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JSC KazMunaiGas Exploration Production.1Q 2014 financial results

30.04.2014

Astana, 30 April 2014. JSC KazMunaiGas Exploration Production (“KMG EP” or “the Company”) announces condensed consolidated interim financial statements for the three months ended 31 March 2014.

·         Revenue in the first three months of 2014 was 220.8bn Tenge (US$1,301m)[1], a 9% increase compared with the same period for2013.The average price of Brent in the first three months of 2014 was 4% lower than in the same period of 2013, down from US$112.6 per barrel to US$108.2 per barrel.

·         Net profit forthe first three months of 2014 was 123.5bn Tenge (US$727m) largely due to a before taxforeign exchange gain of 108bn Tenge (US$635m) as a result of theTenge devaluation in February 2014.

·         Production expenses in the first three months of 2014 were 43.8bn Tenge (US$258m), which is 2% higher compared with the same period of 2013 mainly due to increased expenses for employee benefits.

 

Production Highlights

In the first three months of 2014,KMG EP produced 3,048 thousand tonnes of crude oil (250kbopd), including the Company’s stakes in Kazgermunai (KGM), CCEL (CCEL) and PetroKazakhstan Inc. (PKI), which is 1% more than inthe same period in2013.

Ozenmunaigas JSC (OMG) produced 1,301 thousand tonnes (106kbopd), an increase of 5% compared with the same period of 2013. Embamunaigas JSC (EMG) produced 684 thousand tonnes (56kbopd), which is 1% less than in the same period of 2013. The total volume of oil produced at OMG and EMG in the first three months of 2014 was 1,985 thousand tonnes (162kbopd), which is 3% more than the same period for 2013.

The Company’s share in production from KGM, CCEL and PKI for the first three months of 2014amounted to 1,063 thousand tonnes of crude oil (88kbopd), 1% lower than in the same period of 2013. 

Crude oil sales

In the first three months of 2014 the Company’s combined export sales from OMG and EMG were 1,459 thousand tonnes (117kbopd), or 74% of the total sales volume from core assets. Domestic sales amounted to 519 thousand tonnes (42kbopd), or 26% of total sales volume.

The Company’s share in sales from KGM, CCEL and PKI was 1,051 thousand tonnes of crude oil (87kbopd), including 598 thousand tonnes (49kbopd), or 57% supplied to export markets.

Net Profit for the Period

Net profitin the first three months of 2014 was 123.5bn Tenge (US$727m) compared to a net loss of 0.7bn Tenge (US$4m) in the same period of 2013. In 1Q 2014 the Company recognized a foreign exchange gain of 108bn Tenge (US$637m) as a result of the Tenge devaluation in February 2014.In the first three months of 2014 KMG EPmade an impairment charge of 27bn Tenge(US$162m)of the recoverable amount of JSC “Ozenmunaigas”. 

Revenues

The Company’s revenuesin the first three months of 2014were 220.8bn Tenge (US$1,301m), a 9% increase compared to the same period of 2013. This was mainly due to an increase in the average Tenge-US Dollar exchange rate by 13% as a result of Tenge devaluation in February 2014, and an increase of the average domestic sales price from 40,000Tenge per tonne in 1Q2013 to 48,000Tenge per tonne in 1Q2014. 

Taxes other than on Income

Taxes, other than on income,in the first three months of 2014 were 80.3bn Tenge (US$473m), some5% higher than the same period in2013, largely because export customs duty was US$60 per tonneas opposed to US$40 per tonnein the first quarter of 2013 and becausethe average Tenge-US Dollar exchange rate was13% higher as a result of Tenge devaluation in February 2014.Export customs duty was raised from US$60 to US$80 per tonne,effective 1 April 2014. 

Production Expenses

Production expenses in the first three months of 2014were 43.8bn Tenge (US$258m), which is 2% higher than in the same period of 2013mainly due to higher expenses for employee benefits.

Expenses for employee benefits in the first three months of 2014 increased by 12% compared tothe same period of 2013,largely due to an indexation of salary for production personnel by 7% in  January 2014, and the introduction of mandatory professional pension contributions for production employees, fixed at 5% of monthly income.

As previously announced, the employee benefits expenses will increase further due to the implementation of a Unified System of Wagesof production employees and a 10% increase of wagesrelated to the devaluation of the Tenge from 1 April 2014 onwards. 

