Serinus Energy Inc.
TSX : SEN
WARSAW : SEN

Serinus Energy Inc.

August 12, 2014 19:15 ET

Serinus Q2 2014 Financial and Operating Results

CALGARY, ALBERTA--(Marketwired - Aug. 12, 2014) - Serinus Energy Inc. ("Serinus", "SEN" or the "Company") (TSX:SEN) (WARSAW:SEN), is pleased to report its financial and operating results for the quarter ended June 30, 2014.

Second Quarter Highlights

  • Production in the second quarter was 4,965 boe/d, up 56% vs. Q2 2013, and 2% higher than the 4,849 boe/d in Q1 2014. The growth vs. Q2 2013 was assisted by the acquisition of Winstar Resources.
  • Despite the uncertain political and security situations, organic growth in the Company's Ukraine properties continued, with average production (net to SEN WI) for the quarter rising 15% to 3,654 boe/d (21.9 MMcfe/d) vs. the same period in 2013, and 4% up from Q1 2014.
  • Average daily production (SEN WI) for the third quarter 2014 to date is approximately 5,625 boe/d (940 bbl/d of oil, 27.6 MMcf/d of gas, 82 bbl/d of liquids). The increase is due substantially to the M-17 well in Ukraine, which was onstream only for a few days at the end of Q2, and is now contributing fully.
  • Gross revenues for the quarter reached $41.6 million, up 44% over Q2 2013. The portion allocable to SEN shareholders was $32.8 million vs. $20.3 million last year. The balance is attributable to the owner of the remaining 30% of KUBGAS Holdings Limited not held by Serinus (see About Serinus below).
  • Netbacks in Ukraine rebounded from $30.85/boe ($5.14/Mcfe) in Q1, to $41.76/boe ($6.96/Mcfe) in Q2 with the expiry of the discounts on imported Russian gas, and some stabilization in the exchange rate between the Ukrainian Hryvnia and the US Dollar. Tunisian netbacks continue to be robust at $54.83/boe.
  • Funds from Operations in the second quarter were up 133% to $20.8 million vs. $8.9 million in Q2 2013, and up 40% compared to $14.9 million in Q1 2014. The amount allocable to SEN shareholders was $15.8 million.
  • Net earnings for the quarter, before the currency charges, were $8.7 million ($5.3 million attributable to SEN shareholders), as compared to $3.2 million in Q2 2013 ($2.4 million attributable to SEN shareholders) due substantially to Winstar acquisition.
  • Serinus recorded comprehensive net earnings of $6.7 million in the second quarter of 2014. Comprehensive earnings were impacted by a $2.0 million charge taken for unrealized foreign currency translation. This relates to the translation of the Ukrainian subsidiaries' financial statements from UAH to USD, and the loss reflects the deterioration of the UAH. As the exchange rate fluctuates, the equivalent value as reported in US dollars changes, but this does not impair the ability of those assets or liabilities to perform their intended purpose(s). If the Hryvnia were to appreciate, some or all of this unrealized loss would be recouped.
  • Capital expenditures for the quarter were $16.1 million vs. $9.3 million for the same period in 2013.
  • During the quarter, KUB-Gas LLC paid dividends of $10.5 million ($7.35 million SEN WI)
  • In Q2 2014, the Company made two early repayments totalling $7 million with respect to the convertible note held by Dutco Energy Limited. Subsequent to June 30, 2014, it made further repayments of $8 million in final settlement of the facility.

Note: Serinus prepares its financial results on a consolidated basis, which includes 100% of its indirectly 70% owned subsidiary, KUB-Gas LLC ("KUB-Gas"). Unless otherwise noted by the phrases "allocable to Serinus", "net to Serinus", "attributable to SEN shareholders" or "net to SEN WI", all values and volumes refer to the consolidated figures. Serinus reports in US dollars; all dollar values referred to herein, whether in dollars or per share values are in US dollars unless otherwise noted.

