JSC KazMunaiGas Exploration Production, released its consolidated financial statements for the year ended December 31, 2009.
• Average Brent price in 2009 declined by 36% compared to 2008, from US$97.1 per barrel to US$61.7 per barrel.
• In 2009 KMG EP made a profit of 209.7bn Tenge (US$1,422m)1 and earnings per share were 2,871 Tenge (US$3.2 per GDR). This includes a significant foreign exchange gain of approximately 89.5bn Tenge (US$607m).
• Operating profit declined by 50% to 155bn Tenge (US$1,050m) compared to 308bn Tenge (US$2,559m) in 2008, mainly due to lower oil prices and introduction of the new Tax Code in January 2009.
Commenting on the financial results for the year, Kenzhebek Ibrashev, CEO of KMG EP, said: “KMG EP received a substantial net profit in 2009 and successfully continued the realisation of its strategy of onshore asset consolidation in Kazakhstan. The acquisition of a 33% stake in PetroKazakhstan Inc was finalised at the end of 2009 and will make its contribution to our performance this year. In 2010 we are planning to continue implementing our acquisition strategy as well as to significantly increase capital expenditure, in order to further grow production and increase reserves.”
Production Highlights
In 2009 the Company produced 8,962 thousand tonnes (181kbopd) of crude oil from its Uzen and Emba fields, 5% less than in 2008. The decline is due to KMG EP’s planned reduction in drilling and production for 2009. Production was also affected by severe weather conditions at the beginning of the year and interruptions in power supply in the first and third quarters of 2009.
Consolidated production in 2009 was 11,497 thousand tonnes (232kbopd) of crude oil, including the Company’s share in production from Kazgermunai and CCEL of 2,534 thousand tonnes (51kbopd).
The Company supplied 8,9662 thousand tonnes (181kbopd) of crude oil, excluding the share in supply from Kazgermunai and CCEL. Of this amount, 6,946 thousand tonnes (140kbopd) were exported (77% of sales), 1,720 thousand tonnes (35kbopd) were supplied to the domestic market and 300 thousand tonnes (6kbopd) were supplied to the Atyrau refinery for processing, subsequent sale and in-house use of the refined products.
The Company’s share in the shipment volumes from Kazgermunai and CCEL was 2,452 thousand tonnes (49kbopd) of crude oil in 2009, including 2,054 thousand tonnes (41kbopd) supplied for export (84% of sales).
Financial Highlights
Profit after tax (net income) for the full year of 2009 was 209.7bn Tenge (US$1,422m) compared to 241.3bn Tenge (US$2,006m) in 2008 representing a 13% decline. This decline is attributable mainly to the decrease in revenue as a result of lower oil prices. This was partly offset by a foreign exchange gain of 89.5bn Tenge (pre-tax) (US$607m) that followed the devaluation of Tenge in February 2009. Excluding the foreign exchange gain net of tax, net income declined by 40% year on year.
Revenue for the full year of 2009 decreased by 20% to 485.5bn Tenge (US$3,291m) compared to 605.0bn Tenge (US$5,029m) in 2008. This was due to an 18% decrease in the average realised price per tonne, from 64,879 Tenge (US$74.60 per bbl) to 53,082 Tenge (US$49.78 per bbl) and a 1% reduction in sales volume. In US Dollar terms, revenues declined by approximately 35% year on year.
In 2009 KMG EP recorded a 2.4bn Tenge (US$16m) loss from its share in Kazgermunai. This amount represents 50% of Kazgermunai’s net profit of 33.8bn Tenge (US$229m) adjusted for 10.6bn Tenge (US$72m) from the effect of purchase price premium amortization, 4.3bn Tenge (US$29m) deferred income tax gross-up amortisation and 4.4bn Tenge (US$30m) deferred income tax benefit revision. The financial results of Kazgermunai in 2009 were primarily affected by the lower oil price compared to 2008, introduction of the new tax code in 2009, accrual of 16.4bn Tenge (US$111m) related to environmental fines for excessive gas flaring and a change in the method of revenue recognition from the beginning of 2009, which has deferred sales by approximately 45-60 days.
In 2009 the Company received US$25m in dividends from Kazgermunai. From the date of the acquisition, dividends received have amounted to US$650m.
The Company has recognised the amount of 21.4bn Tenge (US$144m) as a receivable from CCEL, a jointly controlled entity, as at December 31, 2009. KMG EP has accrued 3.2bn Tenge (US$22m) of interest income for the full year of 2009 which is related to the US$26.87m annual priority return from CCEL.