Selling, General and Administrative Expenses

Selling, general and administrative expenses in the first three months of 2014 were 22bn Tenge (US$131m), which is 1% higher than in the same period of 2013, largely due to an increase in transportation expenses, which was offset by a decline in fines and penalties.  Transportation costs increased by 7% due to the increase of domestic tariffs from 1 January 2014,higher transportation expenses on the CPC routeresulting from the transportation of larger volumes and the increase in the average Tenge - US Dollar exchange rate, as the CPC tariff is denominated inUS Dollars. 

Impairment Charge

In the first quarter of 2014 the management of the Company has updated its formal assessment of the recoverable amount of JSC “Ozenmunaigas”. As a result,a 27bn Tenge (US$162m) impairment charge was made. The impairment charge relates to an increase in employee benefits and an increase in export customs duty from US$60 to US$80 per tonne effective 1 April 2014. 

ForeignExchangeGain

In the first quarter of 2014 a foreign exchange gain of 108bn Tenge (US$637m) resulted from the 19% Tenge devaluation in February 2014.

On 11 February 2014, the National Bank of Kazakhstan (NBK) made a decision to abandon its support of the Tenge, reducing foreign exchange interventions and efforts to control the exchange rate of the Tenge. To prevent destabilisation of the financial markets and the economy as a whole, NBK established a Tenge-US Dollar fluctuation band at 185 Tenge per US Dollar plus or minus 3 Tenge, thus continuing the bank’s policy of smoothing over exchange rate spikes and short-term volatility. 

Cash Flows from Operating Activities

Operating cash flow in the first three months of 2014 was 98bn Tenge (US$579m) compared with 30bn Tenge (US$200m)in the corresponding period of 2013, largely due to a foreign exchange gain seen in 1Q 2014. 

Capex

Capital expenditures[2]in the first three months of 2014 were 23bn Tenge (US$134m), whichis 3% higherthan in the same period of 2013. 

Cash distribution to stockholders

On 18 March 2014 the Board of Directors of KMG EP recommended a dividend for 2013 financial year of 1,976Tengeper ordinary and preferred share which is equivalent to about 135 billion Tenge[3] (approximately US$730 million[4]). This proposal will be voted upon at the AGM. 

Cash and Debt

Cash and cash equivalents as at 31 March 2014amounted to 283bn Tenge (US$1.6bn) compared to 119bn Tenge (US$0.8bn) as at 31 December 2013.

Other financial assets as at 31 March 2014 were 481bn Tenge (US$2.6bn) compared to 504bn Tenge (US$3.3bn) as at 31 December 2013.

As at 31 March 2014,86% of cash and financial assetswere denominated in US Dollars and 14% were denominated in Tenge and other foreign currencies. Finance income accrued on cash,financial,and other assetsin the first three months of 2014 was 5.2bn Tenge (US$31m).

Borrowings as at 31 March 2014were 7.9bn Tenge (US$43m),compared to 6.8bn Tenge (USD$44m) as at31 December 2013.

The net cash position[5]as at 31 March 2014 amounted to 756bn Tenge (US$4.2bn) compared to616bn Tenge (US$4.0bn) as at 31 December 2013.

Income from associates and joint ventures

In the first three months of 2014, KMG EP’s share of results of associates and joint ventures was 16bn Tenge (US$95m) compared with 21bn Tenge (US$137m) in the same period of 2013. 

Kazgermunai

In the first three months of 2014, KMG EP recognised 10.5bn Tenge (US$62m) of income from its share in KGM. This amount represents 11.5bn Tenge (US$68m) corresponding to 50% of KGM’s net profit net of the 0.9bn Tenge (US$5m) effect of amortization of the fair value of licenses and the related deferred tax.

KGM’s net profit in the first three months of 2014 declined by 27% compared with the same period of 2013. This wasmainly due to lower export volumes with corresponding volumes reallocated to the domestic market, and an increase in the export customs duty from US$40 to US$60 per tonne from April 2013.

On 25 April 2014, the Company received US$100m as dividends from KGM in accordance with its ownership interest (50% share in KGM).

 

PetroKazakhstan Inc.

In the first three months of 2014,KMG EP recognised 8.0bnTenge (US$47m) of income from its share inPKI. This amount represents 9.2bn Tenge (US$54m) corresponding to 33% of PKI’s net profit net of the 1.2bn Tenge (US$7m) effect of amortization of the fair value of the licenses.

In the first three months of 2014,PKI’s net profit declined by 27% compared with the same period of 2013. The decline is primarily due to lower export volumes with corresponding volumes reallocated to the domestic market, and an increase in export customs duty from US$40 to US$60 per tonne from April 2013. 

