KazMunaiGas Exploration Production Financial Results for the First Nine Months of 2017
JSC KazMunaiGas Exploration Production (“KMG EP” or “the Company”) announces its consolidated interim financial results for the first nine months ended 30 September 2017.
- Revenue for the first nine months of 2017 was up 29% year-on-year at 666bn Tenge (US$2,059m[1]). This was largely a result of a 24% increase in the price of Brent, a higher share of export sales and the switch to the processing scheme in April 2016, partially offset by a 6% decrease in the average Tenge – US dollar exchange rate.
- Net profit for the first nine months of 2017 was 168bn Tenge (US$521m) compared to 76bn Tenge (US$220m) in the same period of 2016. Net cash generated from operating activities was 184bn Tenge (US$570m) compared to 108bn Tenge (US$314m) in the same period of 2016.
- EBITDA[2] for the first nine months of 2017 was 181bn Tenge (US$559m) compared to 123bn Tenge (US$359m) in the same period of 2016.
- Net cash position[3] as at 30 September 2017 was 1,360bn Tenge (US$4.0bn) compared to 1,172bn Tenge (US$3.5bn) as at December 31, 2016.
Production
KMG EP, including its stakes in Kazgermunai (“KGM”), Karazhanbasmunai (“CCEL”) and PetroKazakhstan Inc. (“PKI”), produced 8,884 thousand tonnes of crude oil (240 kbopd) in the first nine months of 2017, a 3% decrease over the same period of 2016.
Ozenmunaigas JSC (“OMG”) produced 4,092 thousand tonnes (110 kbopd), a 2% decrease year on year, mainly due to lower level of production from the existing well stock. Embamunaigas JSC (“EMG”) produced 2,117 thousand tonnes (57 kbopd), 0.2% less than in the same period of 2016. The total volume of oil OMG and EMG produced was 6,209 thousand tonnes (167 kbopd), a 1% decrease compared to the same period of 2016.
The Company’s share of production from KGM, CCEL and PKI for the first nine months of 2017 amounted to 2,675 thousand tonnes of crude oil (73 kbopd), 6% less than in the same period of 2016. This was mainly driven by a natural decline in oil production at PKI, which produced 13.5% per day less than in the same period of 2016.
Crude oil supplies and sales of oil products
In the first nine months of 2017, the Company’s combined sales from OMG and EMG were 6,056 thousand tonnes (160 kbopd). Of these crude oil sales, 4,200 thousand tonnes (111 kbopd) were exported and 1,856 thousand tonnes (49 kbopd) were sold to the domestic market, equivalent to 31% of the total sales volume. In the same period of 2016, the Company sold 40% of crude oil in the domestic market.
Out of 1,856 thousand tonnes (49 kbopd) of crude oil supplied by OMG and EMG to the domestic market, 1,437 thousand tonnes (38 kbopd) were supplied to Atyrau Refinery (ANPZ) and 419 thousand tonnes (11 kbopd) were supplied to Pavlodar Refinery (PNHZ).
Under the independent oil processing scheme, sales of oil products for the first nine months of 2017 were 1,774 thousand tonnes.
The Company’s share in sales from CCEL, KGM, and PKI amounted to 2,552 thousand tonnes of oil (69 kbopd). Of this, 1,045 thousand tonnes (27 kbopd) were exported with the remaining 1,506 thousand tonnes (42 kbopd) supplied to the domestic market, equivalent to 59% of total sales volume.
Net Profit for the Period
Net profit for the first nine months of 2017 was 168bn Tenge (US$521m), compared to 76bn Tenge (US$220m) in the same period of 2016. The increase in net profit was due to higher revenue resulting from a 24% rise in the Brent price, an increased share of export sales, the switch to the independent processing scheme starting in April 2016, foreign exchange gain and an increase in the share of results of associate and joint ventures, partially offset by an increase of taxes other than on income and production expenses.
In the first nine months of 2017, the Company recorded a foreign exchange gain of 29bn Tenge (US$90m) due to an increase of the Tenge – US dollar exchange rate from 333.29 Tenge/US$ at 31 December 2016 to 341.19 Tenge/US$ at 30 September 2017.
Net profit was reduced by KZT8.9bn as a result of increased provisions for ecological work to clean contaminated soil principally at EMG where no provision had been made for historical obligations.
