30th Apr 2009 09:11
KazMunaiGas Exploration Production releases its Annual Report for 2008
Astana, 30 April 2009. JSC KazMunaiGas Exploration Production (KMG EP or the Company) has published today its Annual Financial Report for 2008. The report is posted on the Company's website at www.kmgep.kz
Further, the Company provides below the extracts from its Annual Financial Report in unedited full text as required in accordance with DTR 6.3.5 (1)
KMG EP at a glance
JSC KazMunaiGas Exploration Production (KMG EP or the Company) is the second largest oil and gas exploration and production company in Kazakhstan.
KMG EP is a subsidiary of the national oil and gas company JSC National Company KazMunaiGas (NC KMG). It was created through the merger of JSC Uzenmunaigas (UMG) and JSC Embamunaigas (EMG) in March 2004.
The total volume of proved and probable reserves of UMG and EMG fields is 1,775 million barrels (241.2 million tonnes). Including the acquisitions made in 2007 the total volume of 2P reserves of the Company is over 2,1bn barrels (292 million tonnes). Today the Company operates on 41 fields (excluding the recent acquisitions).
The Company's shares are listed on the Kazakhstan Stock Exchange and its GDRs are listed on the London Stock Exchange.
KMG EP has years of experience of oil production in Kazakhstan and expert knowledge of the geology of Western Kazakhstan.
Financial and Operational Highlights
|
2007 |
2008 |
% change |
|
|
Reserves 2Р mln. tonnes (mmbbl) |
240 (1,767) |
241 (1,775) |
0.5% |
|
Production, mln. tonnes (kbopd) () |
10,64 (215) |
11.95 (240) |
12 % |
|
Revenue |
KZT487bn US$3.97bn |
KZT605bn US$5.03bn |
24% |
|
Net income2 |
KZT157bn US$1.28bn |
KZT241bn US$2.01bn |
54% |
|
Capex2 |
KZT40.1bn US$327.18m |
KZT41.9bn US$348.26m |
4,5% |
|
Cash, cash equivalents and other financial assets |
KZT369.4bn US$3.07bn |
KZT534.5bn US$4,43bn |
45% |
|
Dividend per share, KZT |
563 |
656 |
16.6% |
|
Dividend per GDR, US$ |
0.78 |
0.734 |
-6.4% |
Letter to shareholders from the Chairman of the Board of Directors
One of the main factors that influenced the operations of JSC KazMunaiGas Exploration Production in 2008 was oil price volatility. During the year, the difference between the highest and the lowest oil points was almost US$110.
In spite of this we are pleased to report that in 2008 KMG EP achieved a record net profit of US$2bn. This success was mainly a result of the approach adopted by the Company's management, who proved capable of navigating through both positive and negative market dynamics.
KMG EP demonstrated the success of its strategy developed five years ago at the inception of the Company. We believe that our strategy will continue to serve us well through 2009.
Firstly, the Company is determined to maintain its production level. At Uzen and Emba as well as at Kazgermunai and Karazhanbasmunai the production plateau has been already reached and in 2009 we intend to stay at approximately the same levels, mainly by using the appropriate oil production technologies.
Secondly, KMG EP will seek to grow its asset portfolio. One of the ways of achieving this is through exploration on the existing licensed blocks, as well as by acquiring new licences in less explored areas of Kazakhstan, for which funds have been allocated.
Another proven way of growing the Company's portfolio is through acquisitions. Ownership of 50% interests in Kazgermunai and Karazhanbasmunai already played a positive role in 2008. The acquisition policy will continue, especially given that under current market conditions the opportunity exists for acquisitions on beneficial terms.
KMG EP intends to expand internationally and this is in line with the general strategy of the "KazMunaiGas" group of companies. Signing of the three-party upstream co-operation agreement between BG Group, NC KMG and KMG EP in December 2008 was an important step in this direction.
Thirdly, the Company is making consistent cost reductions and continues to improve its management systems. The introduced ISO standards are having a positive impact, in particular, on the quality of management. The effectiveness of production is also increasing. The Company is committed to the optimal use of its resources, and as a result the reserves replacement ratio in 2008 was 113%. However the Company appreciates that there is still much to be done for this trend to continue.
As for 2009, in poor market conditions we have implemented a radical reduction of all non-production costs, including administrative expenses.
Despite the fact that the development plan for 2009 is conservative, as it is based on the average Brent oil price forecast of US$40 per barrel, we realise that a worse scenario may occur. Therefore, following the recommendation of the Board of Directors, KMG EP has devised an alternative plan which is based on the assumption that the oil price could fall as low as US$25 per barrel. In this instance the Company will have to make appropriate adjustments, however, we will ensure that general strategic development continues.
The history of oil production in Kazakhstan is over 110 years old. Several generations of Kazakh oilmen made significant contributions to the development of their country. We are working to continue this valuable contribution for the benefit of the oil and gas sector and the economy at large. It is rewarding to note the large pool of experience within KazMunaiGas Exploration Production, the Company that continues the operations of its predecessors who have been exploiting the Emba fields for over 100 years.
The five years since the creation of KMG EP is just a fraction of the history of oil production in Kazakhstan, but it has been an important part of the story. The example of KMG EP shows that it is possible to combine over a century of tradition with modern approaches to business.
Making the right choices only brings results when they are properly implemented. 2008 proves this point. We still have a great deal to achieve, but KMG EP has considerable potential. I am convinced that having absorbed the experience of previous generations KMG EP will continue on its way as a modern and competitive company.
Kairgeldy Kabyldin
Chairman of the Board of Directors
Letter to shareholders from the Chief Executive Officer
2008 was a year of contrasts for KazMunaiGas Exploration Production. Our net profit reached a five year record of US$2bn. However, the year also saw a sharp fall in the oil price, the looming global economic downturn and the introduction of the New Tax Code in the Republic of Kazakhstan. These events inevitably had an impact on the Company's operations.
It is my pleasure to note that KMG EP was well prepared to face new challenges and, as a result, we maintained our position as the second largest oil producer in Kazakhstan. In 2008 KMG EP produced approximately 12m tonnes of oil, including our share in the production of Kazgermunai and Karazhanbasmunai, of which we own 50% of both. It is due to those acquisitions that we managed to significantly increase our oil production. In accordance with our strategy, we intend to continue to look for and to acquire new assets. An important step in this direction was the signing of the three-party upstream co-operation agreement between BG Group, NC KMG and KMG EP.
Our Company adopts a highly considered approach to the exploitation of natural resources, the development of which was entrusted to us by the government of Kazakhstan. Due to the use of modern technology and the high professionalism of our staff, KMG EP managed to maintain stable production levels at its core fields and grow our reserves at the same time. According to the report by Gaffney, Cline & Associates, the total 2P reserves of oil as at 31 December 2008, excluding the share of KMG EP in Kazgermunai and CCEL (Karazhanbasmunai), were 241m tonnes.
Throughout the year the Company demonstrated its resilience to the influences of external factors. This was evidenced by the fact that Standard & Poor's reaffirmed its credit rating of KMG EP at "BB+". Thus, the efforts of the Company's management to adhere to the principles of openness, transparency and the improvement of financial control systems were duly recognised. The financial stability of the Company, largely dependent on consistent profits, sufficient cash flow and balanced strategy of control over finances, has also been noted.
The Company could not fail to react to the sharp fall in oil price. In response to the decision of the Board of Directors, the Company's management prepared the budget for 2009 based on an assumption that the average oil price for Brent would be US$40 per barrel. The projected production from Uzen and Emba was slightly reduced. All non production expenditure has been minimised while maintaining the funding for capital investment in the areas of exploration and well maintenance. Moreover, the Company managed to avoid redundancies and preserve its valuable staff counting on the eventual improvement of the macroeconomic situation.
KMG EP also had to react to the fall in its share price. Realising that under the influence of external factors the share price ceased to reflect the real value of the Company, the management introduced a share buyback programme. By doing so, we demonstrated our confidence in the Company and also introduced a more effective use of funds in the interests of all shareholders.
Overall, 2008 has confirmed the business acumen of the KMG EP's management. Our team proved that it can deal with emerging challenges. Over time we have created a modern system of corporate governance that is characterised by effectiveness and transparency. We continue to improve our management systems and adhere to the best international standards in this regard. We are pleased to note that this work has received recognition by the international rating agencies. Thus, in November 2008, Standard & Poor's increased our corporate governance score from CGS5+ to CGS6 on the international scale.
KMG EP is a socially responsible company. We aim to support projects that improve living conditions in the areas where we operate. The Company does everything in its power to provide for its employees a fair system of pay, necessary social guarantees and a safe working environment. These efforts were highly commended by the State of Kazakhstan and KMG EP won the National Competition among socially responsible businesses in the category "The Best Collective Agreement".
It is our people who are at the core of our success and stability. KMG EP enjoys a coherent professional team, and in everyday operation we manage to combine modern approaches with experience of past generations. Kazakhstan boasts 110 years of oil production and we are proud of our traditions in this sector.
I would like to thank the Board of Directors that brings together support from the National Company, international perspective of Independent Non-Executive Directors and extensive individual experience of all Board members. This is a key element of the Company's success.
I am confident that 2008 only made our Company stronger and more resilient. I have no doubt that KMG EP is well positioned to achieve its goals in the interests of all stakeholders.
Askar Balzhanov
Chief Executive Officer
2008 MILESTONES
The world economic crisis forms the background against which all the 2008 key events developed. Nevertheless, for KMG EP this year was one of the most successful since the Company's creation. In addition to financial and operational indicators, the success of the decisions taken was confirmed by independent experts. Gaffney, Cline & Associates has acknowledged our commitment to the efficient use of reserves, the corporate governance development efforts were highly evaluated by Standard & Poor's, and our social policy was recognised on the highest state level.
1Q 2008
22 January. KMG EP published its operating results for 2007. The crude production volume, including the share in subsidiaries, was 10,639 thousand tonnes (215 kbopd), an increase of 1,118 thousand tonnes, or 11.64%, over 2006. The increase in production was primarily due to the acquisition of 50% stakes in JV Kazgermunai LLP and CITIC Canada Energy Limited (CCEL).
5 February. KMG EP announced the increase of proved and probable reserves. According to the report by Gaffney, Cline & Associates, the total Proved and Probable (2Р) oil reserves were 240,5m tonnes (1,767m barrels) excluding KMG EP's interests in Kazgermunai and CCEL (Karazhanbasmunai). Comparing on a like for like basis in early 2007 the 2P oil reserves grew by 18.1%. Given the crude produced during 2007, the growth of oil reserves was 22.8%. The reserves replacement ratio (a reserves growth to annual production ratio) was 490%.
19 February. KMG EP entered into an agreement with the Administration (Akimat) of the Mangistau Region on financing the development of the social infrastructure of Karakiya District and Zhanaozen. This agreement is an addendum to the subsoil use contract signed in 1996 for the development of Uzen and Karamandybas oilfields in the Mangistau Region. According to the terms and conditions of the agreement, KMG EP will annually allocate KZT900m under the Social Infrastructure Development Programme for Karakiya District and Zhanaozen.