Summary Financial Results (US$ 000's unless otherwise noted)
Three Months Ending June 30
2014 2013 Change
Oil and Gas Revenue 41,635 28,929 44%
Net Income (as reported) 8,733 3,181 175%
per share, basic and diluted $0.11 $0.06
Net Income (allocable to SEN) 5,344 829 545%
per share, basic and diluted $0.07 $0.02
Comprehensive Net Income 6,737 3,181 112%
per share, basic and diluted $0.09 $0.06
Cash Flow from Operations (as reported) 20,840 8,928 133%
per share, basic and diluted $0.27 $0.18
Cash Flow from Operations (allocable to SEN $15,778 ($4,078)(487%)
per share, basic and diluted 0.20 ($0.08)
Capital Expenditures 16,059 9,258 73%
Average Production (net to Serinus)
Oil(Bbl/d)982 -
Gas(Mcf/d)23,293 18,331 27%
Liquids(Bbl/d)101 124 (19%)
BOE(boe/d)4,965 3,179 56%
Average Sales Price
Oil($/Bbl)$108.13 na
Gas($Mcf)$10.56 $11.55
Liquids($Bbl)$77.79 $88.76
BOE($/boe)$76.72 $70.02
June 30
2014 2013
Cash & Equivalents 15,719 19,253
Working Capital (11,727)9,524
Long Term Debt 15,413 5,352
Shares
Outstanding, period end 78,629,941 78,611,441
Average for period (basic) 78,629,941 50,182,427
Average for period (FD) 78,629,941 50,182,427

Operational Highlights & Update

Second quarter production and prices are broken down as follows:

Q2 2014 Production Q2 2014 Commodity Prices
Ukraine1TunisiaTotal UkraineTunisiaTotal
Oil(bbl/d)-982982($/bbl)-$108.13$108.13
Gas(Mcf/d)21,3181,97523,293($/Mcf)$10.23$14.47$10.56
Liquids(bbl/d)101-101($/bbl)$77.79-$77.79
Boe(boe/d)3,6541,3114,965($/boe)$61.83$102.79$76.72
1.Ukraine volumes are Serinus 70% interest

Note on nomenclature: Wells in the Company's Ukraine properties are named by the initial of the field followed by a well number. Wells in Olgovskoye, Makeevskoye, Vergunskoye, Krutogorovskoye and North Makeevskoye fields use the prefixes "O", "M", "V", "K" and "NM" respectively. For example, the Makeevskoye-17 well is referred to herein as M-17.

  • Production for the first quarter of 4,965 boe/d increased by 2% vs. Q1 2014 (4,849 boe/d) driven substantially by higher production in Ukraine.
  • The M-17 well was drilled during the first quarter. Logs indicated 9 metres of net pay in the primary target, the S6 sand, and 2.5 metres of pay in the S5 and 5.5 metres in the deeper S7. They also indicated resource potential 22 metres in the R30c. On test, the S7 achieved a rate of 900 Mcf/d, exceeding the Company's expectations that it would require stimulation to produce at a commercial rate. A bridge plug was set above the S7, and after testing, and the S6 commenced production on June 26th at an initial rate of 6.0 MMcf/d (4.2 MMcf/d SEN WI). That rate has been increased several times, allowing the well to stabilize at each stage, and it has averaged 8.6 MMcf/d (6.0 MMcf/d SEN WI) since start-up. The S5 and R30C remain behind pipe to be tested and developed at a later date.
  • The Winstar-12bis ("WIN-12bis") well spud on July 17th. It is expected to reach its target total depth of 3,900 metres in mid-September, with evaluation and testing taking approximately four additional weeks thereafter. WIN-12bis is the first of a two well drilling program in the Sabria field in central Tunisia. Each well is anticipated to cost $14.4 million ($6.5 million SEN WI).
  • A 203.5 km2 3D seismic program over the Sanrhar field commenced in early June, and is approximately 90% complete. Legacy sparse 2D data indicates a number of four-way structural closures which this program will investigate more thoroughly. Current production from Sanrhar is 50 - 60 bbl/d of oil from a single well, which has produced 421 Mbbl of oil to the end of 2013.
  • In Tunisia, a coiled tubing unit was successful in restoring the CS Sil-1 well to production at a rate of approximately 400 - 500 Mcf/d and 40 - 50 bbl/d of oil, after running a velocity string during April. It also attempted unsuccessfully to recomplete CS Sil-10 from the Triassic TAGI sandstone to the Silurian Tannezuft. Both wells are being reviewed to determine additional measures to increase or restore production.

