JSC KazMunaiGas Exploration Production 1Q 2011 Financial results

JSC KazMunaiGas Exploration Production released its consolidated financial statements for the three months ended March 31, 2011:

 The average price of Brent in the first three months of 2011 was 38% higher than in the same period last year, up from US$76 per barrel to US$105 per barrel

 Net profit amounted to 59bn Tenge (US$403m)1 and earnings per share – 810 Tenge (US$0.9 per GDR), an increase of 14% compared to the same period in 2010.

Production Highlights

In the first three months of 2011 KMG EP’s consolidated production was 3,172 thousand tonnes of crude oil (261 kbopd) including the Company’s stakes in LLP Kazgermunai JV (KGM), CCEL (CCEL, Karazhanbasmunai) and PetroKazakhstan Inc. (PKI). This is 9 thousand tonnes or 0.3% less than during the same period in 2010.

The Company produced 2,093 thousand tonnes (171 kbopd) of oil at Uzenmunaigas and Embamunaigas production facilities, which is 8 thousand tonnes or 0.4% higher than in the same period of last year. The results of the first quarter were negatively affected by a number of emergency power cuts in the fields, caused by severe weather conditions in March 2011.

The Company’s export sales and domestic sales volumes from Uzenmunaigas and Embamunaigas production facilities were 1,682 thousand tonnes (138 kbopd) and 398 thousand tonnes (33 kbopd),respectively.

The Company’s share in the production volumes from KGM, CCEL and PKI2 amounted to 1,079 thousand tonnes of crude oil (90 kbopd), which is 17 thousand tones or 2% less than in the same period in 2010. The Company’s share in the sales volumes from KGM, CCEL and PKI2 was 1,213 thousand tonnes of crude oil (101 kbopd), including 9692 thousand tonnes (81 kbopd) or 80% supplied to export markets.

Net Profit for the Period

Profit after tax (net income) in the first three months of 2011 was 59bn Tenge (US$403m). This represents a 14% growth compared to the same period of 2010, which is mainly explained by a 38% increase in oil price, partly offset by increase in operating taxes, production costs and selling, general and administrative expenses.

Revenue
The Company’s revenue in the first three months of 2011 increased by 31%, compared to the same period in 2010 and amounted to 192bn Tenge (US$1,308m). This was due to a 33% increase in the average realized price, from 69,022 Tenge per tonne (US$64.64 per barrel) to 91,682 Tenge per
tonne (US$86.61 per barrel).

Taxes Other than on Income

Taxes other than on income in the first three months of 2011 were 73bn Tenge (US$495m), which is 79% higher compared to the same period of 2010. The increase is due to the higher rent and mineral extraction taxes (MET) as a result of the oil price growth, as well as reintroduction of crude oil customs export duty (CED) on 16th August 2010 and its subsequent increase to US$40 per tonne from 1st January 2011.

Production Expenses
Production expenses in the first three months of 2011 were 30bn Tenge (US$203m), which is 37% higher compared to the same period of 2010. A significant part of the production costs increase is due to increase in payroll and repairs and maintenance expenses. Increase in payroll expenses reflects salary increase at the production units from 1st June 2010 and salary indexation from the 1st January 2011. Growth in repairs and maintenance expenses was due to increased number of repaired wells and higher repair cost per well.

Selling, General and Administrative Expenses
Selling, general and administrative expenses in the first three months of 2011 were 25bn Tenge (US$173m), which is 22% higher compared to the same period of 2010, mainly due to increase in fines in penalties related to an environmental fine accrual as well as increase in transportation and payroll expenses.

The environmental fine accrual is related to gas flaring at Prorva group of fields when it was no tfeasible to obtain the required regulatory permissions in a timely manner. The Company accrued the estimated sums in its financial statement for the first quarter of 2011 and intends to appeal the matter with the regional court. The permissions for the remainder of 2011 were obtained in March 2011.