17 March. KMG EP published financial results for 2007. According to the audited financial results, the Company's net profit increased by 28% over 2006, and was KZT157bn (US$1,282m), of which the additional profit of KZT17.9bn (US$146m) was generated by the 50% stake in Kazgermunai.
2Q 2008
17 May. The export customs duty of US$109.91 per tonne of exported crude (US$14.9 per barrel) was introduced. From 11October 2008, the duty was increased to US$203.8 per tonne (US$27.7 per barrel).
28 May. The Company held an Annual Shareholders' Meeting where shareholders approved the Financial Statements and Annual Report for 2007 and decided on the dividend amount per one share to be KZT563 (US$0.78 per GDR) including a special dividend.
29 May. KMG EP held an Open Day event. The Company provided analysts and media with an update on the Company's activity.
30 June. KMG EP and NC KMG management conducted a meeting in Zhanaozen with representatives of some transportation units of Uzenmunaigas to resolve a dispute around proposed restructuring of UMG and compensation system for the employees of these units. Measures taken over the months following this meeting enabled social stability to be maintained and improved labour discipline.
3Q 2008
1 July. The KMG EP Board of Directors approved the amendments to the exploration programme for 2008. In accordance with the updated programme, the Company performed 3D seismic survey on the territory of 360 sq km to complete a detailed study of the Buiyrgyn subsalt structure on the R-9 block.
2-4July. KMG EP participated in the international conference Kazakhstan Growth Forum (London).
3 July. The Brent price peaked at US$146.08 per barrel.
18 July. KMG EP published operational results for the first half year 2008. The consolidated crude production was 5,899 thousand tonnes (238kbopd). This is an increase of 960 thousand tonnes, or 19.4%, compared with the same period in 2007. The production increase occurred largely due to the acquisition of 50% stakes in JV Kazgermunai LLP and CCEL (Karazhanbasmunai) in April and December 2007, respectively.
28 July. The 2007 dividend payments commenced. The total amount of dividends was approximately KZT39.5bn (US$328.4m).
16 September. KMG EP published financial results for the first half of 2008. According to the unaudited interim financial information, the net profit increased 154% year on year to KZT147.5bn (US$1.2bn), which resulted in an increase of the profit per share from KZT780 to KZT1,990 (US$1.06 per GDR and US$2.75 per GDR, respectively). Contribution of the 50% stakes in JV Kazgermunai LLP and CCEL to the Company's financial results was KZT28.6bn (US$238m).
24 September. At an Extraordinary General Meeting the new members of the Company's Board of Directors were elected: Kairgeldy Kabyldin, the President of NC KMG and Tolegen Bozzhanov, a Vice President of NC KMG.
4Q 2008
8 October. The KMG EP Board of Directors approved the Company's share buyback programme. In accordance with this programme, the Company intends to purchase ordinary shares listed on the Kazakhstan Stock Exchange (KASE) and global depositary receipts (GDRs) listed on the London Stock Exchange (LSE) for an amount up to US$350m. The approved share buyback programme started on 24 November and is to be completed by 31 October, 2009.
8 October. At the Board of Directors meeting Kairgeldy Kabyldin, the President of NC KMG, was elected Chairman of the Board of Directors. In addition, Kairbek Yeleusinov, Director of Uzenmunaigas, was approved as a new member of the KMG EP Management Board
17 November. International rating agency Standard & Poor's (S&P) confirmed KMG EP's credit rating at BB+. S&P noted that the management's efforts are focused on transparency and improvement of the financial control system. The financial sustainability of KMG EP is ensured by adequate profitability, sufficient cash flows, and a well-balanced treasury management strategy.
18 November. International rating agency Standard & Poor's increased the corporate governance rating of JSC KazMunaiGas Exploration Production from CGS5+ to CGS6 on the international scale.
5 December. NC KMG, KMG EP and BG Group signed an upstream co-operation agreement. The agreement sets out the principles of a joint study of hydrocarbon reserves potential of specific areas in the Republic of Kazakhstan and other countries. The companies will cooperate to identify opportunities across a range of potential oil and gas exploration and production projects.
24 December. KMG EP won a prize at the national Paryz Awards for social responsibility. The Company became a winner in the Large Enterprise category for The Best Labour Contract. This nomination considered labour contracts that significantly improve and enhance labour and social rights of employees under existing legislation.
24 December. The Brent price dropped to a low of US$36.61 per barrel.
25 December. The KMG EP Board of Directors approved the Company's 2009 budget based on the annual average Brent price at US$40 per barrel.
KMG EP plans to make capital investments of KZT40.0bn (US$266.7m) in 2009. The reduction in capital investment versus the previously planned amount is a prudent response to the worsening world economic situation.
Production volume at the core assets (Uzenmunaigas and Embamunaigas) was planned at 9.141m tonnes (184.32kbopd), 3.8% less than the previously envisaged level. This reflects the fact that with low oil prices it becomes unprofitable to maintain existing production rates on some low yield wells.
OPERATIONAL ACTIVITY
The key goals of KMG EP's core operations are to maintain production on a steady level and to ensure cost optimisation. Application of modern technologies and equipment as well as timely optimisation of field development plans not only help to maintain achieved production levels, but also improve efficiency of oil extraction and enhance recoverable reserves of the existing fields.
Crude Oil Production
In 2008 KMG EP (including shares in Kazgermunai and CCEL) produced 11,954 thousand tonnes of crude (239.8kbopd), or by 1,315 thousand tonnes, 12% more than in 2007. The increase is due to the acquisitions made by KMG EP in 2007.
In an effort to intensify crude production and to maximize the full potential of the fields, the Company applies enhance oil recovery methods such as hydro-fracturing, flow deviating polymer injection, electric formation stimulation, as well as a number of technologies stimulating wellbore zones. These are insulating works, re-perforation, perforation of additional intervals, acid treatment and treatment with other solvents.
Production optimisation includes improvement of the field development plans, more extensive utilisation of electric-centrifugal pumps and electric screw-type pumps, replacement of steel pipes with fibreglass pipes, and more effective well monitoring.
These measures enable the Company to maintain oil production at its fields at an optimal level. At the core assets (Uzenmunaigas and Embamunaigas) 9,470 thousand tonnes of crude were produced (190.4kbopd), which is slightly less than in 2007.
Currently, thanks to the Company efforts, an optimal level of production was reached which the Company seeks to maintain.
Crude Production Dynamics (tonnes, barrels)
|
2004 |
8,893 thousand tonnes |
178.83kbopd |
|
2005 |
9,341 thousand tonnes |
188.35kbopd |
|
2006 |
9,530 thousand tonnes |
192.17kbopd |
|
2007 (including shares in KGM and CCEL) |
10,640 thousand tonnes |
215.04kbopd |
|
2008 (including shares in KGM and CCEL) |
11,954 thousand tonnes |
239.81kbopd |
In 2008 9,079 thousand tonnes (182.6kbopd) of crude were sold to customers (excluding the crude oil of Kazgermunai and CCEL), including 7,008 thousand tonnes (140.9kbopd) of crude sold for export. The share of Kazgermunai1 and CCEL sales owned by KMG EP was 2,474 thousand tonnes (49.5kbopd) of crude, including 2,125 thousand tonnes (42.5kbopd) of crude sold for export.
KMG EP Crude Sales export routes in 2008
|
Atyrau refinery |
2,072 thousand tonnes |
|
UAS |
4,898 thousand tonnes |
|
CPC |
2,110 thousand tonnes |
|
Uzenmunaigas 2 fields 3,766 production and 1,233 injection wells 2P oil reserves as of December 31, 2008: 1.35bn barrels Crude production in 2007: 136kbopd Crude production in 2008: 134kbopd Reserves-to-production ratio: 27 years |
|
Embamunaigas 39 fields 2,248 production and 442 injection wells 2P oil reserves as of December 31, 2008: 0.42bn barrels Crude production in 2007: 57kbopd Crude production in 2008: 57kbopd Reserves-to-production ratio: 21 years |
Growth of Oil Reserves
According to the report of Gaffney, Cline & Associates, in 2008 the total Proved and Probable (2P) reserves of KMG EP were 241.2 million tonnes (1,775 million barrels) excluding the Company's share in Kazgermunai and in CCEL (Karazhanbasmunai).
Including the crude produced over 2008, the Company's reserves increased by 10.7 million tonnes (78 million barrels). The reserves replacement ratio (a reserves growth to annual production ratio) was 113%. The reserves-to-production ratio in 2008 is 25 years.
The growth of proved and probable reserves of KMG EP reflects the efficiency of the Company's operations. Thanks to up-to-date technologies and highly qualified specialists working for the Company, KMG EP managed to maintain a stable production level and replenish its reserves at the same time.
Hydrocarbon Reserves of KMG EP (UMG and EMG)
|
Reserves as of December 31, 2007 |
Production in 2008 |
Growth of Reserves |
Reserves as of December 31, 2008 |
|
|
1P, million tonnes 2P, million tonnes 3P, million tonnes |
102.1 240.0 282.5 |
9.47 |
2.90 10.70 8.53 |
95.544 241.180 281.583 |
|
1P, million barrels 2P, million barrels 3P, million barrels |
751.6 1,767.1 2,079.2 |
69.7 |
20.94 77.74 61.47 |
702.9 1,775.2 2,071.1 |
COMPANY DEVELOPMENT
KMG EP is consistently moving forward and expanding its resource and operational base.
In 2008, for the first time, the operational and financial results of the Company consolidated the performance indicators of JV Kazgermunai LLP and CCЕL (Karazhanbasmunai), where KMG EP has 50% stakes. As a result of the acquisitions made in 2007, the Company's annual average production level increased by 12% in 2008 and reached 11.95m tonnes. KMG EP's share in the net profit of Kazgermunai (50%) was KZT58.8bn (US$488.6m), and the financial income from CCЕL was KZT2.9bn (US$23.7m).
Acquisition of New Assets
In 2008 the Company conducted integrated audits of potential acquisition targets and made preliminary estimation of risks and project profitability. However, the Company made a decision to postpone the transactions due to uncertainty surrounding the development of a new Tax Code of Kazakhstan, changes on the world oil and gas market and the overall economic situation.
For those companies, such as KMG EP, possessing significant financial resources, this is a good time to acquire new assets as their value declines in a lower crude price environment.
Acquisition of Interest in JSC Mangistaumunaigas
KMG EP has expressed interest in acquiring a share in the oil-producing assets of JSC Mangistaumunaigas (MMG). In April 2009 NC KMG and CNPC signed an agreement on the acquisition of 100% of the common shares of MMG from Central Asia Petroleum Ltd. NC KMG expects to complete the deal in 2009, once the final approvals are obtained from the regulatory authorities.
It is anticipated that after this transaction is finalised, the negotiations concerning the acquisition of a stake in MMG by KMG EP will commence.
Agreement between KMG EP, NC KMG and BG Group
In 2008, KMG EP made an important step towards getting access to the international market. On 5 December 2008 NC KMG, KMG EP and BG Group signed an upstream co-operation agreement. The agreement sets out the principles of a joint study of the hydrocarbon reserves potential in a number of areas in Kazakhstan and other countries. The companies will work in partnership to identify opportunities across a range of potential oil and gas exploration and production projects. A joint team will assess targeted regions and recommend prospective acreage to partners for their consideration. Cooperation with BG Group will provide KMG EP with an opportunity to join large-scale international projects and achieve a new level of development.