Revenue
The Company’s revenue in the first nine months of 2017 was 666bn Tenge (US$2,059m), up 29% compared to the same period in 2016. This increase is the result of a 24% rise in the Brent price, an increased share of export sales and the switch to the independent processing scheme starting in April 2016, which was partially offset by a 6% decrease in the average Tenge – US dollar exchange rate.
Net revenue from the sale of refined oil products (net of all processing and marketing costs[4]) for the first nine months of 2017 was 54,848 Tenge per tonne at ANPZ and 60,787 Tenge per tonne at PNHZ. For the six months, ended September 30, 2016, net revenue was 39,859 Tenge per tonne and 48,433 Tenge per tonne for ANPZ and PNHZ, respectively. Net revenue in 3Q2017 was 51,951 Tenge per Tonne at ANPZ and 65,235 Tenge per Tonne at PNHZ compared with 42,485 Tenge per Tonne and 50,065 Tenge per tonne, respectively in 3Q2016.
Production Expenses
Production expenses in the first nine months of 2017 were 230bn Tenge (US$713m), up 18% compared to the first nine months of 2016. This was mainly due to a 13% increase in employee benefit expenses, a recognition of reserve for environmental remediation obligations, additional processing expenses related to the new independent processing scheme starting in April 2016, as well as higher repair and maintenance expenses, partially offset by a change in crude oil balance.
Employee benefit expenses were up by 13% mainly due to the absence of annual bonus provision in the first nine months of 2016, as well as a 7% salary indexation of production units’ personnel since January 2017. Annual bonus provision for the first nine months of 2017 is 3.8bn Tenge as compared to 5.7bnTenge in 2016.
Estimate of environmental remediation obligations increased due to a recognition of an additional reserve by the Company for removal of historical contaminations at OMG and EMG in an amount of 8.9bn Tenge.
Repair and maintenance expenses were up due to a higher volume and price of hydraulic fracturing works and increased number of well servicing performed by third parties at OMG.
As announced, the processing fee at ANPZ has been amended according to the approved budget and stands at the level of 24,512 Tenge per tonne (20,501 Tenge in 1Q2017 and April-December 2016) from April 1, 2017. The fee at PNHZ stands at the level of 16,417 Tenge per tonne from August 1, 2017 (14,895 Tenge in January-July 2017 and April-December 2016).
Selling, General and Administrative Expenses
Selling, general and administrative expenses during the first nine months of 2017 amounted to 93bn Tenge (US$287m), down 2% compared to the same period in 2016. This was largely a result of the absence of the agency fee expenses and reversal of accruals for fines and penalties related to the 2009-2012 tax audit after reduction of the tax charge by the tax authorities, which was partially offset by an increase of transportation expenses.
As announced, on January 1, 2017 the Company ceased using KazMunaiGas Refining & Marketing as its sales agent and started marketing refined products directly[5]. In April-September 2016, the Company paid 3.6bn Tenge for these services.
Taxes other than on Income
Taxes, other than on income, for the first nine months of 2017 were 202bn Tenge (US$624m), up 74% compared to the same period in 2016. This was largely due to an increase in the rent tax, Mineral Extraction Tax (MET), Export Customs Duty (ECD) and other taxes. This was largely a result of a rise in the average Brent price and higher share of export sales.
Rent tax for the first nine months of 2017 averaged 12,236 Tenge per tonne of export volume versus 3,582 Tenge per tonne of export volume in the same period of 2016. This was driven by a higher rent tax rate, which correlates to the price of Brent. Also, the Company’s current rent tax payable was reduced by 6.3bn Tenge in the same period of 2016 as a result of changes in the tax legislation in relation to the methodology for calculating the rent tax.
The Company applies the MET rate of 13% for OMG fields in 2017, while in September 2016 MET rate was set at 9% for 2016, as OMG recorded losses under tax accounting in 2016 and was thereby granted a reduction based on the Government Decree. Effect from reduced MET rate in the first nine months of 2016 was a reduction of 11.5bn Tenge.
The increase in ECD expenses was due to a higher average Brent price, an increase in the export volumes of crude oil and export of oil products after the Company switched to the independent oil processing scheme in April 2016, which was partially offset by decrease in average Tenge – US dollar exchange rate. The average ECD rate in the first nine months of 2017 was US$47 per tonne of crude oil compared to US$37 per tonne of crude oil in the first nine months of 2016.
