Thomson Reuters

Thomson Reuters

Malka Oil: Year-End Report 2009

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Source: Thomson Reuters

  • Malka Oil AB sells its production subsidiary STS-Service
  • Operating income for the 4th quarter amounted to TSEK 38,847 (TSEK 28,806) of which TSEK 38,847 (TSEK 28,806) attributable to the discontinued operations
  • The sale of STS-Service results in a re-measurement effect in the income statement amounting to TSEK -342,609
  • The net result after tax for the 4th quarter adjusted for the re-measurement effect amounted to TSEK 11,929 (TSEK -152,052) of which TSEK 16,199 (TSEK -145,597) attributable to the discontinued operations
  • Operating income for the January-December period amounted to TSEK 136,577 (TSEK 158,593) of which TSEK 136,577 (TSEK 158,593) attributable to the discontinued operations
  • The net result after tax for the January-December period adjusted for cost due to conversion of convertible bonds and the re-measurement effect amounted to TSEK -212,545 (TSEK -272,751) of which TSEK -197,622 (TSEK -259,141) attributable to the discontinued operations
  • Earnings Per Share for the January-December period amounted to SEK -0.27 (SEK -0.90 SEK) of which SEK -0.27 (SEK -0.86) attributable to the discontinued operations


MD's Report

Dear Shareholders,

The past year was very turbulent for Malka Oil. When I was appointed Managing Director as of July 1, I considered it a great challenge to solve the problems and financial difficulties that the company had. During the autumn, we managed to solve quite a few of the outstanding issues in our operations, for instance to reopen our pipeline which had been closed in late spring. We strengthened our organization and made it more efficient, we managed to lower our production costs, we increased revenues from oil sales.

The company's result in 2009 has been impacted by a number of specific one-off costs linked to previous problems including payments for damages and provisions for doubtful receivables. I also want to point out the financial cost of TSEK 225,549 which arose in the second quarter as a result of the early conversion of the convertible bond loans.

Earlier in the year, the company signed an agreement with the Russian investment bank Renaissance Capital as financial advisor concerning a review of strategic opportunities. The cooperation with Renaissance Capital was intensified towards the end of the year and the fourth quarter was a busy period for Malka Oil.

Focus has been on finding a strategic solution for the future development of the company. We have explored various alternatives such as organic growth, growth through acquisitions, cooperation and sale of subsidiaries. The evaluation process has particularly covered expectations for future revenue and costs and has taken into account the prevailing conditions for growth and profitability. Great emphasis has been put on evaluating the geological prospects but major work has been aimed at clarifying legal aspects. For these purposes external expertise has been used.

As one alternative we involved external parties to try to find a solution to finance our production operations. In this context we also developed a plan for a new share issue.

The conclusion from our investigation is that the company's licence block 87 has geological potential but the investments needed would be very large and entail a lot of risk for Malka Oil. This fact in combination with the legal disputes that the subsidiary STS-Service is involved in has formed the base for the resolution taken at the Extraordinary General Meeting of shareholders on 17 December 2009 to sell the subsidiary STS-Service and its licence block 87 to Gazprom Neft. The value of the transaction was 820 million SEK and it was completed on 5 February 2010 with the registration of the sale by Russian authorities.

So what then will be the future for Malka Oil AB?

The conversion of the convertible bond loans during the spring and the recent transaction has created a debt free company with a large cash balance. My intention is that the company will continue its business in the Russian oil sector and a revised business plan is now being developed by company management and the board. It will be presented in April at an Extraordinary General Meeting of shareholders.

Maks Grinfeld
Managing Director Malka Oil AB


Comment on the Group's result and financial position

During the fourth quarter, a decision was made to sell the subsidiary STS-Service. Since the discontinued operations within STS-Service have constituted the main part of Malka Oil's operations, the following comments relate to the discontinued operations if nothing else is indicated.

Turnover and result
Operating income for January-December 2009 amounted to TSEK 136,577 (TSEK 158,593), of which revenues from oil sales were TSEK 136,052 (TSEK 155, 863).

Gross profit amounted to TSEK 4,973 (TSEK -9,434). This amount includes an amortization charge of TSEK 17,616 (TSEK 18,616 TSEK).

Selling and distribution expenses were TSEK -3,481 (TSEK -26,100). These expenses have decreased significantly compared to earlier report periods following the conclusion of a new and more advantageous contract with Tomskayaneft for treatment and pumping of produced oil into Transneft's system.

Administrative costs and other operating expenses amounted in total to TSEK -146,592(TSEK -100,677). A number of one-off costs related to the company's financial difficulties and the debt restructuring process have been booked as other operating expenses. Specifically, damages and fees amounting to TSEK 18,780 arose in the secound quarter and in the third quarter, a provision of approximately TSEK 18,000 was made for a doubtful receivable from OOO Kupir. Other operating expenses also include transaction costs related to the sale of STS-Service as well as provisions for compensation to dismissed staff and liquidation of remaining operations in Russia.

Operating profit for the year amounted to TSEK -145,100 (TSEK -136,211).