This is the first agreement of such significance in Central Asia and it is strategically important for KMG EP. The benefits for KMG EP from this cooperation are evident. First, it is an entry to the international market in partnership with an experienced oil and gas operator; second, gaining experience in international project management, including offshore projects, and getting access to up-to-date oil and gas exploration and production technologies.
The agreement provides for a long-term, mutually beneficial partnership: BG Group's contribution is sharing its international upstream experience, technologies and training local personnel. KMG EP will bring significant technical and commercial upstream opportunities as well as knowledge of local industry specifics.
Exploration
Exploration is a key activity of KMG EP in order to grow the Company's reserves. Throughout 2008, the Company focused on searching for hydrocarbons at deeper subsalt horizons.
A detailed seismic survey was performed on Liman and R-9 blocks, and its geological and geophysical results were analysed in order to evaluate the resource base of these prospects. In addition, a risk assessment was made in order to select locations for exploration wells.
Although the KMG EP 2009 budget provides for a reduction in expenditure, significant funds are allocated for exploration and are considered by the Company as investments for the future.
The main focus of the further study will be block R-9. In particular, a seismic survey is expected to be carried out in the northern and north-eastern parts of the block.
A 3D seismic survey was performed earlier on another structure of R-9 block - Buiyrgyn. In 2009, it is scheduled to make data interpretation with pre-stack depth migration. Depending on the results of the aforementioned survey it is expected that a well will be drilled to 2,000 meters to the suprasalt horizons of the priority structure. In addition, with regard to a subsalt structure, it is expected that drilling of a 7,000 meter well will be started, and its construction will continue in 2010.
Additional exploration of the S. Nurzhanov field will also be carried out. As a result of drilling wells No.502 and No.503 it was confirmed that the oil bearing area in the Trias structure on a southern block of the field is larger than previously thought. Moreover, in 2009 it is planned to drill two wells with a projected depth of 3,500 meters.
Other Opportunities
KMG EP, as a subsidiary of NC KMG has the opportunity to participate in oil and gas projects which are supported by NC KMG and the Government. One such project is the production of Bitumen from the crude oil produced by JSC Karazhanbasmunai (50% owned by the Company), which will thereby upgrade the heavy Karazhanbas crude oils. This project is promoted by NC KMG and by JSC Kazakhstan Petrochemical Industry (JSC KPI - 50% owned by the Company).
Another project, which the Company approved in 2008, is a facility for sulphur removal from associated petroleum gas (APG) at the Prorva group of oil and gas fields, which will enhance APG utilization. A pre- design study was done with a view to selecting treatment technology and determining the budgeted cost of the project.
The Company can also be expected to respond to Governmental objectives for related businesses. One such is the construction of an integrated petrochemical complex (IPC) to produce polyethylene and polypropylene in the Atyrau area. The Company's Board of Directors approved a contribution of US$40m to the authorised capital of a design company in order to finance the development of a Front End Engineering Design (FEED) as a basis for contractors to provide turnkey bids in an international tender. The Company's continued participation in the project is expected to be considered towards the end of 2009 after review of these bids.
SOCIAL RESPONSIBILITY
KMG EP is building an open and effective business that meets the long-term interests of the country and community. The Company is striving to share its success with the regions of its operations by taking an active part in social infrastructure development. KMG EP is consistently providing social support, not only for its own staff but it is also contributing to the improvement of the welfare of the community in general. KMG EP is especially focusing on implementing a progressive corporate policy on labour and environmental protection.
Social Projects
The core assets of the Company - Uzenmunaigas (UMG) and Embamunaigas (EMG) are vital to local communities. The future of Zhanaozen (Mangistau Region) and of the district centres and settlements of the Atyrau Region directly depends on the development of the Company's production branches. This is why KMG EP views its operating and financial performance as an important element of social responsibility. UMG and EMG are among the largest taxpayers of the Mangistau and Atyrau regions and contribute a significant share of the regional budgets.
Moreover, as a part of social partnership arrangement and according to the subsoil use contracts, the Company contributes to the development of infrastructure in the regions where it operates in line with the municipal social development programmes.
In 2008, the funding of medical, sport, entertainment, recreation, special charitable and sponsorship programmes, as well as social benefits and social support payments in the regions where KMG EP operates, amounted to approximately KZT2,1bn (US$17,6m).
Traditionally, one of the elements of the KMG EP's social policy has been providing assistance to low income groups of the local population. Every year the Company provides financial aid and sends gifts to orphans, veterans of war, pensioners, and to people with special needs. During the times of the economic recession these groups are the most vulnerable, and KMG EP intends to continue supporting them.
Personnel Policy
KMG EP views well-being of its employees and their families as an integral part of its business success. By creating good working conditions, providing opportunities for growth and development, the Company strives to build a highly qualified and strong team of specialists who have the ability to move the business forward.
In 2008, the main objective of KMG EP's personnel policy was to retain high quality personnel and therefore enhance the Company's potential. Despite the challenging business environment in the second half of 2008 KMG EP was among the few companies in Kazakhstan which managed to avoid extensive staff reductions.
KMG EP's Labour Agreement, based on the principles of distribution of rights and responsibilities, is aimed at ensuring the Company's operational effectiveness and providing socio-economic and legal guarantees to the Company employees. At the Paryz Awards competition for social responsibility in 2008, KMG EP's Labour Agreement achieved recognition as the best in Kazakhstan.
KMG EP's Collective Labour Agreement allows for the efficient resolution of labour disputes in accordance with the legislation of the Republic of Kazakhstan. One example is resolution of a labour dispute involving transportation units of UMG that emerged in June 2008.
Since 1 July 2008, monthly salaries for ancillary workers at production branches increased by 40-45% and of core production workers by 20-25%. This compensated for the impact of inflation and ensured social stability in the regions where KMG EP operates.
The Company regards the health of its staff as one of its key priorities. Medical cover and regular medical examinations and vaccination programmes have been developed for KMG EP's employees, both at the production branches and at the head office of the Company.
In 2008, the Company funded healthcare facilities and medical insurance programmes in the amount of KZT602.7m (US$5m).
Health, Safety and Environment
In the area of industrial and environmental safety KMG EP is committed to meeting high international standards and is successfully moving in this direction.
The Company has a corporate labour and environmental protection policy in place that ensures a continual control over the quality of the fields' ecosystem.
In order to ensure the smooth operation of this system and the sustainable preservation of the environment, the Company implements a series of highly advanced environmental projects.
In 2008 the actual expenses for environmental protection activities at the Company amounted to KZT5.2bn (US$43.2m). In 2007 these expenses totalled KZT3.9bn (US$31.8m)
Last year, the Company managed to increase utilisation of waste that had accumulated for decades. The area of land re-cultivated by a biological method also increased. Polluted areas were reduced from 70 hectares at the beginning of the year to 58 hectares at the end of 2008.
In 2008, independent auditing organisation Kazecology made an assessment of environmental risks for the Company. The assessment confirmed that potential environmental risks have been identified by the Company, developed corrective measures are adequate, and corresponding financial reserves are sufficient.
Industrial facilities of oil companies are inherently hazardous, and therefore, KMG EP is actively working to reduce risks that pose a threat to personnel's health and safety. Nevertheless, accidents at work do happen and this is the utmost concern for the management. 2008 has seen seven work-related incidents, of which three were fatal. Strict disciplinary actions were undertaken following the incidents, including termination of employment agreements with the certain employees. General controls have been further strengthened. The Company's permanent commission conducts regular inspections and reviews the state of labour and environmental protection. The commission checks industrial facilities and assesses the knowledge of employees of production branches, inspects the industrial equipment and instruments for compliance with their technical standards.
Labour safety issues are reviewed at the meetings of the Company's Board of Directors on a regular basis.
Accident prevention is given the highest consideration. Ongoing safety training for all personnel has been organized and this is a key element of the current personnel training and professional development system in the Company.
CORPORATE GOVERNANCE INFORMATION
Combined Code Compliance
As an overseas company with GDRs admitted to the Official List of United Kingdom Listing Authority, the Company is not required to comply with the provisions of the UK Combined Code on Corporate Governance (Combined Code). In addition, it is not required to disclose in its Annual Report whether or not it complies with the corporate governance regime of the Republic of Kazakhstan and the significant ways in which its actual governance practices differ from those set out in the Combined Code. However, the Directors view high standards of corporate governance to be very important and consider that such information shall be included in the Annual Report.
Differences in Kazakhstan Corporate Governance Code and Combined Code provisions
Corporate governance best practice in Kazakhstan is set out in the Kazakhstan Corporate Governance Code. The Kazakhstan Corporate Governance Code is based on existing international best practice in the area of corporate governance and sets out recommendations for applying the principles of corporate governance by Kazakhstan joint-stock companies. It was approved by the Expert Council for Securities Market Matters under the National Bank of the Republic of Kazakhstan in September 2002. The Code was also approved by the Association of Financial experts of Kazakhstan in March 2005 and by the Board of Issuers in February 2005.
The Company currently complies with the provisions of the Kazakhstan Corporate Governance Code in all material respects.
The Company has adopted the Kazakhstan Corporate Governance Code, modified to include certain provisions from the Combined Code, as its Corporate Governance Code. The modifications adopted by the Company impose additional corporate governance obligations on the Company. The Company believes that these additional modifications significantly strengthen the corporate governance regime adopted by the Company. The Company will also take into consideration other provisions of the Combined Code and will seek to improve its standards of corporate governance in the future.
Below are described the main differences between the Corporate Governance Code and the Combined Code which the Directors believe to be important.
The Combined Code provides that the Non-Executive Directors should meet without the Chairman of the Board present at least annually to appraise the Chairman's performance and on such other occasions as are deemed appropriate.
Five meetings of the Non-Executive Directors were held in 2008 where the following issues were discussed: management appointments at NC KMG, the amendments to the tax legislation of the Republic of Kazakhstan, the Company's treasury policy, construction project of the first integrated petrochemical complex in the Atyrau region, and drafts of the Company's production programme and 2009 budget. Although no official evaluation of the activity of the Chairman of the Board of Directors was made by the Non-Executive Directors; the Board's activities were evaluated by an external independent consultant in December 2008.
In accordance with the provisions of the Combined Code, following his appointment, the Chairman of the Board of Directors shall meet the criteria of independence defined in the Combined Code.
The provision on appointment of the Chairman of the Board of Directors is not included in the Company's Corporate Governance Code, and in the opinion of the Directors, the Chairman of the Board of Directors would not meet the criteria of independence stated in the relevant provision of the Combined Code.
The Combined Code stipulates that not less than half of the Board of Directors members, except for the Chairman of the Board of Directors, shall be Independent Non-Executive Directors. In contrast to this, the Company's Corporate Governance Code stipulates that not less than one third of the Board of Directors members shall be Independent Non-Executive Directors.