CCEL

As of 31 March 2014 the Company had 21.1bn Tenge (US$116m) as a receivable from CCEL, a jointly controlled entity with CITIC Resources Holdings Limited. The Company has accrued 0.7bnTenge (US$4m) of interest income in the first three months of 2014 related to the US$26.87m annual priority return from CCEL. 

Tax and environmental audits

As at 31 March2014 the Company had several claims related to tax and environmental matters.More detailed information is provided in the consolidated financial statements for the three months ended 31 March 2014.

Tax audit for 2006-2008.During 2013-2014 the tax authorities’ assessments of additional taxes payable werereduced from 16.9bn Tenge (US$100m) to 12.2bn Tenge (US$72m).As at 31 March 2014 existing tax provisions amounted to 14.8bn Tenge (US$87m).

PetroKazakhstanKumkolResources JSC (PKKR) tax audit.As a result of the comprehensive tax auditfor 2009-2012 of PKKR (100% subsidiary of PKI Inc.) the Tax Department concluded that there wereadditional taxes payable of 10.0bnTenge (US$54m). PKKR disagreed with the tax audit results andplan to file an appeal to the Tax Committee of the Ministry of Finance. No provision has been accrued for this matter as at March 31, 2014.

PKKR continues appealing a notification for environmental emissionsfor the total amount (including fines and penalties) of 19.4bn Tenge (US$105m). On 12 February 2014, the Tax Committee of the Ministry of Finance made a decision in favour of Kyzylorda Regional Tax Department. PKKR disagreed with the decision of the Tax Committee and on 20 February2014 filed a claim to the Interregional Kyzylorda Economic Court.

Ozenmunaigasenvironmental audit 2011-2012.In February 2014 the Cassation Judicial Panelof the Mangystau Regional Court has fully cancelled a 59.3bn Tenge (US$321m) fine for environmental damagesbut there remains the remote possibility that the Department of Ecology will file an appeal to the Supreme Court. No provision has been accrued for this claim as at 31 March 2014.

Ozenmunaigasenvironmental audit 2012-2013.In 2014 JSC “Ozenmunaigas” (OMG)has received a notification to pay a fine of 212.6bn Tenge (US$1,249m) and an administrative fine for environmental damage of 327.9bn Tenge (US$1,926m)caused by the disposal of excessive waste to the environment at 11 waste collection pointsfrom the Department of Ecology of the Mangystau Region.

As of to date there is no avenue for appeal from the Department of Ecology of Mangystau Regionon 212.6bn Tenge(US$1,249m) with the remote possibility that the Court's ruling can be revisited by the Prosecutor's office. In April 2014, the Court decision on the 327.9bn Tenge (US$1,926m)fine upheld in favour of OMG by the Judicial Panel of Appeals of the Mangystau Regional Court.No provision has been accrued for this matter as at March 31, 2014.

Embamunaigas gas flaring. The Company is currently in the process of appealing a notificationfrom the Department of Ecology of Atyrau Regionin the amount of 37.2bn Tenge (US$201m) in fines for environmental damage caused by violations of ecology law to the General Prosecutor’s office of RK and the Specialized Interregional EconomicCourt of Atyrau Region.No provision has been made for this claim as at 31 March 2014.

The condensed consolidated interim financial statements for the three months ended March 31, 2014, the notes thereto, and the operating and financial review for the period is available on the Company’s website (www.kmgep.kz).

 APPENDIX

Consolidated Interim Statement of Comprehensive Income (unaudited)

Tengemillion

 

Three months ended March 31,

 

2014

2013

 

 

 

Revenue

220,824

202,185

Share of results of associate and joint ventures

16,160

20,700

Finance income

5,236

5,813

Total revenue and other income

242,220

228,698

 

 

 

Production expenses

(43,793)

(42,801)

Selling, general and administrative expenses

(22,244)

(22,058)

Exploration expenses

(258)

(6,620)

Depreciation, depletion and amortization

(15,056)

(12,400)

Taxes other than on income

(80,280)

(76,239)

Impairment of property, plant and equipment

(27,448)

(57,164)

Loss on disposal of property, plant and equipment

(223)

(656)

Finance costs

(806)

(1,954)

Foreign exchange gain, net

108,113

876

Profit before tax

160,225

9,682

Income tax expense

(36,767)

(10,342)

Profit / (loss) for the period

123,458

(660)

 

 

 

Exchange difference on translating foreign operations

52,334

160

Other comprehensive incomefor the period to be reclassified to profit and loss in subsequent periods

