Interim report January-September 2015


(for full report, please see attached file)

January - September 2015 Continuing Operations\*

* Total revenue: SEK 23 (36) million
* Operating result: SEK 1 (2) million
* Operating margin: 2% (6%)
* Basic and diluted earnings per share: SEK -2.58 (0.11)

January - September 2015 Russian and Ukrainian Operations\*\*

* Revenue: SEK 62 (93) million
* Operating result: SEK 9 (23) million
* Operating margin: 15% (24%)

 


Financial result Russian and Ukrainian Operations excluding one-off
items

|   | Q3 | Q3 | Q1-Q3 | Q1-Q3 | FY |
| Amounts in SEK th | 2015 | 2014 | 2015 | 2014 | 2014 |
| Russia |   |   |   |   |   |
| Revenue | 7 226 | 12 006 | 22 517 | 35 812 | 44 252 |
| Capitalized work | 450 | 944 | 1 364 | 2 531 | 3 252 |
| Expenses | -5 158 | -8 055 | -17 281 | -22 248 | -28 641 |
| Operating result | 2 518 | 4 895 | 6 600 | 16 095 | 18 863 |
| Operating margin | 35% | 41% | 29% | 45% | 43% |
|   |   |   |   |   |   |
| Ukraine |   |   |   |   |   |
| Revenue | 12 125 | 17 164 | 39 264 | 56 695 | 68 578 |
| Expenses | -8 388 | -11 603 | -30 568 | -36 342 | -47 320 |
| Operating result | 3 737 | 5 561 | 8 696 | 20 353 | 21 258 |
| Operating margin | 31% | 32% | 22% | 36% | 31% |
|   |   |   |   |   |   |
| Parent company | -1 949 | -2 501 | -6 151 | -13 879 | -16 911 |
|   |   |   |   |   |   |
| Total operating result | 4 306 | 7 955 | 9 145 | 22 569 | 23 210 |
| Total operating margin | 22% | 27% | 15% | 24% | 21% |

 

<table>
	<tbody>
		<tr>
			<td> </td>
			<td>
			Q3
			</td>
			<td>
			Q3
			</td>
			<td>
			Q1-Q3 2015
			</td>
			<td>
			Q1-Q3
			</td>
			<td> </td>
			<td> </td>
			<td> </td>
		</tr>
		<tr>
			<td>
			Oil production
			</td>
			<td>
			2015
			</td>
			<td>
			2014
			</td>
			<td>
			2014
			</td>
			<td>
			2014
			</td>
			<td>
			2013
			</td>
			<td>
			2012
			</td>
		</tr>
		<tr>
			<td>
			Russia
			</td>
			<td>
			39,430
			</td>
			<td>
			49,470
			</td>
			<td>
			121,600
			</td>
			<td>
			150,496
			</td>
			<td>
			196,236
			</td>
			<td>
			122,305
			</td>
			<td>
			57,900
			</td>
		</tr>
		<tr>
			<td>
			Ukraine
			</td>
			<td>
			30,350
			</td>
			<td>
			29,630
			</td>
			<td>
			88,810
			</td>
			<td>
			95,041
			</td>
			<td>
			125,141
			</td>
			<td>
			126,565
			</td>
			<td>
			119,950
			</td>
		</tr>
		<tr>
			<td>
			Total barrels
			</td>
			<td>
			69,780
			</td>
			<td>
			79,100
			</td>
			<td>
			210,410
			</td>
			<td>
			245,537
			</td>
			<td>
			321,377
			</td>
			<td>
			248,870
			</td>
			<td>
			177,850
			</td>
		</tr>
		<tr>
			<td> </td>
			<td>
			 
			</td>
			<td> </td>
			<td>
			 
			</td>
			<td> </td>
			<td> </td>
			<td> </td>
			<td> </td>
		</tr>
		<tr>
			<td>
			Russia
			</td>
			<td>
			429
			</td>
			<td>
			538
			</td>
			<td>
			445
			</td>
			<td>
			551
			</td>
			<td>
			538
			</td>
			<td>
			335
			</td>
			<td>
			159
			</td>
		</tr>
		<tr>
			<td>
			Ukraine
			</td>
			<td>
			330
			</td>
			<td>
			322
			</td>
			<td>
			325
			</td>
			<td>
			348
			</td>
			<td>
			343
			</td>
			<td>
			347
			</td>
			<td>
			329
			</td>
		</tr>
		<tr>
			<td>
			Total barrels per day
			</td>
			<td>
			758
			</td>
			<td>
			860
			</td>
			<td>
			771
			</td>
			<td>
			899
			</td>
			<td>
			880
			</td>
			<td>
			682
			</td>
			<td>
			486
			</td>
		</tr>
	</tbody>
</table>

 

On 17 November 2015 Shelton Petroleum issued a press release stating
that the interim report will include several non-recurring adjustments
of values and reclassifications. These items are described in detail in
this interim report in the section “Adjustments and reclassifications”
and note 6. In order to facilitate comparison of the development of the
Russian and Ukrainian Operations with previous periods, the table above
includes financial data excluding one-off adjustments and
reclassifications.