Currently, there are three Independent Non-Executive Directors in the Company: Christopher Mackenzie, Paul Manduca and Edward Walshe, and thus the number of independent directors comprises more than one third of the Board of Directors. In addition, according to the Company's Charter, key issues are required to be approved by Independent Non-Executive Directors. The issue of the Board of Directors membership and the requirements concerning appointment of independent directors will be periodically considered.
The Combined Code also states that the Board shall appoint one of the independent directors to be a Senior Non-Executive Director.
The Board of Directors did not appoint a Senior Non-Executive Director given the current shareholder structure. The requirement concerning appointment of a Senior Non-Executive Director will be considered from time to time.
DIRECTORS' RESPONSIBILITY STATEMENT
In compliance with the UKLA's Disclosure and Transparency Rules each of the Directors, whose names and functions appear in the Company's Annual Financial Report, confirms that to the best of his or her knowledge:
the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and;
the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
THE BOARD OF DIRECTORS STRUCTURE
As of December 31, 2008 the Board comprised eight members, being:
|
Kairgeldy Kabyldin |
Chairman of the Board of Directors |
|
Askar Balzhanov |
Member of the Board of Directors (CEO) |
|
Yerzhan Zhangaulov |
Member of the Board of Directors |
|
Tolegen Bozzhanov |
Member of the Board of Directors |
|
Kenzhebek Ibrashev |
Member of the Board of Directors |
|
Christopher Mackenzie |
Independent Non-Executive Director |
|
Paul Manduca |
Independent Non-Executive Director |
|
Edward Walshe |
Independent Non-Executive Director |
The following changes in the composition of the Board of Director of the Company during the year of 2008 were made based on decisions of general meeting of shareholders upon proposal of the major shareholder:
On January 23, 2008 Assia Syrgabekova resigned, and Zhannat Satubaldina was elected;
On September 24, 2008 Uzakbay Karabalin, who had chaired the Board of Directors since 2006 and Zhannat Satubaldina resigned, and Kairgeldy Kabyldin and Tolegen Bozzhanov were elected.
By resolution of the Board of Directors (Minutes No.27 dated October 8, 2008) Kairgeldy Kabyldin was elected the Chairman of the Board of Directors.
In accordance with the Corporate Governance Code, the Board of Directors established the fact of independence of the directors and considers that Christopher Mackenzie, Paul Manduca and Edward Walshe are independent by nature and in decision making. The Board of Directors determined that there exist no relations or circumstances that affect or may significantly affect the independent decisions made by these directors.
ANNUAL OPERATING AND FINANCIAL REVIEW 2008
The following is intended to assist in the understanding and assessment of trends and significant changes in the Company's results and financial condition. This review is based on the consolidated financial statements of the Company and should be read in conjunction with its consolidated financial statements and the accompanying notes. All of the financial data and discussions thereof are based upon financial statements prepared in accordance with IFRS.
Overview
KazMunaiGas Exploration Production Joint Stock Company (KMG EP or the Company) is engaged in the acquisition, exploration, development, production, processing and export of hydrocarbons with its core operations of oil and gas properties located in the Pre-Caspian and Mangistau basins of western Kazakhstan. The Company's direct majority shareholder is JSC National Company KazMunaiGas (NC KMG), which represents the state's interests in the Kazakhstan oil and gas industry. The Company conducts its core production activities at 41 oil and gas fields including the production branch Uzenmunaigas (UMG) - consisting of 2 fields - and the production branch Embamunaigas (EMG) - 39 fields. In addition the Company has a 50% interest in a jointly controlled oil and natural gas producer and a receivable from a jointly controlled entity.
Production of the Company and its associates based on the Company's working interest (a 50% share in JV Kazgermunai LLP and a 50% share in CCEL) was 11,954 thousand tonnes or 240 kbopd in 2008 (UMG and EMG - 190 kbopd, JV Kazgermunai LLP - 33 kbopd and CCEL - 17 kbopd).
The above two associates are described in more detail in the section "Overview of Associates' Operations". Elsewhere in this Operating and Financial Review the discussion is limited to the core assets of the Company unless indicated otherwise.
Business Environment and Outlook
Economic factors affecting the Company's financial performance during the period under review include movements in crude oil prices, foreign exchange, particularly the Tenge-US dollar rate, and domestic inflation rates.
Business Environment in 2008
The price of Brent averaged US$97.08 per barrel in 2008, an increase of US$24.7 per barrel from the average price in 2007.
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
(US$ /bbl) |
% |
(US$ /bbl) |
% |
||||
|
55.48 |
114.68 |
88.45 |
(37%) |
Brent |
97.08 |
72.39 |
34% |
|
56.26 |
116.77 |
89.07 |
(37%) |
CPC blend |
98.44 |
73.02 |
35% |
|
53.74 |
112.31 |
86.09 |
(38%) |
Urals |
94.08 |
69.53 |
35% |
Most of the Company's revenues and net financial assets are denominated in US dollars (US$), while the majority of the Company's operating expenses are denominated in Tenge (KZT). The impact of foreign currency fluctuations on the Company's results depends on its net foreign currency position and the magnitude and direction of any fluctuation in foreign exchange rates.
KZT/US dollar exchange rates and domestic inflation, as measured by the consumer price index (CPI) for the periods presented, were as follows:
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
120.16 |
119.99 |
120.75 |
0% |
average US$ vs KZT |
120.29 |
122.55 |
(2%) |
|
1.4% |
2.4% |
10.2% |
(86%) |
CPI |
9.5% |
18.8% |
- |
|
120.77 |
119.81 |
120.30 |
0% |
US$ vs KZT at balance sheet date |
120.77 |
120.30 |
0% |
Outlook for Business Environment and Operating Risks in 2009
The Company is exposed to the effect of fluctuations in the price of crude oil, which is quoted in US dollars on the international markets. The Company prepares annual budgets and periodic forecasts including sensitivity analyses in respect of various levels of crude oil prices in the future. The fall of the world oil price that started in the middle of 2008 continued into 4Q 2008. In January and February 2009 the Brent oil price was, on average, US$43.59 and US$43.82 per barrel respectively. The Company currently uses Brent US$40 per barrel price for budgeting purposes in 2009.
On the February 4, 2009 the National Bank of Kazakhstan announced that it "considers the new level of exchange rate objectively necessary" and stated that it is possible that "the exchange rate corridor will be around KZT150 per US$1 ±3%". As a consequence in February 2009 Tenge weakened against the US dollar and averaged 145.20 Tenge/US$, a depreciation of KZT24.91 from the 2008 average rate of KZT120.29/US$1. According to preliminary estimates, an increase in the KZT/US$ exchange rate of KZT10 per US$1 in relation to the current level of about KZT150 per US$1 would, in the short term, lead to a 6% increase in revenue and approximately 3% increase in operating costs. The actual changes in costs would depend on several factors, including inflation, pricing by various suppliers and the Company's measures on cost optimisation.
The National Bank of Kazakhstan forecasts the inflation rate for 2009 at 9%, which is almost the same as in 2008. The Company uses this inflation rate in its budgeting process. The CPI increased by 0.3% and 0.8% in January and February 2009, compared to 1.1% and 0.8% for the respective months of 2008.
The New Tax Code of the Republic of Kazakhstan took effect from January 1, 2009. The introduction of the new tax regime, according to the Company's preliminary calculations, leads to an increase in tax take (measured as the ratio of the total amount of taxes and the pre-tax profit before all taxes) by around 0.5% at the budgeted US$40 per barrel, increasing at higher oil prices. The increase of the tax burden with the growth of the oil price is explained by the use of a progressive scale of rent tax and excess profit tax. This estimate assumes for the 2008 tax regime a constant export duty at the actual average rate in 2008 (approximately US$11 per barrel).
The Company does not expect significant changes in other aspects of its business environment such as transportation tariffs and route capacities, availability of production, finance and human resources.
An overview of the principal market risks can be found at the end of this Operating and Financial Review. Some of the Company's operating and financial risks are discussed in Notes 18 and 20 to the audited consolidated financial statements for the year ended December 31, 2008.
Operational activity in 2008
The Company largely achieved its targeted production goals for 2008, with oil production of 9,470 thousand tonnes, which was 1% less than the level of oil production for 2007 and marginally below the oil production plan for 2008. Of this total oil production, 6,646 thousand tonnes were produced by UMG and 2,824 thousand tonnes by EMG.
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
(thousand tonnes) |
% |
(thousand tonnes) |
% |
||||
|
1,703 |
1,654 |
1,699 |
0% |
UMG |
6,646 |
6,724 |
(1%) |
|
698 |
723 |
724 |
(4%) |
EMG |
2,824 |
2,806 |
1% |
|
2,401 |
2,377 |
2,423 |
(1%) |
Total production |
9,470 |
9,530 |
(1%) |
As at December 31, 2008 the Company had 6,014 production wells and 1,675 injection wells.
The majority of the Company's existing oil fields are at the mature stage of development, characterized by high watercut and declining oil production. The Company performed production drilling, workover operations and enhanced recovery in order to mitigate natural production decline and maintain planned volumes of oil production in 2008.
In 2008 the Company constructed 149 wells which contributed 216,452 tonnes to production. Workovers were conducted on 1,201 wells and provided an incremental production of 495,444 tonnes. The Company applied enhanced oil recovery techniques, including hydro-fracturing and polymer systems. As a result an additional 440,557 tonnes were recovered following 493 well operations.
The Company conducted exploration activities on the following blocks/fields in 2008: Taisoigan (Uaz, Kondybai), R-9, Liman, territories adjacent to the Uzen and Karamandybas fields and S. Nurzhanov field. Overall exploration drilling in 2008 amounted to 5,950 meters on 3 exploration wells.
Due to the revision of the exploration plan for 2008 drilling of four of planned structural wells (2 wells at R-9 block and 2 wells at Liman block) was cancelled in 2008.
During 2008 700 km of 2D and 360 km2 of 3D seismic field surveys were performed at Liman and R-9 blocks, respectively. At both blocks a number of prospective sectors were identified at sub-salt layers.
Planned activity in 2009
Crude oil production in 2009 is expected to be 9.14 million tonnes, or 3.5% less than was produced in 2008. The planned reduction of production level reflects the adjustment of the Company's budget to the lower oil price environment anticipated in 2009. The Company's current budgeting assumption is US$40 per barrel (Brent) versus US$97 per barrel actual average price in 2008. In order partly to offset the natural production decline in 2009, the Company is planning to drill 70 development wells and perform operations on existing wells, including reservoir recovery improvements, well workovers, bottomhole zone treatment and the rehabilitation of previously abandoned wells.
In 2009, the Company is planning exploration activities in prospective areas focusing on the identification of geological structures in the above-salt and sub-salt complex and selecting drilling candidates. In particular, the Company is planning to conduct exploration on the R-9 block. In 2009 400 km of 2D-MOGT seismic field surveys are planned. It also plans to drill two exploration wells with projected depth of 3500 meters on S. Nurjanov field. The Company is planning to start drilling one sub-salt and one above-salt well on R9 exploration block in 2009. Exploration programmes for other exploration blocks are under review.
The Company's capital expenditure in 2009 is expected to be around KZT40bn. The Company's budget is subject to periodic reviews to reflect changes in oil prices, the KZT/US$ exchange rate and inflation, among other factors.