Outlook

The events in Ukraine this year have presented an unusual set of challenges for Serinus and its partners this year. These issues have resulted in the delay or deferral of a number of projects, and the Company now expects to exit 2014 at a production rate of 6,000 boe/d. Previous guidance was for growth of 30% - 35% over the 2013 exit rate of 4,986 boe/d, or approximately 6,500 - 6,750 boe/d.

The first major issue that affected operations was the reduction in realized gas prices during Q1 due to the discount on imported Russian gas, and the deterioration of the UAH/USD exchange rate, reducing cash flow from operations for the quarter. The Company adjusted by delaying certain operations that would not have contributed to 2014 production, such as seismic acquisition and the Romanian drilling program to later in the year. It was believed at the time that the 6,500 boe/d exit rate was still attainable.

Two additional developments have since occurred which now make it unlikely that the originally planned 2014 work program can be completed by year end. First was the decision to suspend drilling and development operations in Ukraine due to security concerns, and the second was the imposition of a new royalty regime in Ukraine which will significantly affect the amount of cash flow available for this year's development program.

With the deterioration of the security situation in eastern Ukraine, the decision was made in late June to suspend drilling, workover and construction operations until such time as safer conditions prevail. This delay has now lasted long enough that even if re-mobilization were to begin today, the total 2014 drilling program will be one well short of its original goal. There has been some improvement in the security situation in the vicinity of the Company's main producing fields, and KUB-Gas is in discussions with service providers regarding the potential resumption of drilling and completion operations, but it is not yet possible to predict when and if that may occur.

On August 1, 2014, President Petro Poroshenko signed into law a bill increasing royalties for a period of five months, commencing August 1, 2014. The major features of the new law include:

  • Royalty rates on natural gas and condensate production increased to 55% and 45% respectively, from 28% and 42%. Unless subsequently renewed or extended, these rates will revert to their current levels (i.e. 28% and 42%) on January 2, 2015.
  • There is a "lowering coefficient" on new wells drilled after August 1, 2014. This reduces the royalties paid on production from new gas wells to 55% of the nominal rates (i.e., the effective rate for new wells would be 30.25% for gas) for a period of two years.

Management estimates that this new royalty regime will result in an approximate 45% decline in its Ukraine after-tax cash flow over the five month effective period, corresponding to a reduction in the netback from $5.78/Mcf to approximately $3.15/Mcf, assuming $10.00/Mcf gas prices. This in turn, reduces KUB-Gas' and Serinus' cash flow which would otherwise have been available to re-deploy into the drilling and development program. The Company is re-evaluating its planned capital program in light of these potential capital constraints.

Notwithstanding the curtailment of active operations, KUB-Gas continues to produce gas and condensate as noted previously, and to be paid regularly for that production. The official price for August at which gas can be sold to industrial customers in Ukraine is 4,724 UAH per Mcm. At the current exchange rate of 12.6 UAH/USD, that is equivalent to $10.62/Mcf. The price that KUB-Gas receives is approximately 4% lower, reflecting the margins of the traders through whom the gas is sold. The Company's realized gas price in Ukraine during the second quarter was $10.23/Mcf.

In the longer term, Serinus is still optimistic about its remaining opportunities within the Ukrainian licences. While the timing of getting to them is uncertain, the inventory of opportunities includes:

  • Four definite drilling locations, including two exploration wells (NM-4 and M-22), and two development wells (M-15 and M-18). Success on any of these will open up additional development and exploration locations. Note: NM-4 was spud in mid June, drilled to a depth of 102 metres, and surface casing was cemented in place prior to the cessation of drilling operations.
  • Fracture stimulations planned for four wells in Ukraine, including NM-3, O-11, O-15 and possibly the S7 zone in M-17. The NM-3 well is a potential oil discovery made in July 2013. The Visean formation is tight and unable to flow unstimulated. If the frac' is successful, it will be the first commercial oil well on Company licences, and will set up several additional development locations.

Other Operations

  • A workover rig has moved to Ech Chouech, and operations commenced at the end of May. The EC-4 well has had debris left by previous operators cleaned out, and was perforated in the Devonian Ouan Kasa zone. After perforating, oil was recovered during swabbing operations. The well has been suspended, pending stimulation. The Ouan Kasa has 20 metres of net pay with average porosity of 12%. The rig is now moving to ECS-1 to perform similar operations. Pending regulatory approval, both wells will be stimulated later this summer, currently targeted for September. The CS-11 and CS-8bis wells are to have various work performed intended to increase or restore production, and to improve overall uptime rates.
  • In Romania, Serinus will drill two exploration wells and shoot 180 km2 of new 3D seismic. Each well is expected to cost $3 million (SEN WI). Spud date for the first well is anticipated to be in November. The seismic acquisition is slated to commence in September.