52,334

160

Total comprehensive income /(loss) for the period, net of tax

175,792

(500)

EARNINGS / (LOSS)  PER SHARE – Tenge thousands

 

 

Basic and diluted

1.81

(0.01)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Interim Statement of Financial Position

Tengemillion

 

March 31, 2014

December 31, 2013

 

Unaudited

Audited

ASSETS

 

 

Non-current assets

 

 

Property, plant and equipment

330,540

350,675

Intangible assets

11,701

12,064

Investments in joint ventures

110,255

88,967

Investments in associate

131,769

107,095

Receivable from a jointly controlled entity

16,352

13,222

Loans receivable from joint ventures

22,555

18,402

Other financial assets

18,879

21,711

Deferred tax asset

38,071

34,356

Other assets

18,660

19,542

Total non-current assets

698,782

666,034

Current assets

 

 

Inventories

25,147

27,422

Income taxes prepaid

35,032

43,684

Taxes prepaid and VAT recoverable

74,871

72,169

Mineral extraction tax prepaid

1,967

1,967

Prepaid expenses

22,290

22,067

Trade and other receivables

145,970

153,219

Receivable from a jointly controlled entity

4,704

3,969

Loans receivable from joint ventures

5,355

3,933

Other financial assets

462,306

482,006

Cash and cash equivalents

282,962

119,036

Total current assets

1,060,604

929,472

Total assets

1,759,386

1,595,506

EQUITY

 

 

Share capital

162,969

162,969

Other capital reserves

2,482

2,482

Retained earnings

1,309,273

1,185,815

Other components of equity

74,843

22,509

Total equity

1,549,567

1,373,775

LIABILITIES

 

 

Non-current liabilities

 

 

Borrowings

4,896

4,291

Deferred tax liability

881

881

Provisions

34,968

34,203

Total non-current liabilities

40,745

39,375

Current liabilities

 

 

Borrowings

2,994

2,503

Provisions

20,126

20,067

Income taxes payable

34,350

29,341

Mineral extraction tax and rent tax payable

60,895

61,956

Trade and other payables

50,709

68,489

Total current liabilities

169,074

182,356

Total liabilities

209,819

221,731

Total liabilities and equity

1,759,386

1,595,506

 

 

Consolidated Interim Statement of Cash Flows (unaudited)

Tengemillion

 

Three months ended March 31,

 

2014

2013

Cash flows from operating activities

 

 

Profit before tax

160,225

9,682

Adjustments to add / (deduct) non-cash items

 

 

Depreciation, depletion and amortisation

15,056

12,400

Share of result of associate and joint ventures

(16,160)

(20,700)

Loss on disposal of property, plant and equipment (PPE)

223

656

Impairment of  PPE

27,448

57,168

Dry well expense on exploration and evaluation assets

46

6,215

Recognition of share-based payments

54

Forfeiture of share-based payments

(8)

Unrealised foreign exchange gain on non-operating activities 

(57,640)

(285)

Other non-cash income and expense

(136)

840

Add finance costs

806

1,954

Deduct finance income

(5,236)

(5,813)

Working capital adjustments

 

 

Change in other assets

14

230

Change in inventories

2,665

7,089

Change in taxes prepaid and VAT recoverable

(2,702)

(3,799)

Change in prepaid expenses

(225)

205

Change in trade and other receivables

7,249

(14,250)

Change in trade and other payables

(6,376)

(14,540)

Change in mineral extraction and rent tax payable

(1,061)

10,163

Change in provisions

419

6,432

Income tax paid

(26,278)

(23,519)

Net cash generated from operating activities

98,337

30,174

Cash flows from investing activities

 

 

Purchases of PPE

(33,017)

(34,279)

Proceeds from sale of PPE

247

10

Purchases of intangible assets

(515)

(2,634)

Loans provided to joint ventures

(519)

(2,711)

Sale of  financial assets heldtomaturity

97,077

26,111

Interest received

2,635

2,692

Net cash generated from / (used) in investing activities

65,908

(10,811)

Cash flows from financing activities

 

 

Repayment of borrowings

(267)

(267)

Dividends paid to Company’s shareholders

(29)

(1)

Net cash used in financing activities

(296)

(268)

Net change in cash and cash equivalents

163,949

19,095

Cash and cash equivalents at beginning of the period

119,036

154,705

Exchange (losses) / gain on cash and cash equivalents

(23)

16

Cash and cash equivalents at the end of the period

282,962

173,816

 

 

 

 

The following tables show the Company’s realised sales prices adjusted for oil transportation and other expenses for the three months ended March 31, 2014.