The Company remains well positioned for potential acquisition of production assets in the Republic of Kazakhstan and abroad. KMG EP has examined a number of potential acquisition opportunities, including certain assets owned or contemplated for acquisition by NC KMG, and prepared specific proposals. Further decision making and timing of the acquisition of these assets by KMG EP depends primarily on the support and decisions of NC KMG and its sole shareholder, Samruk-Kazyna National Wealth Fund (Samruk-Kazyna).
Results of Operations
Amounts shown in US dollars are included solely for the convenience of the reader. Amounts derived from the consolidated income statements and consolidated cash flow statements are translated at the average rate over the applicable periods and amounts derived from the consolidated balance sheets are translated at the end of the period rate. See "Business Environment and Outlook".
Selected measures
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
(KZT thousands, unless otherwise stated) |
% |
(KZT thousands, unless otherwise stated) |
% |
||||
|
85,457,281 |
182,504,504 |
148,136,521 |
(42%) |
Revenue |
604,993,422 |
486,974,879 |
24% |
|
100,022,583 |
75,367,696 |
58,581,892 |
67% |
Operating expenses |
297,167,473 |
210,834,485 |
41% |
|
3,519 |
3,441 |
3,285 |
3% |
Operating expenses (KZT per bbl) (1)(2) |
3,277 |
3,006 |
9% |
|
29.29 |
28.68 |
27.20 |
4% |
Operating expenses (USD per bbl) (1)(2) |
27.24 |
24.53 |
11% |
|
(14,565,302) |
107,136,808 |
89,554,629 |
(114%) |
Profit (loss) from operations |
307,825,949 |
276,140,394 |
11% |
|
22,739,530 |
71,027,962 |
53,638,521 |
(58%) |
Net income(3) |
241,282,369 |
157,119,081 |
54% |
|
34,806,950 |
24,077,307 |
27,995,126 |
22% |
Oil Production and other cost |
101,769,924 |
89,243,901 |
14% |
|
16.39 |
11.47 |
13.00 |
24% |
Oil Production and other costs (USD per bbl) (1)(4) |
12.14 |
10.38 |
17% |
|
13,056,824 |
8,665,743 |
11,657,237 |
12% |
Capital expenditure |
41,891,804 |
40,095,396 |
4% |
(1) Converted at 7.36 barrels per tonnes of crude oil.
(2) Operating expenses net of export customs duty expense.
(3) Profit for the period.
(4) Oil production and other costs represent an aggregate of the following operating expenses line items (as presented in the Company's consolidated financial statements for the year ended December 31, 2008 (see the Company website for a soft copy): employee benefits, materials and supplies, repairs and maintenance, energy and other costs. These include costs related to gas producing and processing activities, oil processing activities and general and administrative costs, which are not directly related to oil production and which increased the US dollar cost per barrel by approximately US$2.04 and US$1.66 for the year ended December 31, 2008 and 2007, respectively (US$1.79 and US$2.54 for quarter ended December 31, 2008 and September 30, 2008). Oil production and other costs exclude royalties (production tax) and all other taxes.
Transport Routes
The Company delivers its crude oil through three principal routes: export markets via the pipeline owned by the Caspian Pipeline Consortium (CPC), the Uzen-Atyrau-Samara pipeline (UAS) owned by JSC KazTransOil (in Kazakhstan) and the domestic market, as outlined in the following table:
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
2008 |
2007 |
|
|
Exports via UAS |
|||||
|
1.2 |
1.3 |
1.3 |
Volume of crude oil (in million tonnes) |
4.9 |
5.2 |
|
55% |
57% |
52% |
% total crude oil sales volume |
54% |
55% |
|
63% |
70% |
64% |
% total sales value of crude oil |
65% |
64% |
|
Exports via CPC |
|||||
|
0.6 |
0.5 |
0.5 |
Volume of crude oil (in million tonnes) |
2.1 |
2.1 |
|
27% |
20% |
22% |
% total crude oil sales volume |
23% |
22% |
|
28% |
25% |
29% |
% total sales value of crude oil |
29% |
28% |
|
Other |
|||||
|
0.4 |
0.6 |
0.6 |
Volume of crude oil (in million tonnes) |
2.1 |
2.2 |
|
18% |
23% |
26% |
% total crude oil sales volume |
23% |
23% |
|
9% |
5% |
7% |
% total sales value of crude oil |
6% |
8% |
Relative profitability of the two export routes depends on the quality of oil in the pipeline, prevailing international market prices and applicable pipeline tariffs. Specifically, CPC tends to be more advantageous due to higher-quality crude oil in the CPC pipeline in a higher-price oil environment, even after taking into account quality bank payments. In 4Q 2008, however, the CPC route was less attractive on a netback basis compared to UAS. The increase between the CPC blend quote and realized price differential in 4Q 2008 in comparison to 3Q 2008 was due to the following two factors. First, sales transactions reflect prices as of the date of sale and not the average crude oil quotations for the quarter (US$44.08 and US$56.26 per barrel accordingly), which may be significantly different due to volatility of the oil price. The second factor is the increase of quality bank expenses in 4Q 2008 to US$9.42 per barrel, or by 15%, due to the growth of crude oil prices in the first three quarters of 2008. Future quality bank expenses should decrease as a result of falling oil prices in the latter part of 2008. It should be noted that the Ministry of Energy and Mineral Resources of Kazakhstan controls the volumes of crude oil that can be shipped through the pipelines and the Company's ability to allocate export volume to different pipelines is therefore limited.
Revenue
The following table shows sales volumes and realized prices for 3Q 2008, 4Q 2008, 4Q 2007, 2008 and 2007:
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
(KZT thousands, unless otherwise stated) |
% |
(KZT thousands, unless otherwise stated) |
% |
||||
|
Export sales of crude oil |
|||||||
|
UAS pipeline |
|||||||
|
51,992,450 |
122,879,988 |
91,178,765 |
(43%) |
Net sales |
383,714,296 |
305,100,868 |
26% |
|
1,227 |
1,321 |
1,253 |
(2%) |
Volume (in thousand tonnes) |
4,898 |
5,237 |
(6%) |
|
42,384 |
93,021 |
72,766 |
(42%) |
Average price (KZT/tonne) |
78,347 |
58,260 |
34% |
|
48.79 |
107.23 |
83.35 |
(41%) |
Average price (US$/bbl) (1) |
90.09 |
65.75 |
37% |
|
CPC pipeline |
|||||||
|
23,184,104 |
44,025,216 |
41,881,709 |
(45%) |
Net sales |
168,406,193 |
132,450,248 |
27% |
|
605 |
456 |
540 |
12% |
Volume (in thousand tonnes) |
2,110 |
2,117 |
0% |
|
38,294 |
96,528 |
77,569 |
(51%) |
Average price (KZT/tonne) |
79,813 |
62,559 |
28% |
|
44.08 |
111.27 |
88.85 |
(50%) |
Average price (US$/bbl) (1) |
91.77 |
70,61 |
30% |
|
75,176,555 |
166,905,204 |
133,060,474 |
(44%) |
Total sales of crude oil-exported |
552,120,489 |
437,551,117 |
26% |
|
Domestic sales of crude oil |
|||||||
|
6,831,651 |
9,864,455 |
10,282,161 |
(34%) |
Domestic sales of crude oil |
36,933,575 |
37,401,142 |
(1%) |
|
379 |
557 |
611 |
(38%) |
Volume (in thousand tonnes) |
2,072 |
2,230 |
(7%) |
|
18,041 |
17,726 |
16,817 |
7% |
Average price (KZT/tonne) |
17,827 |
16,768 |
6% |
|
20.77 |
20.43 |
19.26 |
8% |
Average price (US$/bbl) (1) |
20.50 |
18.93 |
8% |
|
6,831,651 |
9,864,455 |
10,282,161 |
(34%) |
Total domestic sales of crude oil |
36,933,575 |
37,401,142 |
(1%) |
|
Total sales of crude oil |
|||||||
|
82,008,206 |
176,769,659 |
143,342,635 |
(43%) |
Total sales of crude oil |
589,054,064 |
474,952,259 |
24% |
|
2,211 |
2,334 |
2,404 |
(8%) |
Total volume (in thousand tonnes) |
9,079 |
9,585 |
(5%) |
|
37,094 |
75,750 |
59,618 |
(38%) |
Average price (KZT/tonne) |
64,878 |
49,554 |
31% |
|
42.70 |
87.32 |
68.29 |
(37%) |
Average price (US$/bbl) (1) |
74.60 |
55.93 |
33% |
|
3,449,075 |
5,734,845 |
4,793,886 |
(28%) |
Other sales |
15,939,358 |
12,022,620 |
33% |
|
85,457,281 |
182,504,504 |
148,136,521 |
(42%) |
Total revenue |
604,993,422 |
486,974,879 |
24% |
(1) Converted at 7.23 barrels per tonne of crude oil.
Key features of crude oil sales in 2008
Total sales of crude oil in 2008 in comparison to 2007 increased by 24%, to KZT589bn, primarily due to the 31 per cent increase in 2008 of the average realization price. The positive effect of price growth in 2008 was partly offset by a decrease in the volume of crude oil sales in the amount of 506 thousand tonnes, or 5%. This decrease was caused by the growth of the crude oil balance in 2008 and the large opening balance at the end of 2006, which was sold in 2007.
Export - UAS pipeline
Sales of crude oil exported via the UAS pipeline in 2008 increased by 26%, to KZT384bn, compared to 2007, mainly due to the growth of the average realization price to KZT78,347 per tonne, an increase of 34%, which was diminished in part by the decrease in volume exported via the UAS pipeline by 339 thousand tonnes, or 6%. Revenue from export sales by the UAS pipeline in 4Q 2008 in comparison to 4Q 2007 fell by 43%, primarily due to the average realization price drop by 42% to KZT42,384 per tonne.
Export - CPC pipeline
Sales of exported crude oil via CPC pipeline in 2008 increased by 27%, to KZT168bn, compared to 2007. The increase was primarily due to the average realization price increase to KZT79,813 per tonne, or 28%. Revenue from export sales by CPC pipeline in 4Q 2008 in comparison with 4Q 2007 decreased by 45%, mainly due to a decrease of 51% in the average price. The negative effect of this average price decrease was partly mitigated by an increase in the volume of oil sold by 65 thousands tonnes, or 12%.
Domestic market - Sales of crude oil
Domestic sales of crude oil decreased by 1% in 2008 compared to 2007 and by 34% in 4Q 2008 compared to 4Q 2007. The decrease in sales was primarily due to decrease of the oil volume sold in 4Q 2008, which was caused by the inability of Atyrau Refinery (ANPZ) to receive the planned volume of oil. Part of the unaccepted volume was exported.
