KMG EP: 2017 Q1 Results – Revenues Up 76% yoy As Oil Price Rebounds

JSC KazMunaiGas Exploration Production (“KMG EP” or “the Company”) announces its consolidated interim financial results for the first three months ended 31 March 2017.

• Revenue for the first quarter of 2017 was up 76% year on year and amounted to 214bn Tenge (US$663m[1]). This was largely a result of a 58% Brent price increase and switch to the processing scheme in April 2016, which was partially offset by a 9% decrease in the average Tenge – US dollar exchange rate.
• Operating profit for the first quarter of 2017 was 44bn Tenge (US$137m) compared with 4.6bn Tenge (US$13m) loss in the same period of 2016.
• In the first quarter of 2017, the Company recorded a foreign exchange loss of 59bn Tenge (US$182m) due to a 6% reduction of the Tenge – US dollar exchange rate (as at 31 March 2017 compared with the exchange rate as at 31 December 2016).
• Net profit for the first quarter of 2017 was 2.3bn Tenge (US$7m) and net cash generated from operating activities was 55bn Tenge (US$172m). Net profit for the first quarter of 2016 was 0.9bn Tenge (US$3m) and net cash used in operating activities was 31bn Tenge (US$87m).
• Net cash position[2] as at 31 March 2017 was 1,143bn Tenge (US$3.6bn) compared with 1,172bn Tenge (US$3.5bn) as at 31 December 2016.

Production

Overall, KMG EP, including its stakes in Kazgermunai (“KGM”), CCEL (“Karazhanbasmunai”) and PetroKazakhstan Inc. (“PKI”), produced 2,904 thousand tonnes of crude oil (238 kbopd) for the first quarter of 2017, a 5% decrease on the same period of 2016. The lower levels of production were largely due to natural decline in production of oil at PKI and fewer wells drilled at Ozenmunaigas JSC (“OMG”), which is in line with the current Company’s plan. In order to achieve the consolidated production plan of 12.2 million tonnes, which is higher than the actual production in 2016, additional geological and technical measures at existing wells have been budgeted and planned for through to year end 2017.

In the first quarter of 2017, OMG produced 1,335 thousand tonnes (109 kbopd), a 4% decrease as compared to the same period of 2016, mainly due to fewer wells drilled and less geological and technical measures performed. Embamunaigas JSC (“EMG”) produced 691 thousand tonnes (57 kbopd), which is 2% less than in the same period of 2016, cause the underlying of underperformance was the same as for OMG. The total volume of oil OMG and EMG produced was 2,026 thousand tonnes (166 kbopd), which is 3% lower compared to the same period of 2016.

The Company’s share in production from KGM, CCEL, and PKI for the first quarter of 2017 amounted to 878 thousand tonnes of crude oil (72 kbopd), which is 8% less than in the same period of 2016, mainly due to a natural decline in production of oil at PKI.

Crude oil supplies and sales of oil products

In the first quarter of 2017, the Company’s combined sales from OMG and EMG were 1,939 thousand tonnes (156 kbopd), representing a year on year decrease of 5%, of which 66% or 1,284 thousand tonnes (103 kbopd) of oil was exported and 655 thousand tonnes (53 kbopd) of oil was sold to the domestic market. The share of domestic supplies from the resources of OMG and EMG was 34% in the first quarter of 2017 as compared to 40% in the same period of 2016.

Out of 655 thousand tonnes (53 kbopd) of crude oil supplied by OMG and EMG to the domestic market in the first quarter of 2017, 520 thousand tonnes (42 kbopd) were processed through the Atyrau Refinery (“ANPZ”) and 135 thousand tonnes (11 kbopd) were processed through the Pavlodar Refinery (“PNHZ). In the first quarter of 2016, the Company sold 830 thousand tonnes to JSC KazMunaiGas Refining & Marketing (“KMG RM”), a subsidiary of the Company’s majority shareholder.