 

\* Continuing Operations fully reflect the financial statements in this
report and include the Russian and parent company operations. They are
not fully comparable with those in previous interim reports as they
include one-off items posted in Q3 2015.

\*\* Russian and Ukrainian Operations are fully comparable with the
financial statements in previous interim reports. The one-off
adjustments and reclassifications reflected in Continuing Operations are
not included in the Russian and Ukrainian Operations. The Russian and
Ukrainian Operations include the Russian, Ukrainian and parent company
operations.

 

Statement from the CEO Robert Karlsson

During the third quarter, Shelton Petroleum produced 758 barrels per
day. The Russian and Ukrainian Operations recorded a turnover of SEK 19
million and an operating result of SEK 4 million. The operating margin
in the third quarter increased to 22% from 15% in the first half of the
year.

The oil price continues to be volatile. The average Brent oil price
during the first nine months this year was USD 55 per barrel, which is
almost 50% below the same period last year. We see that the oil industry
is adapting to the new economic environment. Onshore US rig count has
reached a five year low and we are starting to see a decline in
production of unconventional oil. Drastic budget cuts on the
conventional side are being announced by the oil and gas industry. In
the long run we expect to see a significant growth in world oil demand.
The factors are there to evidence a recovery of the oil price. The
timing of such recovery is however uncertain. In the midst of this,
Shelton Petroleum is positioning itself in terms of cost controls but
also in order to take advantage of the business opportunities that
arise.

On 9 November the shareholders of Shelton Petroleum and Petrogrand
approved a transaction between the two companies to enter into a
business combination. An enlarged oil group with Russian oil assets with
32 million barrels 2P oil reserves and a daily net production of 1,350
barrels will be formed. The combined businesses will benefit from an
attractive license portfolio and an improved position on the financial
markets. Synergies will be achieved within operational management, oil
sales, purchasing power as well as central administration. In addition,
the transaction will dissolve the cross-ownership between the companies,
which in turn will directly facilitate future development. One of the
objectives of the transaction is to accelerate drilling activity and
increase production. The new combined board of directors will be in a
position to communicate strategic direction and activities following
closing of the transaction planned for December this year. In short, the
transaction is the definitive end to the cross-ownership and marks the
beginning of new opportunities in terms of further drillings, increased
production, stronger financial position and growth opportunities.

Prior to the transaction with Petrogrand, Shelton Petroleum will
distribute its Ukrainian operations to its shareholders. Due to the
geopolitical development in the region, it is the opinion of the board
that it is best to manage the Russian and Ukrainian operations as
separate entities. The Ukrainian operations produced over 300 barrels
per day and recorded a turnover of almost SEK 40 million, an operating
profit of SEK 9 million and an operating margin of 22% for the first
nine months of 2015. Despite the relatively strong financial results,
the carrying value of the Ukrainian operations has been written down to
reflect the volatility in the oil price and the geopolitical
environment.

In summary, the combined entity will have an attractive license
portfolio with proven and producing fields. A new drilling program could
potentially boost production significantly. The lower oil prices post
challenges to the oil industry, but also open up new possibilities to
expand and to pursue new opportunities and ventures.

 

January - September 2015

Financial development of the Russian and Ukrainian Operations

In order to facilitate a comparison with previous periods, this section
contains comments to the financial development of the Russian and
Ukrainian Operations accounted for according to the same principles as
in previous periods. One-off items are therefore not included. It is
recommended that the section “Adjustments and reclassifications” and
note 6 below are read in parallel as they cover important items in the
Condensed consolidated statement of comprehensive income and Condensed
consolidated statement of financial position. 

Revenue from oil sales in the Russian and Ukrainian Operations amounted
to SEK 62 (93) million. During the period, Shelton Petroleum sold
208,590 (236,810) barrels of oil and the production in the period
amounted to 210,410 (245,537) barrels of oil. The price of oil in USD in
both Russia and Ukraine was significantly lower in the first nine months
2015 compared to the same period last year.



The average daily production during the first nine months 2015 amounted
to 771 barrels compared to 899 barrels the same period in 2014.

 

The Russian and Ukrainian Operations, excluding one-off items, reported
an operating result for the period January - September 2015 of SEK 9
(23) million, equivalent to an operating margin of 15% (24%). The
operating result was negatively affected by the lower oil prices in the
period compared to last year. In January to September 2015, the average
price of Brent oil was USD 56 per barrel compared to USD 107 per barrel
the same period last year.