Higher other tax expenses were mainly due to a higher excise tax on diesel and petrol in the first nine months of 2017 after the Company switched to the independent oil processing scheme in April 2016. As announced, the excise tax on diesel increased for the period from June to October to 9,300 Tenge per tonne from 540 Tenge per tonne applied during the rest of the year.
Capital expenditures
Capital expenditures[6] in the first nine months of 2017 totaled 76bn Tenge (US$235m), up 6% compared to the same period in 2016. This was primarily due to an increase in purchases of fixed assets and higher expenses related to hydraulic fracturing works performed on the new wells at OMG, which was partially offset by a decrease in capital expenditures directed towards the construction and modernization of production facilities and a reduction in volumes of production drilling at OMG and EMG.
The Company plans capital expenditures for 2017 at the level of 136bn Tenge[7] (US$378m[8]), which is 21bn Tenge above the 115bn Tenge (US$337m) spent in 2016.
Cash Flows from Operating Activities
Net cash generated from operating activities in the first nine months of 2017 was 184bn Tenge (US$570m) compared to 108bn Tenge (US$314m) in the same period in 2016.
Increase in the net cash generated from operating activities was mainly due to the improved oil price environment, higher level of export sales, continued success in processing on own accounts, recovery of previously made CIT, EPT and MET tax prepayments in the amount of 27.1bn Tenge, return of VAT in the amount of 24.5bn Tenge in the first nine months of 2017, which was partially offset by an increase of taxes other than on income and production expenses.
Net cash
The net cash position as at September 30, 2017 was 1,360bn Tenge (US$4.0bn), representing a 188bn Tenge (US$471m) increase over the net cash position of 1,172bn Tenge (US$3.5bn) as at December 31, 2016. 98% of cash and financial assets were denominated in foreign currencies (predominantly US dollars) and 2% were denominated in Tenge.
Finance income accrued on cash, financial, and other assets in the first nine months of 2017 totaled 22.4bn Tenge (US$69m), compared to 22.0bn Tenge (US$64m) in the first nine months of 2016.
Share of results of associate and joint ventures
In the first nine months of 2017, KMG EP reported a profit of 18.2bn Tenge (US$56m) in its share of results of associate and joint ventures, compared to a loss of 7.6bn Tenge (US$22m) in the first nine months of 2016.
Kazgermunai
In the first nine months of 2017, KMG EP recognized 15.6bn Tenge (US$48m) income from its share in KGM compared to a profit of 4.0bn Tenge (US$21m) in the same period in 2016. This amount represents the Company’s 50% share in KGM’s net profit, which amounts to 17.9bn Tenge (US$55m) adjusted for 2.4bn Tenge (US$7m) amortization of the fair value of licenses and the related deferred tax benefit.
KGM’s revenue in US dollars for the first nine months of 2017 increased by 33% compared to the same period in 2016. This was largely driven by a 24% increase in Brent price and higher domestic prices.
KGM declared a dividend payment of US$125m (KMG EP share) for the year of 2016, of which US$111m were received by KMG EP. KMG EP received an additional dividend payment of US$2m in January 2017 for past periods.
PetroKazakhstan Inc.
In the first nine months of 2017, KMG EP recognized a profit in an amount of 3.8bn Tenge (US$12m) from its share in PKI compared to a loss of 10.6bn Tenge (US$31m) in the same period in 2016. This amount represents the Company’s 33% share in PKI’s net profit, which amounted to 9.7bn Tenge (US$30m) adjusted for the 5.9bn Tenge (US$18m) amortization of the fair value of licenses.
PKI’s revenue in US dollars for the first nine months of 2017 increased by 20% compared to the same period in 2016. This was largely driven by a 24% increase in Brent price and higher domestic prices, which partially offset a decrease in sales volumes resulting from lower production levels.
PKI made a dividend payment of US$31.4m (after withholding tax) to KMG EP in June 2017 for the year of 2016.
CCEL
As of 30 September 2017, the Company had 38.3bn Tenge (US$112m) as a receivable from CCEL, a jointly controlled entity with CITIC Resources Holdings Limited. The Company has accrued 3.0bn Tenge (US$9m) of interest income in the first nine months of 2017, which is a part of the annual priority return in an amount of US$26.9m from CCEL.