The following table shows the Company's realized sales prices adjusted for crude oil transportation and other expenses for the periods ended December 31, 2008, September 30, 2008 and December 31, 2007:
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
(US$/bbl) |
% |
(US$/bbl) |
% |
||||
|
UAS |
|||||||
|
53.74 |
112.31 |
86.09 |
(38%) |
Benchmark end-market quote (1) |
94.08 |
69.53 |
35% |
|
48.79 |
107.23 |
83.35 |
(41%) |
Realized price (2) |
90.09 |
65.75 |
37% |
|
23.77 |
9.84 |
n/a |
- |
Export customs duty (3) |
11.29 |
n/a |
- |
|
7.32 |
7.42 |
6.24 |
17% |
Transportation |
7.38 |
6.13 |
20% |
|
0.07 |
0.07 |
0.07 |
4% |
Sales commissions |
0.07 |
0.07 |
6% |
|
17.63 |
89.90 |
77.04 |
(77%) |
Adjusted realized price |
71.35 |
59.55 |
20% |
|
CPC |
|||||||
|
56.26 |
116.77 |
89.07 |
(37%) |
Benchmark end-market quote(1) |
98.44 |
73.02 |
35% |
|
44.08 |
111.27 |
88.85 |
(50%) |
Realized price(2) |
91.77 |
70.61 |
30% |
|
23.77 |
9.84 |
n/a |
- |
Export customs duty (3) |
11.29 |
n/a |
- |
|
7.65 |
7.68 |
7.76 |
(1%) |
Transportation |
7.79 |
6.89 |
13% |
|
0.07 |
0.07 |
0.07 |
4% |
Sales commissions |
0.07 |
0.07 |
6% |
|
12.59 |
93.68 |
81.02 |
(84%) |
Adjusted realized price |
72.62 |
63.65 |
14% |
|
Other |
|||||||
|
20.77 |
20.43 |
19.26 |
8% |
Realized price(2) |
20.50 |
18.93 |
8% |
|
1.01 |
1.04 |
0.88 |
15% |
Transportation |
0.94 |
0.83 |
13% |
|
19.76 |
19.39 |
18.38 |
8% |
Adjusted realized price |
19.56 |
18.10 |
8% |
|
Average |
|||||||
|
42.70 |
87.32 |
68.29 |
(37%) |
Realized price(2) |
74.60 |
55.93 |
33% |
|
19.70 |
7.49 |
n/a |
- |
Export customs duty (3) |
8.71 |
n/a |
- |
|
6.33 |
5.95 |
5.22 |
21% |
Transportation |
6.00 |
5.07 |
19% |
|
0.06 |
0.05 |
0.05 |
16% |
Sales commissions |
0.05 |
0.05 |
6% |
|
16.61 |
73.83 |
63.02 |
(73%) |
Adjusted realized price |
59.84 |
50.81 |
18% |
(1) The following quoted prices are used as benchmarks: Urals blend (FOB Odessa) for shipments through the UAS pipeline and CPC blend (FOB Novorossiysk) for shipments through the CPC pipeline.
(2) Converted at 7.23 barrels per tonne of crude oil.
(3) Customs duty on export of crude oil in the amount of US$109.91 per tonne took effect from May 17, 2008 and changed to US$203.8 per tonne effective from October 11, 2008.
The difference between the benchmark quote and realized price on sales through the CPC pipeline mainly comprises freight costs, CPC quality bank payments, port charges, customs fees, certain sales commissions and averaging effects. The difference between the benchmark quote and realized price on sales through the UAS pipeline mainly comprises freight costs, port charges, customs fees and certain sales commissions. The price received for domestic sales of crude oil is determined primarily by an agreement with NC KMG (production cost +3%) and the price is usually significantly below market prices.
Operating Expenses
The Company's operating expenses relate primarily to the cost of producing crude oil. The following table presents the components of the Company's operating expenses:
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
(KZT thousands) |
% |
(KZT thousands) |
% |
||||
|
37,828,310 |
15,164,818 |
- |
- |
Export customs duty |
68,796,006 |
- |
- |
|
13,596,236 |
13,784,561 |
11,374,459 |
20% |
Transportation |
53,135,541 |
48,247,039 |
10% |
|
14,481,320 |
10,672,173 |
11,065,804 |
31% |
Employee benefits |
43,117,573 |
39,389,555 |
9% |
|
9,189,229 |
8,982,929 |
9,070,117 |
1% |
Depreciation, depletion and amortization |
34,368,825 |
34,663,502 |
(1%) |
|
4,215,738 |
7,136,487 |
5,687,704 |
(26%) |
Royalties |
25,312,574 |
17,948,868 |
41% |
|
9,520,458 |
5,901,833 |
6,252,956 |
52% |
Repairs and maintenance |
24,653,917 |
20,496,194 |
20% |
|
2,385,015 |
3,599,466 |
4,271,200 |
(44%) |
Materials and supplies |
12,717,118 |
13,878,706 |
(8%) |
|
2,912,728 |
1,717,231 |
1,959,118 |
49% |
Energy |
9,291,579 |
7,633,700 |
22% |
|
2,115,113 |
2,111,549 |
1,977,999 |
7% |
Management fees and sales commissions |
8,439,633 |
8,002,198 |
5% |
|
2,087,593 |
1,508,202 |
993,009 |
110% |
Other taxes |
5,690,873 |
4,830,875 |
18% |
|
(193,026) |
581,464 |
70,420 |
(374%) |
Fines and penalties |
1,808,845 |
2,735,535 |
(34%) |
|
(1,100,810) |
1,455,466 |
1,166,134 |
(194%) |
Social projects |
1,649,078 |
3,660,170 |
(55%) |
|
503,142 |
85,469 |
1,794,865 |
(72%) |
Loss on disposal of fixed assets |
852,909 |
2,992,114 |
(71%) |
|
(3,025,892) |
479,444 |
(1,547,941) |
95% |
Change in crude oil balance |
(4,656,735) |
(1,489,717) |
213% |
|
5,507,429 |
2,186,604 |
4,446,048 |
24% |
Other |
11,989,737 |
7,845,746 |
53% |
|
100,022,583 |
75,367,696 |
58,581,892 |
71% |
Total operating expenses |
297,167,473 |
210,834,485 |
41% |
Operating expenses in 2008 increased by 41% to KZT297bn, compared to 2007, primarily due to the introduction of export customs duty from May, 2008 and the increase in royalties and transportation expenses. Excluding the export customs duty and increases in royalties and transportation expenses in 2008, the total operating expenses increased (by 2.5%) compared to 2007. The most significant amounts and movements are explained as follows:
Export customs duty expenses in 2008 occurred as a result of the introduction of customs fee on exported crude oil from May 17, 2008. The initial export duty rate was US$109.91 per tonne, later changed to US$203.8 per tonne effective from October 11, 2008. In accordance with the new tax code enacted on January 1, 2009, the Company in 2009 is not taxable by export customs duty in 2009 and instead will be subject to rent tax on export sales introduced from January 1, 2009.
Transportation expenses in 2008 increased by 10% compared with 2007, primarily due to the growth of average export tariff for crude oil transportation on export by UAS pipeline on the territory of Kazakhstan by 24.9% from January 1, 2008 and transportation tariff by CPC pipeline by 25.7% from October 1, 2007. This effect was partly mitigated by the decrease in volume of crude oil transported by 5% and a decline in demurrage expense in the amount KZT964m in 2008 compared with 2007.
The increase of employee benefits in 2008 by 9% in comparison to 2007 is primarily due to the growth of basic salary by 10% to reflect inflation and the additional salary increase of production branch workers by approximately 40% starting from July 2008.
Royalties expense increased by KZT7.4bn, or 41%, in 2008 compared with 2007. This increase is due to the general increase of average market prices for crude oil in 2008 comparing with 2007. From January 1, 2009 in accordance with the new tax code the royalties were replaced by the mineral extraction tax.
Repairs and maintenance expenses increased due to the increase in the cost and number of wells repaired, reservoir pressure maintenance G&G works and seismic works on R-9 and Liman blocks.
Energy expenses increased by 22% due to the increase of energy tariff by 15% and energy transmission tariff by 37%.
Management fees are paid according to the management services agreement with NC KMG adjusted for a budgeted inflation rate of 7% (KZT8.01bn in 2008 compared to KZT7.49bn in 2007).
Other taxes expense increased by 18%, or KZT860m, in 2008 compared to the same period of 2007, primarily due to derecognising reserves in 2007 for tolling VAT in the amount of KZT2.1bn which was partly diminished by the decrease of VAT expenses on VAT-exempt operations in 2008 for the amount KZT913m.
The expenses incurred due to fines and penalties in 2008 decreased by 34% compared to 2007 due to the fact that in 2007 the Company paid penalties on CIT, EPT, royalty, social tax upon a tax audit related to the period 2003-2004 years in total amount of KZT717.1m.
The decrease in expenses for social projects in 2008 was mainly due to scheduled completion of construction projects.
Losses on the disposal of fixed assets decreased by 71% to KZT853m in 2008 compared with 2007, primarily due to the write-off of non-productive wells in 2007 due to the lower number of non-productive wells written off in 2008 versus 2007.
The change in crude oil balance of KZT4.7bn in 2008 was due to the growth of crude oil inventory.
Other expenses in 2008 increased by KZT4.1bn, primarily due to the impairment in 2008 of investments and receivables in LLP KPI for KZT2.4bn, accrual in 2008 of bad debt provision in the amount of KZT1.1bn and reverse of due diligence expenses in 2007 for JV Kazgermunai LLP acquisition for KZT1.0bn.
Within the year 2008, significant increases in employee benefits, repairs and maintenance, energy and other expenses in 4Q 2008 primarily reflected seasonal factors and relevant accounting accruals.
Finance income/costs and foreign exchange gain/loss (Net financial income/costs)
The Company's financial income in each of the periods relates mainly to interest on deposits. The Company's financial costs in each of the periods mainly comprise interest on borrowings and the unwinding of a discount relating to asset retirement obligations.
The net financial income for 2008 was KZT42.9bn compared to the net financial income of KZT13.2bn in 2007. This was mainly due to the increase in interest income by KZT15.3bn, interest income from CCEL acquisition of KZT2.9bn and the decrease of foreign exchange loss for KZT9.1bn. The weighted average interest rate on deposits in 2008 was 8.84% per annum or 0.31% more than in 2007.
Share of result of associates and joint ventures
The Company's income from its share in associates and joint ventures in 2008 increased to KZT57.6bn in comparison to KZT17.4bn in 2007, primarily due to the increase of net income from JV Kazgermunai LLP' in the amount of KZT58.8bn.
Income Tax Expense
The income tax expense in 2008 increased by KZT16.6bn, or 11% to KZT167.1bn. The Company's overall effective tax rate decreased from 49% in 2007 to 41% in 2008.
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
(KZT thousands) |
% |
(KZT thousands) |
% |
||||
|
20,282,608 |
125,900,076 |
102,526,265 |
(80%) |
Profit before tax |
408,374,235 |
307,630,358 |
33% |
|
911,034 |
114,902,529 |
93,989,630 |
(99%) |
Profit before tax (net of associates and JV's results) |
350,750,351 |
290,200,508 |
21% |
|
(2,456,922) |
54,872,114 |
48,887,744 |
(105%) |
Income tax |
167,091,866 |
150,511,277 |
11% |
|
(12%) |
44% |
48% |
(60%) |
Effective tax rate |
41% |
49% |
(8%) |
|
(270%) |
48% |
52% |
(322%) |
Effective tax rate (net of associates and JV's results) |
48% |
52% |
(4%) |
The decline in the effective income tax rate in 2008 compared with 2007 was caused by the growth of the shared results of JV Kazgermunai LLP, a decrease in the effective excess profit tax rate, a decrease in non-deductible expenses together with higher deferred tax benefit as a result of the introduction of the new tax code and of lower income tax rates.