The Russian and Ukrainian Operations held SEK 14 million in cash and
cash equivalents at the end of the period compared to SEK 14 million at
31 December 2014. Cash flow from operations during the period was SEK 7
million, whereas cash flow from investing activities was SEK -9 million,
all related to the oil and gas operations. Cash flow from financing
activities was SEK 4 million, reflecting a loan from Pareto Securities.
The company’s shareholding in Petrogrand has been pledged for this loan.

The accounts receivable balance in the Ukrainian operations amounted to
SEK 57 million as of 30 September 2015 compared to SEK 54 million at 31
December 2014. During January to September, payments received for oil
sales in Ukraine amounted to SEK 32 million. The counterparties have
confirmed the receivables in writing. Despite the fact that the operator
in Ukraine has sold its produced oil to new customers in the second and
third quarter, that is to other companies than the one that previously
has acquired the vast majority of the oil, payments are still made with
delays, although on a regular basis. The company believes that the
receivables will be settled in full. However, to reflect the cost of
interest on older receivables the company has increased the reserve that
was booked at year end by SEK 2.4 million and the reserve amounts to SEK
3.0 million. The company monitors the situation closely and has a
continuous dialogue with the customers on settling the outstanding
amounts as they become due.

In the first quarter the operator of the Lelyaki oil field, Kashtan
Petroleum, recommenced to pay dividends to Shelton Petroleum’s wholly
owned subsidiary. During the period January to September, approximately
SEK 10 million has been received.

Investments in exploration and development activity in the Russian and
Ukrainian Operations amounted to a total of SEK 9 (19) million for the
period.

Non-current financial assets amounted to SEK 35 million at the end of
the period compared to SEK 48 million at 31 December 2014, and consisted
of shares in Petrogrand. The lower value is due to lower price of the
Petrogrand share.

Shareholders\' equity per share at 30 September 2015 was SEK 11.61
(19.54) and the equity to assets ratio was 81 (85) %.

The Russian and Ukrainian currencies continued to be volatile during the
period. The Russian ruble strengthened by 7 per cent against the Swedish
krona compared to the year-end rate 2014 while the Ukrainian hryvnia
weakened by 21 per cent against the Swedish krona. See note 6 for
details regarding exchange differences that affects the condensed
financial statements.

 

Adjustments and reclassifications

On 17 November 2015 Shelton Petroleum issued a press release stating
that the interim report will include several non-recurring adjustments
of values and reclassificiations as a result of the recent shareholder
approval of the agreement between Shelton Petroleum and Petrogrand, the
development on the oil and gas market, depreciation of the Ukrainian
currency and share price development in Petrogrand. These items are
described below and in note 6.

 

Ukrainian operations

Due to the distribution of the Ukrainian operations to the Shelton
Petroleum shareholders, now also approved by the shareholders at an
extraordinary general meeting, these operations are in accordance with
IFRS 5 accounted for as discontinued operations in the financial
reporting starting from the third quarter 2015. The Ukrainian operations
are therefore reported as discontinued operations below those of
continuing operations in the Condensed consolidated statement of
comprehensive income.

As mentioned above, the Ukrainian operations continue to show
profitability despite the drop in the oil price. For the period
January-September 2015, these operations recorded revenue of SEK 39
million and an operating profit of SEK 9 million, equivalent to an
operating margin of 22%. Despite that, the board has decided to adjust
the group’s value attributed to the Ukrainian operations from SEK 78
million to SEK 35 million. It is the opinion of the company that the oil
price and the geopolitical situation in Ukraine will continue to be
volatile. A downward adjustment of the value of approximately SEK 43
million has therefore been reported within discontinued operations.

Furthermore, the weakening of the Ukrainian currency is no longer
regarded as temporary. Accumulated adjustments (amounting to SEK -84
million as of 30 September) of the value of the Ukrainian operations due
to the depreciation of the Ukrainian currency will therefore be reported
in discontinued operations following the distribution of the Ukrainian
operations. In the press release on 17 November 2015 (“Update regarding
the interim report for January-September 2015”) it was anticipated that
this reclassification would take place in the third quarter 2015.
However, the company now expects to reclassify this item in the fourth
quarter when the distribution of the Ukrainian operations approved by
the shareholders meeting is planned to be executed.

 

Shares in Petrogrand

Shelton Petroleum is Petrogrand’s largest shareholder and holds
11,585,308 shares equivalent to approximately 29% of the capital. Due to
the development in the Petrogrand share price, Shelton Petroleum has in
previous interim reports written down the book value of the shareholding
by SEK 38 million in other comprehensive income. The third quarter has
evidenced a further drop by SEK 11 million. It is the opinion of the
company that the share price development is no longer temporary.
Adjustments made in previous quarters and in the third quarter of the
value of the shares in Petrogrand amounting to approximately SEK 49
million are reported in financial items in the group’s income statement,
of which SEK 36 million is a reclassification from other comprehensive
income in continuing operations.