Net financial items amounted to TSEK -312 752 (TSEK -144,870). Part of this amount is a financial cost of TSEK 225,549 which has arisen in the accounts during the second quarter as a result of the revised terms for early conversion of the convertible bond loans. This cost is shown as a separate financial cost and does not have any impact on the cash flow. This cost also does not impact the reported equity capital of the company. The predominant proportion of the remaining financial costs amounting to TSEK 97,108 TSEK consists of currency exchange rate losses with no impact on cash flow. The amount of interest paid with an effect on cash flow during the year was only TSEK 10,268.

The result has been negatively impacted by a revaluation to net realized value of the discontinued operations in STS-Service amounting to TSEK 342,609.

The tax item for the period amounted to TSEK 34,681 (TSEK 21,940). This amount includes a dissolution of deferred tax assets in the Russian subsidiaries of TSEK 31,583 which has impacted the Group's result negatively. This dissolution, which does not have any impact on cash flow, has been made based on the assessment that the losses carried-forward accumulated in the subsidiaries during earlier periods not will be fully usable in future periods.  The tax item also includes a dissolution of provisions for the Group's deferred tax liability linked to the purchase of the oil licence. This dissolution amounts to TSEK 66,380 with a positive impact on the net result.

The Group reports a net result after tax for year 2009 of TSEK -780,703 (TSEK -272,751), equivalent to an earnings per share of SEK -0.27 (SEK -0.90). Of the net result, TSEK -765,780 (TSEK -259,141) is attributable to the discontinued operations equivalent to an earnings per share of SEK -0.27 (SEK -0.86).

Investments
Investments in tangible and intangible fixed assets in the Group during the period January - December 2009 amounted to TSEK
 32,096 (TSEK 338,265), of which investments in intangible fixed assets represented TSEK 31,318 (TSEK 322,886).

Valuation of assets
In line with what has been earlier communicated, the board of Malka Oil upon its appointment started a process of evaluating the company's strategic opportunities. One alternative has been to sell subsidiary companies. The evaluation has particularly covered expectations for future revenue and costs
and has taken into account the prevailing conditions for growth and profitability for the business.

Great emphasis has been put on evaluating the geological conditions of the company's licence block in the Tomsk region. In the process, the board has come to the conclusion that the licence block has geological potential but also contains difficult technical challenges. The investments for extraction of the reserves would most likely be too large in relation to the potential future revenue. The process of evaluating the company's strategic opportunities thus resulted in the decision to divest STS-Service with its licence block.

During the structures sales process, in which a number of interested potential buyers have placed bids for STS-Service, it has been evident that the market players have put a considerably lower value on the operations than the value which under different circumstances has been maintained so far.

As reported, the re-measurement to fair value less cost to sell on disposal group has resulted in a loss.

VAT- registration
During the 3rd quarter, the company applied for VAT registration and after it was granted applied for and received retroactively a refund of all VAT paid by the parent company during the whole period of its activity. 

Financing and liquidity
In the beginning of 2009, the company's financial situation was very difficult and the board of directors made a proposal for a financial restructuring as a way to solve the financing requirements.

The proposal consisted of two parts:

- an offer to holders of convertible bonds of early conversion into shares of the two outstanding convertible bond loans of nominally MUSD 80;

- a new rights issue under the special condition that the convertible bond owners must accept their offer in full for the rights issue to go through.

The proposal was accepted by the convertible bond holders and shareholders and the conversion of the convertible bond loan and the rights issue were according to the decisions executed in April 2009 which led to a reduction of the company's interest bearing debt of approximately 640 million SEK. As a result of these actions, the Group balance sheet has been significantly strengthened and the Group does not as of 31 December 2009 have any outstanding long- term interest bearing debt.

Cash balances in the Group amounted to TSEK 6,075 (TSEK 42,011) as of 31 December 2009, of which TSEK 2,683 in the continuing operations.

The company in the fourth quarter used a commitment from one of the major shareholders concerning short-term bridge financing at market conditions in order to meet its liquidity needs until receipt of payment from the buyer of STS-Service. After receiving payment from the buyer in early February 2010, the short-term credit has been repaid.

Legal disputes
Malka Oil's Russian subsidiary, OOO STS-Service, was as of the end of 2009 involved in legal disputes with two local suppliers: OOO Kupir concerning construction work and OOO EERB concerning drilling work. Malka Oil in its annual report for 2008 made a provision concerning its total outstanding receivable from OOO EERB amounting to approximately 270 million RUR corresponding to approximately 70 million SEK and in the third quarter, a provision was made concerning the receivable from OOO Kupir amounting to approximately 75 million RUR corresponding to approximately 18 million SEK. The board of directors does not see any need for further provisions due to these disputes.

As a result of the sale of OOO STS-Service to Gazprom Neft in February 2010, the disputes with OOO EERB and OOO Kupir have been transferred to Gazprom Neft.

Malka Oil AB is as of 26 February 2010 involved in a legal dispute with Central Asia Gold AB's Russian subsidiary OOO Tardan Gold concerning a bill of exchange receivable. Malka Oil AB has per 31 December 2009 made a provision concerning this receivable amounting to TSEK 14,046. On 15 March 2010, court hearings will take place in Tomsk.