Supporting Documents

The full Management Discussion and Analysis ("MD&A") and Financial Statements have been filed in English on www.sedar.com and in Polish and English via the ESPI system, and will also be available on www.serinusenergy.com.

Abbreviations

bbl Barrel(s) bbl/d Barrels per day
boe Barrels of Oil Equivalent boe/d Barrels of Oil Equivalent per day
Mcf Thousand Cubic Feet Mcf/d Thousand Cubic Feet per day
MMcf Million Cubic Feet MMcf/d Million Cubic Feet per day
Mcfe Thousand Cubic Feet Equivalent Mcfe/d Thousand Cubic Feet Equivalent per day
MMcfe Million Cubic Feet Equivalent MMcfe/d Million Cubic Feet Equivalent per day
Mboe Thousand boe Bcf Billion Cubic Feet
MMboe Million boe Mcm Thousand Cubic Metres
UAH Ukrainian Hryvnia USD U.S. Dollar
CAD Canadian Dollar

About Serinus

Serinus is an international upstream oil and gas exploration and production company with a diversified portfolio of projects in Ukraine, Brunei, Tunisia, Romania and Syria and with a risk profile ranging from exploration in Brunei, Romania and Syria to production and development in Ukraine and Tunisia. The common shares of the Company trade under trading symbol "SEN" on both the WSE (Warsaw Stock Exchange) and the TSX.

In Ukraine, Serinus owns an effective 70% interest in KUB-Gas LLC through its 70% shareholding of KUBGas Holdings Limited. The assets of KUB-Gas LLC consist of 100% interests in five licences near to the City of Lugansk in the northeast part of Ukraine. Four of the licences are gas producing.

In Tunisia, Serinus owns a 100% working interest in the Chouech Essaida, Ech Chouech, Sanrhar and Zinnia concessions, and a 45% working interest in the Sabria concession. Four of the concessions are currently producing oil or gas.

In Romania, Serinus has an undivided 60% working interest in the onshore Satu Mare concession, a 2,949 square kilometre exploration and development block, in north western Romania.

In Brunei, Serinus owns a 90% working interest in a production sharing agreement which gives the Company the right to explore for and produce oil and natural gas from Block L.

In Syria, Serinus holds a participating interest of 50% in the Syria Block 9 production sharing contract which provides the right to explore for and, upon the satisfaction of certain conditions, to produce oil and gas from Block 9, a 10,032 square kilometre area in northwest Syria. The Company has an agreement to assign a 5% ownership interest to a third party which is subject to the approval of Syrian authorities, and which, if approved, would leave the Company with a remaining effective interest of 45% in Syria Block 9. Serinus declared force majeure, with respect to its operations in Syria, in July 2012.

The main shareholder of the Company is Kulczyk Investments S.A., an international investment house founded by Polish businessman Dr. Jan Kulczyk.

Translation: This news release has been translated into Polish from the English original.

Forward-looking Statements This release may contain forward-looking statements made as of the date of this announcement with respect to future activities that either are not or may not be historical facts. Although the Company believes that its expectations reflected in the forward-looking statements are reasonable as of the date hereof, any potential results suggested by such statements involve risk and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Various factors that could impair or prevent the Company from completing the expected activities on its projects include that the Company's projects experience technical and mechanical problems, there are changes in product prices, failure to obtain regulatory approvals, the state of the national or international monetary, oil and gas, financial, political and economic markets in the jurisdictions where the Company operates and other risks not anticipated by the Company or disclosed in the Company's published material. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties and actual results may vary materially from those expressed in the forward-looking statement. The Company undertakes no obligation to revise or update any forward-looking statements in this announcement to reflect events or circumstances after the date of this announcement, unless required by law.

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Telephone: +1-403-264-8877
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Telephone: +971-4-339-5212
Nowogrodzka 18/29, 00-511 Warsaw, Poland
Telephone: +48 (22) 414 21 00

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