Operating expenses were 330.6bn Tenge (US$2,241m) for the full year of 2009 compared to 297.2bn Tenge (US$2,470m) in 2008, representing an 11% increase. The key reasons for the increase were the introduction of the mineral extraction tax (MET), which replaced royalty, accrual of fines and penalties and the increase in payroll expenses. Excluding tax-related factors and accrued fines and penalties, operating expenses in 2009 increased by 4% in Tenge compared to 2008. This was primarily due to an increase in payroll expenses, change in crude oil balance, impairment of investment in joint venture, increase in energy tariffs and a loss on the disposal of fixed assets. This was partially offset by the reduction in depreciation expenses and decreases in costs of repairs, maintenance and materials. In US Dollar terms, operating expenses, excluding taxes, fines and penalties decreased by 15% year on year.
Operating cash flow for the full year of 2009 was 149.2bn Tenge (US$1,011m), which is 9% less than in 2008. The key reason for the decline was the decrease in oil price and the replacement of royalty by the MET.
Purchases of property, plant and equipment (capital expenditure, not including purchases of intangible assets, as per Cash Flow Statement) in 2009 were 43.3bn Tenge (US$294m) compared to 41.9bn Tenge (US$348m) in 2008, representing 3% increase. In US Dollar terms, capital expenditure declined by 16% year on year.
Impact of PKI acquisition. In December 2009 the Company finalised the acquisition of 100% of common shares of KMG PKI Finance from NC KMG. KMG PKI Finance holds a 33% equity interest in PetroKazakhstan Inc.(“PKI”). The acquisition of KMG PKI Finance does not represent a business combination and the Company accounted for this transaction as an acquisition of assets and liabilities. KMG PKI Finance’s investment in PKI is recognized as an investment in an associate in the consolidated financial statements of the Company.
The major impact was on the balance sheet, in particular, investments in associates increased by 131.0bn Tenge (US$883) and borrowings increased by 129.0bn Tenge (US$869m). Impact on profit and loss accounts was immaterial. For the detailed discussion of impact of PKI acquisition on the Company’s accounts please refer to the consolidated financial statements and the notes.
Borrowings and obligations increased by 117.2bn Tenge (US$759m) from 20.4bn Tenge (US$169m) as at 31 December 2008 to 137.7bn Tenge (US$928m) as at 31 December 2009. Increase in borrowings was mainly due to recognition of non-recourse debt and liabilities related to the acquisition of the 33% stake in PKI (as discussed above).
Net cash, cash equivalents and financial assets3 at 31 December 2009 amounted to 505.0bn Tenge (US$3.4bn) compared to 534.5bn Tenge (US$4.4bn) as at 31 December 2008.
As at December 31, 2009, 74% of cash and deposits with banks were denominated in USD and 26% were denominated in Tenge. Cash and deposits with two of the largest Kazakh banks, Halyk and Kazkommertsbank, account for approximately 75% of the financial assets as at 31 December 2009. Interest accrued on deposits with banks for the 2009 was 42.9bn Tenge (US$291m).
Dividends paid in 2009 were 46.1bn Tenge (US$313m) compared to 39.5bn Tenge (US$328m) paid in 2008.
Fines and Penalties. As a result of the tax audit covering the period of 2004 – 2005, the tax authorities assessed additional amounts of 32.0bn Tenge (US$213m) including principal of 16.2bn Tenge (US$107m) with the balance consisting of fines and penalties. The Company’s management maintains that its interpretation of the tax legislation was correct. However, as the outcome of the dispute remains uncertain, the Company made appropriate provisions. As at 31 December 2009 the accrued provision was11.4 bn Tenge (US$77m). This amount increased during the fourth quarter of 2009 (accrued provision was 9.1bn Tenge (US$61m) as of 30 September 2009) as the Company made another provision related to similar risk in 2009 and interest until 31 December 2009.
Hedging. In October 2009 the Company completed its 2009 hedging program. As of December 2009 the aggregated volume of transactions was 3.3 million barrels per month, which represents 78% of average monthly export volume in 2009. As a result of the Brent price exceeding collar cap price the Company recognized a loss on a crude oil derivative instrument to the amount of 0.2bn Tenge (US$1.7m) in 2009. As at December 31, 2009 the Company had no outstanding crude oil derivative instruments. No hedging is planned for 2010.
Outlook for 2010
Production in 2010 at Uzenmunaigas and Embamunaigas is expected to be 9,200 thousand tonnes (186 kbopd). Consolidated production in 2010 is expected to increase to 13.6 million tonnes including the 50% share in production of Kazgermunai and CCEL, as well as the 33% share in production of Petrokazakhstan Inc.
The annual plan on shipments to domestic market from Core fields in 2010 is expected at the level of 2.2 million tonnes.
For the 2010 budget the Company based on the oil price of US$50 per barrel adhering to a conservative oil price scenario. This is in line with the government’s macroeconomic forecast and the oil price assumption used by the Company’s parent, National Company KazMunayGas.
In 2010 the Company is planning to spend about 95bn Tenge (US$633m) on capital expenditure, to primarily fund maintenance and exploration drilling, as well as the implementation of the associated gas utilisation program.
