not extended. The companies have discussed various solutions and in December the companies reached an agreement to dissolve the cross-ownership, subject to approval on extraordinary general meetings in both companies. The extraordinary general meeting in Shelton Petroleum, held in January 2015, did not approve the proposal to dissolve the cross-ownership.

Public offers

In January 2014 Shelton Petroleum announced a public offer to the shareholders of Petrogrand. Initially Shelton Petroleum offered 0.30 shares of series B in Shelton Petroleum for each share in Petrogrand. The offer was subsequently raised to 0.34 and finally to 0.44 shares. On 14 April 2014 Shelton Petroleum completed the offer. On the completion date Shelton Petroleum had received 11,585,308 shares, equal to 28.8% in Petrogrand, and in exchange for those shares issued 5,097,534 shares of series B in Shelton Petroleum.

On 21 March, Petrogrand announced an offer to the shareholders of Shelton Petroleum. Petrogrand’s offer expired on 1 July 2014 and only 248,901 shares, or 1.33% of the total number of shares, had accepted the offer. Petrogrand announced that they would not complete the offer.

October – December 2014

Russian operations

Shelton Petroleum’s production of oil in Russia during the fourth quarter amounted to 45,740 (58,500) barrels. Production per day amounted to 497 (636) barrels. Workovers led to fewer production days and lower production in the fourth quarter of 2014. Revenue in the fourth quarter for the Russian segment amounted to SEK 8.4 (14.3) million and operating profit to SEK 2.8 (7.0) million, corresponding to an operating margin of 33% (48%). The drop in the oil price negatively affected revenue and operating profit.

In November 2014 new production taxes and export duties on oil were approved by the Russian parliament and signed into law by the Russian President. Changes in the fiscal regime have been implemented as of 1 January 2015. The export tax has been reduced whilst the production tax has been increased. The domestic price, at which Shelton Petroleum is selling oil, is determined by the export equivalent netback, which all things equal should increase due to the reduced export tax. The theoretical net effect of the change in both taxes on profitability for Shelton Petroleum works out to approximately USD -2 per barrel, however the domestic oil industry have yet to adapt to the new market conditions and the effects have yet to crystallize.

Ukrainian operations

Production in the fourth quarter amounted to 30,100 (33,560) barrels. Production per day amounted to 327 (365) barrels. Revenue in the fourth quarter in the Ukrainian segment amounted to SEK 11.9 (23.0) million and operating profit to SEK 1.9 (8.9) million, corresponding to an operating margin of 16% (38%). Revenue and operating profit were negatively affected by the falling prices on oil and a reserve has been booked to reflect the cost of interest on late payments of receivables.

The emergency law passed in July 2014 by the Ukrainian Parliament entailing an increase of the production tax on oil and gas has been extended to 2015.

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. The objective is to step by step enhance productivity and increase production volumes.

Ukraine’s new Cabinet of Ministers and President remain dedicated to implementing reforms to modernize the country. Although a cease-fire has recently been signed, unrest in eastern Ukraine will likely continue for some time. Shelton Petroleum’s production is, due to its geographical location in central Ukraine, however stable and unaffected by the recent events.

For information regarding the JIA with CNG, please see the section Financial Development above.

Significant events occurring after the reporting period

An extraordinary general meeting on 26 January 2015 did not approve the board’s proposal to dissolve the cross-ownership with Petrogrand.

The parent company

The parent company's total assets as at the period end amounted to SEK 353 (513) million. The decrease in total assets is due to the repayment of a convertible loan issued to Petrogrand. Cash and cash equivalents amounted to SEK 7 (26) million. The result after tax January – December 2014 was SEK -50 (-6) million. The negative result is an effect of non-recurring costs for legal advice during the period January – December and an adjustment to fair value of the shares in Petrogrand.

Annual General Meeting and dividend

The annual general meeting will be held on 21 May 2015 in Stockholm. The Board proposes that no dividend is paid for the financial year 2014.

Risk factors and uncertainties

A detailed account of the risks facing the company can be found in the 2013 annual report. During the period, there has been no major change in material risk factors or uncertainties for the group or the parent company. Risks include exploration risk, oil price risk, exchange rate risk, liquidity risk, credit risk, interest rate risk and political risk, among others.

Upcoming financial reporting

Annual report 2014 April 2015

Interim Report January – March 2015 20 May 2015

Interim Report April – June 2015 21 August 2015

Interim Report July – September 2015 20 November 2015

Annual General Meeting 2015 21 May 2015

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 20 February 2015 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