Profit for the period
As a result of the factors described above, in 2008 the Company's profit for the period increased by 54% to KZT241.3bn compared to 2007.
Overview of Associates' Operations
JV Kazgermunai LLP
JV Kazgermunai LLP's key financial and operational indicators are shown below:
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
159,618 |
547,412 |
399,610 |
(60%) |
Revenue, US$ thousands |
1,768,697 |
1,275,844 |
39% |
|
183,493 |
154,408 |
103,058 |
78% |
Operating expenses, US$ thousands |
494,908 |
278,529 |
78% |
|
7,370 |
162,594 |
120,293 |
(94%) |
Income tax expense, US$ thousands |
529,502 |
424,059 |
25% |
|
(31,245) |
230,410 |
176,259 |
(118%) |
Net income, US$ thousands |
744,287 |
573,256 |
30% |
|
54,316 |
55,171 |
47,485 |
14% |
Capital expenditure, US$ thousands |
207,240 |
55,691 |
272% |
|
805 |
784 |
817 |
(1%) |
Crude oil production, th. tonnes |
3,140 |
3,055 |
3% |
|
813 |
760 |
719 |
13% |
Crude oil sales, th. tonnes |
3,026 |
2,717 |
11% |
|
375 |
255 |
413 |
(9%) |
Export via Aktau |
1,448 |
1,435 |
1% |
|
370 |
373 |
170 |
118% |
Export via Kazakh-Chinese pipeline |
1,193 |
933 |
28% |
|
- |
- |
- |
- |
Export to Uzbekistan |
5 |
- |
- |
|
68 |
132 |
136 |
(50%) |
Domestic market |
380 |
349 |
9% |
The Company's share (50%) in JV Kazgermunai LLP's oil production in 2008 is 1,570 thousand tonnes. In 2008 Kazgermunai incurred capital expenses in the amount of US$207m. Equity income from the joint venture, included in the consolidated financial statements of the Company in 2008, is KZT58.8bn. The Company received US$325m in distributed net profit from JV Kazgermunai LLP in 2008 (US$300m in 2007).
In 2009 JV Kazgermunai LLP plans to produce 3.18m tonnes of crude oil and drill 17 development wells. Capital expenditure of US$184m in 2009 is planned.
CCEL
CCEL's key financial and operational indicators are shown below:
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
149,118 |
335,891 |
235,170 |
(37%) |
Revenue, US$ thousands |
1,032,914 |
794,413 |
30% |
|
179,372 |
134,787 |
143,056 |
25% |
Operating expenses, US$ thousands |
538,476 |
410,610 |
31% |
|
(123,652) |
107,186 |
40,337 |
(407%) |
Income tax expense, US$ thousands |
148,489 |
190,069 |
(22%) |
|
93,398 |
93,918 |
51,778 |
80% |
Net income, US$ thousands |
345,949 |
193,734 |
79% |
|
63,296 |
65,328 |
75,408 |
(16%) |
Capital expenditure, US$ thousands |
229,914 |
176,547 |
30% |
|
484 |
484 |
437 |
11% |
Crude oil production, th. tonnes |
1,829 |
1,942 |
(6%) |
|
491 |
490 |
433 |
13% |
Crude oil sales, th. tonnes |
1,814 |
1,884 |
(4%) |
|
403 |
371 |
346 |
17% |
Export via Makhachkala |
1,369 |
1,132 |
21% |
|
60 |
60 |
40 |
50% |
Export via Primorsk |
234 |
229 |
2% |
|
- |
- |
- |
- |
Export via Iran |
- |
183 |
(100%) |
|
- |
- |
- |
- |
Export via Odessa |
- |
110 |
(100%) |
|
28 |
59 |
48 |
(41%) |
Domestic market |
211 |
230 |
(8%) |
In 2008 the Company recognized finance income from its investment in CCEL of KZT2.9bn. Capital expenses in 2008 of US$230m were incurred, which was 30% more than in 2007.
In 2009 CCEL planned to produce 1.8m tonnes of crude oil and drill 40 development wells versus the 304 drilled in 2008. Capital expenditure in 2009 is planned up to the amount of US$81m. The decrease in CCEL's capital expenditure in 2009 is mainly due to the decrease of production well drilling, construction and modernization of production assets.
Liquidity and Capital Resources
Summary of Cash Flows
The Company's liquidity requirements arise principally from the need to finance its existing operations (working capital), to finance investment (capital expenditure) and realize its growth targets primarily via acquisition. The management believes that the Company has adequate liquidity to meet its short-term obligations and pursue investment opportunities.
|
4Q 2008 |
3Q 2008 |
4Q 2007 |
4Q on 4Q change |
2008 |
2007 |
Change |
|
|
(KZT thousands) |
% |
(KZT thousands) |
% |
||||
|
(1,409,748) |
89,873,087 |
63,639,283 |
(102%) |
Net cash generated from (used in) operating activities |
163,854,907 |
172,961,468 |
(5%) |
|
257,172,971 |
(47,338,347) |
(113,038,098) |
(328%) |
Net cash generated from (used in) investing activities |
140,539,758 |
(164,678,826) |
(185%) |
|
(937,815) |
(39,392,142) |
(667,551) |
40% |
Net cash used in financing activities |
(40,977,580) |
(44,974,056) |
(9%) |
In 2008 net cash generated from operating activities was KZT163.9bn, KZT9.1bn less than in 2007. This decrease was mainly due to the introduction of the export duty and large amount of income taxes paid based on 2007 results and project 2008 profitability, which more than offset the growth in sales.
Net cash generated from investing activities increased to KZT140.5bn in 2008. The increase was due to a KZT229.9bn increase in net cash inflows from the operations with financial assets held to maturity, decrease in 2008 of cash used for purchase of interest in joint ventures for the amount of KZT135.3bn and increase of cash inflows from interest received by KZT31.2bn. The increase of cash generated from investing activities was partly mitigated by a decrease in 2008 of loan repayments received from related parties and associates to the amount of KZT95.5bn.
In 2008 and 2007, the Company's capital expenditure, calculated on a cash basis, was KZT41.9bn and KZT40.1bn, respectively.
Net cash used in financing activities reached KZT41.0bn in 2008 compared to KZT45.0bn in 2007. The decrease of cash used was mainly due to decrease in cash outflows for repayment of borrowings in 2008 for the amount of KZT7.9bn, which was partly offset by an increase of cash outflow for dividends paid to Company's shareholders by KZT3.8bn.
Borrowings and cash position
The following table below shows the Company's net cash for the periods ended December 31, 2008, September 30, 2008 and December 31, 2007:
|
As at December 31, 2008 |
As at September 30, 2008 |
As at December 31, 2007 |
December on December change |
|
|
(KZT thousands, unless otherwise stated) |
% |
|||
|
Current portion |
14,905,744 |
18,624,980 |
18,713,954 |
(20%) |
|
Maturity over 1 year |
5,532,332 |
878,213 |
14,135,480 |
(61%) |
|
Total borrowings |
20,438,076 |
19,503,193 |
32,849,434 |
(38%) |
|
Cash and cash equivalents |
285,131,743 |
30,085,316 |
21,658,451 |
1216% |
|
Other current financial assets |
264,677,096 |
512,237,965 |
378,603,924 |
(30%) |
|
Non-current financial assets |
5,108,021 |
7,042,096 |
1,953,799 |
161% |
|
Total financial assets |
554,916,860 |
549,365,377 |
402,216,174 |
38% |
|
US$-denominated financial assets, % |
67% |
67% |
47% |
- |
|
Net cash (debt) |
534,478,784 |
529,862,184 |
369,366,740 |
45% |
Financial assets in BTA Bank
As reported in the press at the beginning of February 2009, during a press conference the Chairman of the Board of Directors of BTA Bank, Arman Dunaev, confirmed that BTA Bank has declined to make certain payments on behalf of some of the National Companies. One of KMG EP's February 2009 payment instructions, to the total amount of KZT17bn, has been accepted for payment but delayed by BTA Bank. In April 2009 KMG EP made a number of relatively small payments out of its accounts with BTA Bank. The total sum of the Company's financial assets held in BTA Bank is approximately KZT43.5bn at the end of April 2009. Although the Company's access to its entire funds with BTA Bank remains uncertain, the current situation does not preclude KMG EP from conducting its business operations as normal and timely fulfilment of its obligations.
Esomet Arrangement
On August 16, 2004 the Company entered into a crude oil sale agreement with Esomet and received a US$600m long-term advance with interest at Libor plus 1.75% per annum. On July 24, 2006 Esomet and the Company amended the Esomet Arrangement to include an additional payment of US$50.0m, a reduction of the interest margin from 1.75% to 1.1% and the release of the existing NC KMG guarantee. As at December 31, 2008 the outstanding principal amount owed by the Company to Esomet amounted to US$111m, or approximately KZT13.4bn, and it is anticipated that the liability to Esomet will be fully discharged in 2009.
Risk Factors
The Company's operation is exposed to many risks and uncertainties in the economic, political, legislative, social and financial fields. When making decisions, stakeholders should take into consideration the risks that may affect the Company's financial and operational results.
In 2008 the Company implemented the corporate risk management system aimed to identify and manage risks. Based upon the results of risk identification and assessment, the Risk Management Committee developed a risk portfolio of the Company. The composition of the Company's risk portfolio is as follows
Operational risks 44%
Technological risks 18%
Financial risks 13%
Legal risks 10%
Strategic risks 8%
Personnel risks 7%
The Company's risk portfolio includes 24% of internal source risks, 68% of external influence source risks and 8% of risks with both internal and external sources.
Internal source risks are fully under the Company's management control, and are directly connected to efficiency of the management and internal control system.
External source risks are beyond the Company's control and management system, but the Company takes possible measures in order to minimize and mitigate such risks.
Some information on risks is disclosed in the IPO and GDRs prospectus published on September 29, 2006, and the key financial risk analysis is included in the annual audited statements.
An additional, inexhaustive list of major risks is provided below.
Volatility of the Price for Crude oil and Oil Products
Changes in the price for crude oil and oil products are caused by the global macroeconomic conditions, political instability or conflict, actions of major crude oil exporting countries, weather conditions and natural calamities. Changes in crude oil and oil products prices may affect the level of expected revenues, investment decision making and operational activity. To this end, the Company drafts annual budgets and prepares periodic forecasts, including sensitivity analyses with regard to various future price levels for crude oil.
