OREANDA-NEWS. August 16, 2011. China North East Petroleum Holdings Limited (the "Company") (NYSE Amex: NEP), a leading independent oil producing and oilfield services company in Northern China, today announced consolidated financial results for the second quarter ended June 30, 2011.

Revenue for the 2011 second quarter totaled USD 24.3 million compared to USD 21.8 million in the 2011 first quarter and USD 27.7 million in the 2010 second quarter.  When compared to the 2010 second quarter, the Company's 2011 second quarter revenue was primarily impacted by a decrease in revenues from its drilling services segment. 

Total oil production in the second quarter of 2011 was 161,498 barrels compared to 162,990 barrels in the 2011 first quarter and 198,775 barrels in the 2010 second quarter period. As of June 30, 2011 the Company had a total of 295 wells in production compared to 289 wells as of June 30, 2010. Revenue from the sale of crude oil increased 25.3% in the 2011 second quarter to USD 19.3 million from USD 14.9 million in the 2011 first quarter and USD 15.4 million in the 2010 second quarter. The average sales price per barrel during the 2011 second quarter was approximately USD 119, a 54.5% increase from USD 77.00 during the 2010 second quarter.

The Company's oil drilling and service subsidiary, Tiancheng contributed USD 5.0 million of revenue in the 2011 second quarter compared to USD 6.9 million in the 2011 first quarter and USD 12.3 million in the 2010 second quarter.  During the quarter Tiancheng completed 40 wells with a total drilling depth of 60,817 meters (~199,531 feet).  Revenue in 2011 second quarter was impacted primarily due to PetroChina's decision to supply the necessary drilling materials instead of purchasing materials directly from the Company, which resulted in reduced overall contract prices received from PetroChina.  In addition, two of Tiancheng's drilling rigs were transported a substantial distance during the quarter which reduced the utilization rate of its drilling rigs resulting in fewer wells drilled as well as lower overall drilling depth.

Gross profit for the 2011 second quarter was USD 15.1 million a 29.1% increase from USD 11.7 million in the 2011 first quarter and a 10.2% decrease from USD 16.9 million in the 2010 second quarter. 

Gross margin in the 2011 second quarter was 62.3% compared to 54.0% in the 2011 first quarter and 60.9% in the 2010 second quarter.

Operating expenses for the quarter were USD 0.9 million compared to USD 1.4 million in the 2011 first quarter and USD 1.1 million in the 2010 second quarter.  The year-over-year decrease in operating expenses was primarily due to the decrease in revenue.

Operating income for the 2011 second quarter was USD 14.3 million, or 58.8% of revenue, compared to USD 10.3 million, or 47.7% of revenue in the 2011 first quarter, and USD 15.8 million, or 57.0% of revenue in the 2010 second quarter. 

The Company had a USD 3.8 million non-cash gain in the quarter due to a change in the fair value of warrants compared to a USD 4.4 million non-cash gain in the 2011 first quarter and a USD 14.6 million non-cash gain in the 2010 second quarter.

Net income attributable to NEP common stockholders for the 2011 second quarter was USD 13.0 million, or USD 0.37 per diluted share, compared to USD 11.3 million, or USD 0.36 per diluted share, in the 2011 first quarter, and USD 25.0 million, or USD 0.80 per diluted share, in the 2010 second quarter.

Excluding the non-cash charge related to the fair value of warrants, 2011 second quarter net income was USD 9.2 million, or USD 0.26 per diluted share, compared to USD 6.9 million, or \\$0.22 per diluted share, in the 2011 first quarter and USD 10.4 million, or USD 0.33 per diluted share, in the 2010 second quarter.

Cash and cash equivalents increased in the second quarter to USD 80.4 million from USD 61.0 million as of December 31, 2010.  Total assets grew to USD 217.9 million, total liabilities were \\$37.8 million and stockholders' equity was USD 180.1 million as of June 30, 2011.

Mr. Jingfu Li, CEO of China North East Petroleum commented, "We were pleased that our crude oil sales, operating income and net income all improved sequentially over the first quarter of this year.  Our sequential performance also benefitted from a sizeable increase in oil prices. In our oil production business, results were within our guidance range of 160-180 thousand barrels. The slight sequential decrease in this segment of our business was the result of a larger number of wells requiring fracture work which led to their short term closure.  These wells have since been turned on and are generating greater yields than in the past. We expect to temporarily halt approximately 20 wells, or 6-8%, of our producing wells each quarter for fracture work in the coming quarters but remain comfortable with our quarterly per-barrel production guidance."

"In our drilling business, Tiancheng completed 40 wells in the second quarter resulting in approximately USD 5.0 million in revenue for this segment of our business.  Drilling revenue was lower due to PetroChina's decision to supply drilling materials to all third party private drilling companies operating in the region instead of purchasing them from independent drillers.  This initiative has reduced the size of our contracts, impacting Tiancheng's overall revenue, cost of revenue and net profit in the second quarter while increasing gross profit and net profit margin at the same time.  The Company expects PetroChina's to continue this practice for the foreseeable future.  We also experienced a reduced drilling utilization rate in the second quarter as two of our rigs were relocated from Inner Mongolia to Jilin.  Our drilling crews have resumed their regular work schedule once again after an extended holiday in the first quarter.  We expect Tiancheng's drilling to continue at a pace of approximately 40-50 new wells per quarter in the second half of 2011."

"During the quarter we also focused on our initiatives related to our Durimu oilfield acquisition.  As part of this effort, we selected our independent geological survey consultant and began seismic testing in early July. We expect to complete our initial geological survey in the third quarter.  At that point our in-house engineering team will work with our geological survey consultant to develop a preliminary production plan.  The Company expects initial test drilling to commence in the fourth quarter and to last approximately 12 to 18 months.  During this 12 to 18 month period, any oil produced will be sold to qualified buyers, which will generate revenue and cash flow to further support the Durimu oilfield exploration program.  Once the initial stage is complete, we intend to increase the pace of drilling in Durimu with an expected overall increase in production, which will in turn generate greater revenue and cash flow."

"As we move forward, our oil production arrangement with PetroChina remains an important component of our business.  We are also pleased to independently pursue our own exploration and drilling initiatives which we believe can result in much greater oil production revenue and profits for our business over the course of the next several years."