Employees
The number of employees in Group companies at the end of the report period was 170 (227),  of which 41 (34) were women and 129 (193) were men. The comparative figures from the previous year include personnel working for Group companies but formally employed in Management company Malca.

Comment on the Parent Company
In the income statement, 'Other operating expenses' include the one-off costs related to the company's financial difficulties and the debt restructuring process described above in the comments on the Group's result.

The financial cost of TSEK 225,549 in the second quarter as a result of the early conversion of the convertible bond loans is also included in the parent company income statement.

The item 'Result from shares in group companies' amounting to TSEK -674,824 is the difference between the earlier reported value of the company's shares in subsidiaries and receivables from subsidiaries and the payment received for the shares in STS-Service in the recent transaction.

In the parent company balance sheet, the transaction involving STS-Service is shown as a reduction in 'Financial fixed assets'.

On the liability side of the balance sheet, the conversion of the outstanding convertible bond loans has resulted in an elimination of long-term liabilities.

 

Major events during the report period

Clarification was published November 23, 2009

Malka Oil entered into an agreement with the Russian investment bank Renaissance Capital as financial adviser to review the company's strategic opportunities.

As part of this agreement the company was investigating the possibility of acquiring other companies, new licenses, or carrying out a new share issue for the expansion of the company, or as an alternative divest its subsidiary OOO STS-Service ('Subsidiary'). Renaissance did for some time provide a data room of the Subsidiary to which a number of reputable companies in the market were granted access.

Several companies had expressed an interest regarding an acquisition of the Subsidiary and Malka Oil was involved in discussions with some of these interested parties but these discussions did not lead to any concrete results. With regard to the information circulating in the media, the Board of directors did after careful examination of a letter received by the Board of directors on 16 October 2009, come to the conclusion that, based on the information available, there was no substance behind the offer or the levels implied by it.

Agreement Malka Oil-Gazprom Neft

Gazprom Neft and Swedish company Malka Oil AB on 1 December 2009 signed a binding term sheet regarding the sale of Malka Oil's production subsidiary OOO STS-Service to Gazprom Neft for a purchase price of SEK 820,000,000 in cash (about $118 mln). 

The binding term sheet was further elaborated in a sale and purchase agreement which was signed by the parties on 14 December 2009.

The transaction was subject to approval by Malka Oil shareholders, Gazprom Neft corporate approval and the Federal Antimonopoly Service (FAS) of the Russian Federation. The Malka Oil board of directors was unanimously recommending Malka Oil shareholders to approve the transaction.

Extraordinary General Meeting of Shareholders

Malka Oil convened an Extraordinary General Meeting held at Strand Hotel in Stockholm on 17 December 17 2009, for decision of approval of the transaction to sell the company's subsidiary OOO STS-Service in line with the proposal of the board of directors. In the resolution of the Extraordinary General Meeting published on 17 December, it was announced that the EGM approved the board's proposition of a sale of the company's subsidiary OOO STS-Service to Gazprom Neft.

 

Operations

Summary
Malka Oil AB is an independent Swedish oil company within exploration and production active in the Tomsk region in western Siberia in Russia. The subsidiary OOO STS-Service, which in the beginning of 2010 has been sold to Gazprom Neft, owns a licence to block 87 for 25 years as from April 2005, with the right to extract all hydrocarbons found within the Tomsk licence block during the licence period. The licence block measures just over 1,803 square kilometres, corresponding to an area of approximately 30 times 60 kilometres, and is located in the very active oil and gas producing north western part of the Tomsk region.

Drilling on the licence block commenced during the Soviet era. The Soviet authorities drilled four wells, three of which discovered hydrocarbons, i.e. oil, gas and gas condensate. A vast amount of 2D seismic data was collected which indicated a volume of approximately one million tons (which is about eight million barrels) of recoverable oil reserves classified in accordance with Russian categories 'Proven' (C1) and 'Probable' (C2).

On 5 February 2010, Russian Authorities registered the transfer of ownership of STS-Service to Gazprom Neft in line with the resolution by the Extra General Shareholders Meeting on the 17th of December 2009 to sell STS-Service to Gazprom Neft.

Following the transaction, the board of Malka Oil AB is developing a new business plan for future operations. This business plan will be presented to shareholders during the spring.

Production status as of December 31, 2009
As of December 31, 2009, on Malka Oil's license block there were 34 wells in total. 29 of these wells were production wells, two were gas and condensate wells, two were water supply wells and one was an injection well. The company has completed 29 of these under its own management while the other five were drilled during the Soviet era. Eleven wells permanently produced oil, ten were producing intermittently, two were awaiting development, one was a pressure observation well and one well was awaiting work over. Four other wells were abandoned wells. Malka Oil´s production of oil and gas condensate for the January-December 2009 period amounted to
785,005 barrels which corresponds to an average daily production of 2,151 barrels. Malka Oil´s production during the 4th quarter amounted to 187,525 barrels.



For further information, please contact:

Maks Grinfeld, MD, tel; +46 768 077 614
Sven-Erik Zachrisson, Chairman of the Board of Directors, tel: +46 8 41 05 45 96


(for complete report see attached file)

HUG#1389303

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