 

Warrants

In June 2015 the exercise period for 320,000 warrants issued in 2012
expired. The warrants were not exercised as the subscription price for
the shares exceeded the market price.

The annual general meeting in May 2015 approved the issue of 320,000
warrants with a subscription period during the first two weeks of July
2015. Management was unable to subscribe to the warrants due to insider
rules, as at that time the transaction with Petrogrand was being
negotiated but had not yet been disclosed to the markets, and the
warrants have therefore expired.

 

July - September 2015

 

Russian operations

Shelton Petroleum’s production of oil in Russia during the quarter
amounted to 39,430 (49,470) barrels. Production per day amounted to 429
(538) barrels. The decrease is due to the natural depletion that all
wells are subject to as oil is extracted.  Revenue in the quarter for
the Russian operations amounted to SEK 7.2 (12.0) million and operating
profit to SEK 2.5 (4.9) million, corresponding to an operating margin of
35% (41%). The lower operating profit and margin compared to the same
period last year is due to a significantly lower oil price, a higher
production tax rate and lower volumes compared to the same period last
year.

Shelton Petroleum has processed and is currently interpreting an
additional 142 kilometers of seismic data that has been collected on the
Suyanovskoye oil field to further delineate three promising structures
that were identified in 2014. Seismic has also been collected on the
Rustamovskoye field in order to determine the next drilling locations.

 

Ukrainian operations

Production in the quarter amounted to 30,350 (29,630) barrels.
Production per day amounted to 330 (322) barrels. Revenue in the quarter
in the Ukrainian segment amounted to SEK 12.1 (17.2) million and
operating profit to SEK 3.7 (5.6) million, corresponding to an operating
margin of 31% (32%). The lower operating profit and margin is due to a
significantly lower oil price, higher production tax rate and lower
volumes compared to the same period last year. As is the case with the
Russian segment, the Ukrainian segment is also able to show sound
profitability despite the lower oil prices.

As the Lelyaki license expires in May 2016, the holder and operator of
the license (Kashtan Petroleum) has recently filed a license extension
application, including an extensive geological study of the field, to
the Geological Service of Ukraine, which is part of the Ministry of
Ecology.

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 support production volumes through a program consisting
of new wells, sidetracks and workovers.

 

Significant events occurring after the reporting period

On 9 November 2015 extraordinary shareholder meetings in both Shelton
Petroleum and Petrogrand approved the agreement by the two companies to
enter into a business combination and dissolve the cross-ownership. The
transaction consists of the following steps: (i) Distribution of Shelton
Petroleum’s Ukrainian operations, (ii) Acquisition of the shares in
Sonoyta, containing USD 4 million as well as 49% of the Komi assets for
a consideration of 17,500,000 B shares, (iii) Cancellation of the
approximately 6,000,000 Shelton Petroleum B shares that the company
receives when Petrogrand distributes its shareholding in Shelton
Petroleum and (iv) Election of a new board of directors consisting of
Björn Lindström (chairman), Hans Berggren, David Sturt, Sven-Erik
Zachrisson and Dmitry Zubatyuk, subject to closing of the transaction.
More information on the transaction is available on
www.sheltonpetroleum.com under the Investor Relations section.

Since the transaction has not yet been completed Shelton Petroleum
cannot present a preliminary purchase price allocation of the
acquisition of Sonoyta in this report.

 

The parent company

The parent company\'s total assets as at the period end amounted to SEK
316 (358) million. Cash and cash equivalents amounted to SEK 2 (7)
million. The result after tax January-September 2015 was SEK -78 (-27)
million. The negative result is mainly due to write down of the value of
Petrogrand shares and a write-down of the value of shares in
subsidiaries, which is related to the decision to adjust the value of
the Ukrainian operations.

 

Risk factors and uncertainties

A detailed account of the risks facing the company can be found in the
2014 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

 

Year-end Report January – December 2015                       26
February 2016

Annual report
2015                                                           April
2016

Interim Report January – March 2016                                 20
May 2016

Interim Report April – June 2016                                       
24 August 2016

Interim Report July – September 2016                               18
November 2016

 

Annual General Meeting 2015                                           
24 May 2016

 

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
November 2015 at 08:00 CET.

 

This is an English translation of the Swedish original. In case of
discrepancies, the Swedish original shall prevail.

 

For more information, please contact:

 

Robert Karlsson, CEO, +46-709 565 141

robert.karlsson@sheltonpetroleum.com

                                                                                
   

Shelton Petroleum AB                 

Swedish corporate identity number: 556468-1491

Hovslagargatan 5B                      

SE-111 48 Stockholm

Tel: +46 8 407 18 50

www.sheltonpetroleum.com

info@sheltonpetroleum.com

 

Attachments

Interim_report_January_September_2015_da56a.pdf