Personnel Risk
Highly qualified personnel are a competitive advantage and the foundation for achieving the Company's strategic goals. Every year the Company encounters the problem of attracting the personnel possessing relevant qualifications. First of all it relates to the difficulty in recruiting qualified personnel due to the deficiency of a required category of experts on the labour market. Based on some reviews, the Company's current salary level is lower than the market indicators of salary level in the companies that are comparable by capitalization and by industry. To reduce this risk, the Company has initiated a project to implement an employee incentive scheme to bring salary levels to the level of market indicators in order to motivate and retain highly qualified personnel. In 2008 by resolution of the Company's Management Board, salaries were recalculated taking into account on the level of inflation.
Changes in Legislation, Fiscal and Regulatory Regimes
Changes in legislation on sub-soil use, tax and customs regulations may lead to an increase in the Company's fiscal burden, a decrease in its financial results, difficulties in operations and a reduction in its available investment resources. Depending on the change in tax and customs burden, the Company intends to revise its production and investment plans and amend them as required.
Labour Protection, Safety and Environmental Protection
The Company's operational activity is exposed to a wide range of risks. The main categories of HSE risk are the failure to comply with safety conditions, industrial accidents, environmental damage, ecological impact and natural disasters. The consequences of such risks can be very severe, including loss of life, pollution of air, soil and water, fire, layoff or shutdown of production. Depending upon the cause of these events, the consequences may have a negative impact on reputation, financial and operational activity of the Company. With regard to industrial safety and labour protection, the Company takes all advanced measures for risk liability prevention by exercising operative control over safety and labour protection, identifying hazards and training the personnel.
In 2008 Company implemented and now successfully operates the integrated system in accordance with international standards ISO 14001 and OHSAS 18001.
Exploration
As is experienced worldwide, exploration always carries a risk of non-commercial hydrocarbon discovery and/or drilling a dry well. To mitigate exploration risks, a number of geology and geophysics surveys is conducted which, in addition to a traditional seismic survey, includes a geochemical survey, high-resolution electric exploration, and special methods such as seismic exploration and gravimetrical measurings.
Partners
The Company cooperates with many foreign and local companies on a variety of areas of its business. The Company has a limited opportunity to influence the behaviour and operations of its partners, which may affect the operational and financial results of the Company. Therefore, the Company is working to develop long-term, loyal and mutually beneficial partnerships. In order to mitigate risks of violations or defaults on partners' obligations, the Company insists on serious penalty clauses in contracts.
Information Technology
The Company is exposed to risks in the area of information technology due to the utilization and implementation of a variety of high-technology hardware and software to maintain effective operations. In this connection, problems with the adaptation of new hardware and software, and providing a safe storage of confidential business data may emerge. In order to ensure effective work in this area , every year the Company analyses the technology used and, while selecting and purchasing, gives preference to the most adaptable and reputable information technology, and ensures reliable control of access to the databases.
***
The following summary operating and financial information is contained in the press-release published by the Company on 12th March, 2009. The full version of the audited consolidated financial statements for the year 2008 with accompanying notes is available on the Company's website: www.kmgep.kz, within the Annual Financial Report as well as in the investor relations section of the website.
QUOTE BEGINS
Key operating and financial indicators of KMG EP for the full year of 2008
Summary of Consolidated Statements of Income
|
Tenge Millions, except as indicated |
Three months ended December 31, |
Year ended December 31, |
|||
|
2008 |
2007 |
2008 |
2007 |
||
|
Revenue |
85,457 |
148,137 |
604,993 |
486,975 |
|
|
Operating expenses |
(100,023) |
(58,582) |
(297,167) |
(210,834) |
|
|
Profit(loss) from operations |
(14,565) |
89,555 |
307,826 |
276,140 |
|
|
Finance income |
13,526 |
6,117 |
45,375 |
27,336 |
|
|
Finance expenses |
(856) |
(1,128) |
(3,147) |
(6,093) |
|
|
Foreign exchange gain (loss) |
2,806 |
(554) |
696 |
(8,043) |
|
|
Gain on sale of subsidiaries |
− |
− |
− |
860 |
|
|
Share of result of associates |
19,372 |
8,537 |
57,624 |
17,430 |
|
|
Profit before tax and minority interest |
20,283 |
102,526 |
408,374 |
307,630 |
|
|
Income tax expense (benefit) |
2,457 |
(48,888) |
(167,092) |
(150,511) |
|
|
Profit for the period |
22,740 |
53,639 |
241,282 |
157,119 |
|
|
EARNINGS PER SHARE, Tenge per share |
|||||
|
Attributable to: Equity holders of the Company |
307 |
725 |
3,257 |
2,123 |
|
|
Year ended December 31, |
||
|
Tenge Millions |
2008 audited |
2007 audited |
|
Net cash generated from operating activities |
163,855 |
172,961 |
|
Cash flows from investing activities |
||
|
Purchases of property, plant and equipment (PPE) |
(41,892) |
(40,095) |
|
Purchase of held-to-maturity financial assets, net |
(91,556) |
(138,310) |
|
Disposal of subsidiaries, net of cash disposed |
− |
10,347 |
|
Purchases of a joint venture |
(1,816) |
(137,158) |
|
Loan repayments received from related parties |
2,036 |
97,540 |
|
Interest received |
44,724 |
13,546 |
|
Sales (purchases) of available-for-sale financial |
98,005 |
(145,077) |
|
Net cash provided used in investing activities |
140,540 |
(164,679) |
|
Proceeds from borrowings |
30 |
1,995 |
|
Repayment of borrowings |
(312) |
(8,175) |
|
Dividends paid to Company's shareholders |
(39,505) |
(35,705) |
|
Interest paid and other |
(969) |
(3,089) |
|
Net cash used in financing activities |
(40,978) |
(44,974) |
Summary of Consolidated Statement of Cash Flows
Summary of Condensed Consolidated Balance Sheets
|
Tenge Millions |
December 31, 2008 audited |
December 31, 2007 audited |
|
ASSETS |
||
|
Non-current assets |
402, 582 |
379,699 |
|
Current assets |
616,949 |
472,153 |
|
Total assets |
1,019,532 |
851,852 |
|
EQUITY |
||
|
Share capital |
259,725 |
259,366 |
|
Other equity |
1,309 |
581 |
|
Retained earnings |
586,059 |
386,495 |
|
Total equity |
847,093 |
646,442 |
|
LIABILITIES |
||
|
Non-current liabilities |
44,249 |
70,077 |
|
Current liabilities |
128,190 |
135,333 |
|
Total liabilities |
172,439 |
205,410 |
|
TOTAL EQUITY AND LIABILITIES |
1,019,532 |
851,852 |
The following tables show the Company's realised sales prices adjusted for oil and oil products transportation and other expenses for the 12 months ended December 31, 2008 and 2007. The quotes used as the market prices are Urals (FOB Odessa) UAS pipeline and CPC blend (FOB Novorossisk) on CPC. Coefficient of 7,23 barrels per tonne is used for calculation of realised prices.
|
2008 |
||||
|
|
UAS |
CPC |
DOMESTIC |
TTL |
|
(US$/bbl) |
||||
|
Benchmark end-market quote |
94.08 |
98.44 |
- |
- |
|
Realised priceP |
90.09 |
91.77 |
20.50 |
74.60 |
|
Export customs duty |
11.29 |
11.29 |
- |
8.66 |
|
Transportation |
7.38 |
7.79 |
0.94 |
6.00 |
|
Sales commissions |
0.07 |
0.07 |
- |
0.05 |
|
Adjusted realised price |
71.35 |
72.62 |
19.56 |
59.89 |
|
2007 |
||||
|
|
UAS |
CPC |
DOMESTIC |
TTL |
|
(US$/bbl) |
||||
|
Benchmark end-market quote |
69.53 |
73.02 |
- |
- |
|
Realised priceP |
65.75 |
70.61 |
18.93 |
55.93 |
|
Export customs duty |
- |
- |
- |
- |
|
Transportation |
6.13 |
6.89 |
0.83 |
5.07 |
|
Sales commissions |
0.07 |
0.07 |
- |
0.05 |
|
Adjusted realised price |
59.55 |
63.65 |
18.10 |
50.81 |
Reference information
|
|
2008 |
2007 |
|
Average exchange rate $/KZT |
120.29 |
122.55 |
|
US$/KZT at balance sheet date |
120.77 |
120.30 |
|
Coefficient barrels to tones for KMG EP crude |
7.36 |
|
Coefficient barrels to tones for Kazgermunai crude |
7.70 |
|
Coefficient barrels to tones for CCEL crude |
6.68 |
QUOTE ENDS
Shareholder information
Annual general SHAREHOLDERS' meeting
The AGM will be held at 12:00 am, on May 28, 2009, at
Rixos President Hotel Astana,
1st floor, Dhall conference hall
7, Tauelsizdik st., Left Bank,
Astana, 010000,
Republic of Kazakhstan
Website
A wide range of information on the Company is available at www.kmgep.kz including details of activities, press releases and annual and interim reports.
shareholders' enquries
For information about proxy voting, dividends and to report changes in personal details, shareholders should contact the Company's registrar/ depositary:
Holders of ordinary and preferred shares: JSC "Fondovyi Tsentr", 79 «А», Zheltoksan Street, Almaty, Republic of Kazakhstan, Tel.: +7 (727) 250 89 61, 250 89 60, Fax: +7 (727) 250 16 96.
Holders of GDRs: The Bank of New York, 101 Barclay Street, 22nd Floor, New York, NY 10286, United States of America, Tel.:+1 212 815 44 93, Fax: +1 212 571 30 50, Telex: 62736 Western Union.
Number of shares in issue:
|
Common |
Preferred |
Total Share |
|
|
Shares |
Shares |
Capital (2) |
|
|
Total number of shares issued (1) |
70,220,935 |
4,136,107 |
74,357,042 |
Including GDRs bought out to implement the Company's Option Program and being in trust management (as of December 31, 2008 - 1,528,749 GDRs), and the shares and GDRs bought out in accordance with own shares buyback programme (as of December 31, 2008 - 236,156 GDRs and 16,389 shares)
The Company's shares are listed on Kazakhstan Stock Exchange and the GDRs are listed on the London Stock Exchange. Each GDR corresponds to one sixth of an ordinary share.
Forward-looking statements
This document includes statements that are, or may be deemed to be "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including, but not limited to, the terms ''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''may'', ''target'', ''will'', or ''should'' or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They include, but are not limited to, statements regarding the Company's intentions, beliefs and statements of current expectations concerning, amongst other things, the Company's results of operations, financial condition, liquidity, prospects, growth, potential acquisitions, strategies and as to the industries in which the Company operates. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that may or may not occur. Forward-looking statements are not guarantees of future performance and the actual results of the Company's operations, financial condition and liquidity and the development of the country and the industries in which the Company operates may differ materially from those described in, or suggested by, the forward-looking statements contained in this document. The Company does not intend, and does not assume any obligation, to update or revise any forward-looking statements or industry information set out in this document, whether as a result of new information, future events or otherwise. The Company does not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved.
CONTACT INFORMATION
KMG EP, Public Relations (+7 7172 97 7600)
Daulet Zhumadil
E-mail: [email protected]
KMG EP, Investor Relations (+7 7172 97 5433)
Asel Kaliyeva
E-mail: [email protected]
Pelham PR (+44 203 178 44 18)
Elena Dobson
E-mail: [email protected]
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