During the first quarter of 2017, sales of oil products were 641 thousand tonnes via the oil processing scheme, including 257 thousand tonnes supplied to the export market. In April – December of 2016 the combined sales value of oil products was 2,324 thousand tonnes with 916 thousand tonnes sold to the export market.

The Company’s share in the sales from KGM, CCEL, and PKI was 871 thousand tonnes of crude oil (72 kbopd), including 375 thousand tonnes (30 kbopd) supplied to the export markets, or 43% of the total sales volume. The domestic sales volume was 496 thousand tonnes (42 kbopd).

Net Profit for the Period

Net profit for the first quarter of 2017 was 2.3bn Tenge (US$7m) compared with 0.9bn Tenge (US$3m) in the same period of 2016. The increase in net profit was due to an increase in revenue as a result of a 58% increase in the Brent price, switch to the processing scheme starting in April 2016 and increase in the share of results of associate and joint ventures, which was partially offset by an increase of production expenses, taxes other than on income and foreign exchange loss.

In the first quarter of 2017, the Company recorded a foreign exchange loss of 59bn Tenge (US$182m) due to a 6% reduction of the Tenge – US dollar exchange rate (as at 31 March 2017 compared with the exchange rate as at 31 December 2016).

Revenue

The Company’s revenue in the first quarter of 2017 was 214bn Tenge (US$663m), up 76% compared to the same period in 2016. This increase is the result of a 58% increase in the Brent price, switch to the processing scheme starting in April 2016, which was partially offset by 9% decrease in the average Tenge – US dollar exchange rate.

Net revenue achieved from the sale of refined oil products (net of all processing and marketing costs^[3]) for the first three months of 2017 was 57,196 Tenge per tonne at ANPZ and 56,596 Tenge per tonne at PNHZ, which is 18% and 4% higher, respectively, compared to the fourth quarter of 2016. This is due to an increase of prices for exported oil products from ANPZ and absence of fees relating to the agency agreement between the Company and KMG RM for the sales of oil products. In April – December of 2016 the Company was paid 42,366 Tenge per tonne and 51,743 Tenge per tonne for its sales to ANPZ and PNHZ, respectively.   

Production Expenses

Production expenses in the first quarter of 2017 were 70bn Tenge (US$217m), up 28% compared to the first quarter of 2016. This was mainly due to additional expenses related to the new processing scheme starting in April 2016 in the amount of 13bn Tenge (US$40m), as well as an 11% increase in employee benefit expenses.

Employee benefit expenses were up by 11% mainly due to a 7% salary indexation of production units’ personnel since January 2017, as well as an unused annual bonus provision reversal in the first quarter of 2016.

Selling, General and Administrative Expenses

Selling, general and administrative expenses during the first quarter of 2017 amounted to 25bn Tenge (US$79m), down 16% compared to the same period in 2016. This was largely a result of the reversal of accruals for fines and penalties related tax charges after successful appeals of notification from authorities of reduced historic balances.

As announced, on January 1, 2017 the Company ceased using KMG RM as its sales agent and started marketing refined products directly[4].

Taxes other than on Income

Taxes, other than on income, for the first quarter of 2017 were 66bn Tenge (US$203m), up 92% compared to the same period in 2016. This was largely due to an increase in the rent tax, Mineral Extraction Tax (MET) and Export Customs Duty (ECD) expenses.

Rent tax expenses were up mainly due to an increase in the average Brent price, which was above US$50 per barrel in the first quarter of 2017, and resulted in a rent tax rate of 11% compared with 0% in the first quarter of 2016, when the average Brent price was below US$40 per barrel.

An increase in MET expenses was due to a higher average Brent price, partially offset by a decline in the average Tenge – US dollar exchange rate. The Company applies the MET rate of 13% for OMG fields in 2017, while in September 2016 MET rate was reduced to 9% for 2016, as OMG recorded losses under tax accounting in 2016 and was thereby granted a reduction from the relevant authorities based on existing tax legislation.

