Volga Gas: Preliminary Results for the Year Ended 31 December 2015

Volga Gas plc, the oil and gas exploration and production group operating in the Volga region of Russia, announces its preliminary unaudited annual results for the year ended 31 December 2015.

During 2015, the Group had to face significantly reduced oil prices and devaluation of the Russian Ruble as well as relatively higher rates of Mineral Extraction Taxes and disruptions to the regional market for condensate. Nevertheless, the Group maintained positive EBITDA and Operating Cash flow and remained in a positive net cash position while increasing capital expenditure to facilitate the completion of development drilling on its Vostochny Makarovskoye (“VM”) gas/condensate field.

As a result of successful drilling activities in 2015, the effective production rates of the Group’s fields increased by one third from approximately 4,500 barrels of oil equivalent per day (“boepd”) to the current level of over 6,000 boepd

FINANCIAL RESULTS

· Revenues of US$17.8 million (2014: US$39.4 million).
· EBITDA of US$0.9 million (2014: US$17.4 million).
· Loss before tax of US$5.0 million (2014: profit of US$16.3 million), after exploration expenses and impairments of US$3.7 million (2014: nil), a loss of $0.7 million from unauthorised transfers from Group bank accounts in Russia (2014: nil) and a foreign exchange gain of US$0.9 million (2014: US$3.3 million).
· Net operating cash flow of US$1.2 million (2014: US$16.3 million).
· Net cash decreased to US$6.7 million as at 31 December 2015 (31 December 2014: US$15.8 million) after utilising US$8.7 million for capital expenditure (2014: US$5.5 million) and paying a final dividend of US$1.0 million (2014: US$3.0 million interim dividend).

PRODUCTION & DEVELOPMENT

· Group average production in 2015 was 3,278 boepd (2014: 4,244 boepd).
· Production from VM and Dobrinskoye fields was impacted by disruption in the local market for condensate during early and mid-2015 and consequently averaged 2,876 boepd in 2015 (2014: 3,549 boepd).
· Drilling of the VM#3 well and of a sidetrack on VM#4 were successfully completed during 2015, effectively concluding development drilling on the VM field. The total wellhead capacity is currently estimated to exceed the planned 1 million cubic metres per day maximum output of the gas plant.

DOBRINSKOYE GAS PLANT

· Dobrinskoye gas plant operated successfully during 2015 and in December 2015 throughput was increased by 50% to 750,000 cubic metres per day (26.5 mmcf/d), when the recently completed VM#4 well was brought on line.
· Completed minor additional modifications to meet regulatory requirements and improve efficiency.
· Completed feasibility and design work to increase throughput and cost efficiency with Amine gas sweetening project.

CURRENT TRADING AND OUTLOOK
· After the normal seasonal slow start in January, production has been sustained at higher levels and is currently running steadily at over 6,000 boepd.
· Oil prices and the Russian Ruble weakened in January and, although having recovered somewhat, remain at low levels compared to recent years. In the current environment, the Group expects to improve on the financial performance of 2015.
· Exports now represent a substantial proportion of condensate sales, protecting the business from disruptions to local markets.
· Capital expenditure commitments have been reduced to a minimal level – to below US$1.5 million of new capital expenditure in 2016.
· Aim to preserve financial strength and to benefit from an eventual upturn in oil prices.

Andrey Zozulya, Chief Executive of Volga Gas, commented:

“The business environment in 2015 has been very challenging for a small, domestically oriented Russian oil, gas and condensate producer like Volga Gas. It is fortunate that the Group entered this challenging period in sound financial condition so that it has been able to complete the drilling on its main producing field with successful outcomes. Now, with the majority of the current capital programme executed, the Group should be able to benefit from its increased production capacity and has a solid base from which to grow its production.

“I am excited about the Group’s assets and remain positive about the potential for growth, both in reserves and production from our licences. We will also continue seek value accretive opportunities, beyond our existing licence areas, building a focused exploration and production business.”