First Quarter 2009 Results

The decline in revenues was because of a decrease in the average price which China North East Petroleum received for its crude oil. The average oil price for the current quarter was $40.04, a 57.5% decline from $94.27 in the year-ago quarter. China North East Petroleum’s output of crude oil for the first quarter of 2009 was 222,091 barrels compared to 114,862 barrels for the year-ago quarter, up 93.4%, which considerably equalizes the impact of lower oil prices.

This raise in production was mainly because of: (i) an raise in the number of producing wells from 165 in the year-ago quarter to 247 in the existing quarter; (ii) refracturing and other technical improvements made to the existing wells; and (iii) implementation of a water injection network, which helped to maintain production levels at certain of China North East Petroleum’s existing wells.

Cost of sales declined by 33.8%, from $4,801,159 in the year-ago quarter to $3,179,425 for the first quarter of 2009. The decline in cost of sales resulted mainly from a decrease in the oil surcharge paid to the PRC government, because of the decline in oil prices generally. For the existing quarter, China North East Petroleum paid an oil surcharge of $37,792 to the PRC government as compared to $2,211,320 paid in the year-ago quarter.

Under a regulation introduced in June 2006, a surcharge of 20% is imposed on the portion of the selling price of crude oil which goes beyond $40 per barrel and a surcharge of 40% is imposed on the portion of the selling price of crude oil which exceeds $60 per barrel. This government oil surcharge tax is paid by China North East Petroleum on a quarterly basis, following the end of each quarter.

The major decrease in the oil surcharge paid to the government was partly counterbalance by a raise in depreciation of oil and gas properties. Depreciation increased from $1,874,692 in the year-ago quarter to $2,624,254 in the existing quarter, up 40%. The raise in the depreciation of oil and gas properties was mainly attributable to the raise in proven oil reserves as of December 31, 2008, the higher volumes of oil produced and the increased depreciable production equipment base during the first quarter of 2009.

Operating expenses totaled $1,337,986 for the first quarter of 2009, up 110%, compared to $635,949 in the year-ago quarter. This increase is mainly a result of an increase of about $320,000 in selling, general and administrative costs, an raise of about $50,000 in amortization of deferred financing costs and about $330,000 in amortization of the discount on debenture from the Lotusbox secured debenture financing transaction consummated in late February 2008.

SG&A costs rose largely because of non-cash charges related with stock and option grants made to directors and certain key employees in the second and third quarters of 2008. Amortization of the discount on the debenture was identified for only one month in the year-ago quarter, against the full three months of the existing quarter, which accounts for the increase.

Other expenses rose from $144,862 for the year-ago quarter compared to $277,945 for the first quarter of 2009. This increase is mainly the result of increases in interest expense which increased from $119,697 in the year-ago quarter to $280,000 in the existing quarter.

EBITDA raised by 2% to $7,644,752 for first quarter of 2009, compared to $7,503,613 in the year-ago quarter. It represented 85.9% of the revenue. This raise is mainly the result of the major decrease in the oil surcharge paid, improved production efficiency and reduced production costs.

Hongjun Wang, president of China North East Petroleum commented, “We are very pleased with the results of this quarter, especially in light of the global economic downturn. The plunge in oil prices – which have fallen dramatically from a record high of $147 per barrel last year, down to an average of about $40 per barrel in the first few months of this year – made 2009 a challenging year to start. However, CNEH’s management views this challenging economic situation as an opportunity rather than a threat.”

“With strategic production planning and wells drilled in 2008, the company achieved an 80.8% production increase compared with the same period last year, which offset the dramatic drop in oil prices during the first quarter. More importantly, CNEH achieved a profit margin of over 25.5% in the first quarter, and a very strong EBITDA result. It is a testament to CNEH’s versatility in a difficult market that the decrease in profit margin of CNEH was relatively lower compared with other major multinational oil companies. We attribute our ability to maintain this profit margin to the higher efficiency of our operation and lower production costs. This demonstrates our strong execution capabilities, even during this challenging time.

“We were satisfied to see the continuous improvements to our financial liquidity in the first quarter. We grew our cash position by 48.1% sequentially to nearly $20 million and notably improved our operating cash flow as well. Therefore, with sufficient cash on hand the company will continue to grow. We remain highly focused on exploring all possibilities to further expand our business presence and market position in the domestic private oil industry in China. We will do so by continuing to increase our production levels, seeking to acquire new oilfield leases and expanding our business into directly related areas of petroleum operations.”

Wang continued, “heading into the second quarter, our management established a production and well drilling plan for the remainder of 2009. Our current plan is to drill an additional 48 wells in the next 10 months, with five wells expected to be drilled each month. If oil prices continue to recover, we may speed up the drilling and place more wells into production in the near future. With this growth plan in place, we expect to yield strong financial results ahead.”

“Finally, getting listed on an exchange is still a priority of the management, and we are currently working closely with the prospective exchange to continue the assessment and review of our listing application. We will update the shareholders on our progress when we have additional information that can be disclosed.” concluded Wang.