The increase in ECD expenses was due to an increase in the export volumes of crude oil and export of oil products after the Company switched to the 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 quarter of 2016 was US$40 per tonne of crude oil compared to US$49 per tonne of crude oil in the first quarter of 2017.

2009-2012 tax audit

As a result of review of the Company’s 2009-2012 tax audit appeal, the Court of Astana has ruled in March of 2017 to reduce the principle tax charge by an additional 3.7bn Tenge. This was recorded in the Company’s financial statements for the first quarter of 2017 as a reduction to corporate income tax and excess profit tax. Additionally, based on this ruling, the Company is expecting the accruals for fines and penalties to be reduced by 3.7bn Tenge by the respective authorities, which has also been recorded in financial statements for the first quarter of 2017. Overall, taking into account these reductions, it is management’s expectation that the ultimate tax charge related to the 2009-2012 tax audit will be reduced from the 38.5bn tenge initial claim and 13.5bn Tenge amount as at December 31, 2016 of previously reduced and provided to 6.1bn Tenge.

As announced, the initial tax charge was reduced by 25.0 Tenge to 13.5bn Tenge in February 2017.

Capital expenditure

Capital expenditure[5] in the first quarter of 2017 totaled 18bn Tenge (US$55m), down 37% compared to the same period in 2016. This was primarily due to a reduction in volumes of production drilling at OMG and EMG and decrease in capital expenditure directed towards the construction and modernization of production facilities at EMG.

As announced, the Company plans capital expenditures for 2017 at the level of 133bn Tenge (US$369m[6]) as compared to 115bn Tenge (US$337m) for 2016.

Cash Flows from Operating Activities

Net cash generated from operating activities in the first three months of 2017 was 55bn Tenge (US$172m), against net cash outflow of 31bn Tenge (US$87m) in the same period in 2016.

Net cash

The net cash position as at March 31, 2017 was 1,143bn Tenge (US$3,6bn), compared with 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 quarter of 2017 totaled 7bn Tenge (US$23m), compared with 8bn Tenge (US$23m) in the first quarter of 2016.

Share of results of associate and joint ventures

In the first quarter of 2017, KMG EP reported a profit of 8.4bn Tenge (US$26m) in its share of results of associate and joint ventures, compared to a loss of 3.7bn Tenge (US$10m) in the first quarter of 2016.

Kazgermunai

In the first quarter of 2017, KMG EP recognized 7.3bn Tenge (US$23m) income from its share in KGM. This amount represents the Company’s 50% share in KGM’s net profit, which amounts to 8.0bn Tenge (US$25m) adjusted for 0.7bn Tenge (US$2m) amortization of the fair value of licenses and the related deferred tax benefit.

KGM’s revenue in US dollars for the first quarter of 2017 increased by 55% compared with the same period in 2016. This was largely driven by a 58% increase in Brent price and higher domestic prices.

PetroKazakhstan Inc.

In the first quarter of 2017, KMG EP recognized a profit in the amount of 1.5bn Tenge (US$5m) from its share in PKI. This amount represents the Company’s 33% share in PKI’s net profit, which amounted to 3.1bn Tenge (US$10m) adjusted for the 1.6bn Tenge (US$5m) amortization of the fair value of licenses.

In the first quarter of 2017, PKI’s net profit in US dollars was US$29m, compared to a net loss of US$9m in the same period of 2016. This was largely due to an increase in revenue due to 58% higher Brent price, lower amortization expenses, transportation and ECD expenses, which partially offset a decrease in sales volumes resulting from lower production levels.

CCEL

As of 31 March 2017, the Company had 33.4bn Tenge (US$106m) as a receivable from CCEL, a jointly controlled entity with CITIC Resources Holdings Limited. The Company has accrued 1.2bn Tenge (US$3.7m) of interest income in the first quarter of 2017, which is a part of the annual priority return in an amount of US$26.87m from CCEL.

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The condensed consolidated interim financial statements for the three months ended March 31, 2017, the notes thereto, and the operating and financial review for the period is available on the Company’s website (www.kmgep.kz)