Growth in transportation expenses was mainly due to increased volume of transportation through CPC pipeline and a 9% increase of transportation tariffs imposed by Transneft from 1st January 2011.

Cash Flows
Operating cash flow in the first three months of 2011 was 46bn Tenge (US$317m) compared to 9bn Tenge (US$62m) in same period of 2010.

Capex
Purchases of property, plant and equipment (as per Cash Flow Statement) in the first three months of 2011 were 18bn Tenge (US$122m), representing 68% increase compared to the same period of 2010, in accordance with Capex budget for 2011.

Cash and Debt
Cash and cash equivalents as at 31 March 2011 amounted to 115bn Tenge (US$792m) compared to 99bn Tenge (US$668m) as at 31 December 2010.
Other financial assets (current and non-current) at 31 March 2011 were 607bn Tenge (US$4.2bn) compared to 600bn Tenge (US$4.1bn) as at 31 December 2010. Other financial assets include the debt instrument (“the Bond”, see below) issued by National Company “KazMunaiGas” (NC KMG), deposits and other financial instruments.

On 16 July 2010, the Company purchased the Bond issued by NC KMG in the amount of 221.5 billion Tenge (US$1.5bn) which carry an annual coupon of 7% and will mature in June 2013 as per previously disclosed information. KMG EP recognized 3.8bn Tenge (US$26m) interest income from NC KMG Bonds in the first three months of 2011.

As at 31 March 2011, 81% of cash and financial assets (including the Bond) were denominated in foreign currency and 19% were denominated in Tenge. Interest accrued on deposits in banks in the first three months of 2011 was 7.7bn Tenge (US$52m).

Borrowings were 122,2bn Tenge (US$838m) as at 31 March 2011 compared to 122,5bn Tenge (US$831m) as at 31 December 2010. Borrowings include 114bn Tenge (US$784m) of nonrecourse debt of KMG PKI Finance B.V. related to the acquisition of the 33% interest in PKI.

Net cash position3 at 31 March 2011 amounted to 600bn Tenge (US$4.1bn) compared to 576bn Tenge (US$3.9bn) as at 31 December 2010.

Contribution from Strategic Acquisitions
In the first three months of 2011 KMG EP’s share of results of associates and joint ventures was 22bn Tenge (US$148m) compared to a 12bn Tenge (US$82m) in same period of 2010. The financial results of associates and joint ventures in the first three months of 2011 were primarily affected by the higher oil price compared to the same period of 2010.

Kazgermunai
In the first three months of 2011 KMG EP recognised a 10.0bn Tenge (US$68m) income from its share in KGM. This amount represents 50% of KGM’s net profit of 11.8bn Tenge (US$81m) and 0.9bn Tenge (US$6m) deferred income tax benefit net of 2.1bn Tenge (US$14m) from the effect of purchase price premium amortization and 0.7bn Tenge (US$4m) deferred income tax amortisation.

On March 31, 2011 the partners of Kazgermunai agreed to distribute 200 million US Dollars as a dividend payment. The Company received its 50% share of the above dividend amount on April 6, 2011.

PetroKazakhstan Inc.
In the first three months of 2011 KMG EP recognised a 11.7bn Tenge (US$80m) income from its share in PKI. This amount represents 33% of PKI’s net profit of 14.4bn Tenge (US$99m) net of Cash, 2.8bn Tenge (US$19m) from the effect of purchase price premium amortization.

CCEL
As of 31 March 2011 the Company has recognised the amount of 20.9bn Tenge (US$143m) as a receivable from CCEL, a jointly controlled entity with CITIC Group. The Company has accrued 0.7bn Tenge (US$5.0m) of interest income for the first three months of 2011 related to the US$26.87m annual priority return from CCEL.

The consolidated financial statements for the three months ended March 31, 2011 with Notes are
available on the Company’s website www.kmgep.kzwww.kmgep.kz