 

1Q14

 

 

 

(US$/bbl)

UAS

CPC

Domestic

Benchmark end-market quote

 108,2

 108,2

 -  

Quality bank

 -  

 (6,9)

 -  

Price differential

(3,2)

(1,7)

 -  

Realised price

 105,0

99,6

 39,3

Rent tax

 (23,1)

 (21,0)

 -  

Export customs duty

 (8,0)

 (7,3)

 -  

Transportation

 (8,5)

 (7,2)

 (2,1)

Netback

 65,4

64,1

 37,2

Premium of bbl difference

-

8,4

-

Effective netback incl. premium of bbl. difference

65,4

72,5

37,2

 

 

1Q13

 

 

 

(US$/bbl)

UAS

CPC

Domestic

Benchmark end-market quote

 112,6

 112,6

 -  

Quality bank

 -  

 (7,8)

 -  

Price differential

(3,6)

(2,4)

 -  

Realised price

 109,0

 102,4

 37,2

Rent tax

 (24,8)

 (24,8)

 -  

Export customs duty

 (5,50)

 (5,1)

 -  

Transportation

 (9,0)

 (7,6)

 (1,8)

Netback

 69,7

64,9

 35,4

Premium of bbl difference

-

8,4

 

Effective netback incl. premium of bbl. difference

69,7

73,3

35,4

 

Reference information

1Q2013

1Q2014

Average exchange US$/KZT rate

150,67

169,77

End of period US$/KZT rate

150,84

182,04

Coefficient barrels to tonnes for KMG EP crude (production)

7.36

Coefficient barrels to tonnes for KMG EP crude (sales)

7.23

Coefficient barrels to tonnes for Kazgermunai crude

7.70

Coefficient barrels to tonnes for CCEL crude

6.68

Coefficient barrels to tonnes for PKI crude

7.75

 Notes to editors

KMG EP is among the top three Kazakh oil and gas producers. The overall production in 2013 was 12.4 million tonnes (an average of 251kbopd) of crude oil, including the Company’s share in Kazgermunai, CCEL and PKI. The Company’s total consolidated volume of proved and probable reserves including shares in the associates, as at the end of 2013 was 200 million tonnes (1.5 bnbbl), out of which 148.8 million tonnes (1.1 bnbbl) relates to Ozenmunaigas, Embamunaigas, and UOG (Rozhkovskoye field, Fyodorovskiy block). The Company’s shares are listed on the Kazakhstan Stock Exchange and the GDRs are listed on The London Stock Exchange. The Company raised over US$2bn in its IPO in September 2006. The International rating agency Standard & Poor's (S&P) confirmed KMG EP’s “BBB-” corporate credit rating in May 2013. 

For further details please contact us at:

KMG EP. Investor Relations (+7 7172 97 5433)

Asel Kaliyeva

e-mail: ir@kmgep.kz 

KMG EP. Public Relations (+7 7172 97 79 08)

Elena Pak

e-mail: pr@kmgep.kz 

Brunswick Group (+44 207 404 5959)

AndrewMitchell

e-mail: KMGEP@brunswickgroup.com

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.


Amounts shown in US dollars (“US$” or “$”) have been translated solely for the convenience of the reader at the average rate over the applicable period for information derived from the consolidated statements of income and consolidated statements of cash flows and the end of the period rate for information derived from the consolidated balance sheets (average rates for 1Q2014 and 1Q2013 was 169.77 and 150.67Tenge/US$, respectively; period-end rates at March 31, 2014 and December 31, 2013 was 182.04 and 153.61Tenge/US$, respectively).

 The Company revised its approach to calculation of Capex. Starting from 4Q 2013 the Capex represents amount of additions to property, plant and equipment. Formerly it represented purchases of property, plant and equipment and intangible assets according to the Cash Flow Statement.

Calculated based on number of shares outstanding as at March 18, 2014

 Translated at the rate of 185 KZT/USD (a midpoint of the current indicative range established by the National Bank of Kazakhstan)

 Cash, cash equivalents and other financial assets less borrowings

JSC NC KazMunayGas

Astana, 30 April 2014. JSC KazMunaiGas Exploration Production (“KMG EP” or “the Company”) announces condensed consolidated interim financial statements for the three months ended 31 March 2014.

·         Revenue in the first three months of 2014 was 220.8bn Tenge (US$1,301m)[1], a 9% increase compared with the same period for2013.The average price of Brent in the first three months of 2014 was 4% lower than in the same period of 2013, down from US$112.6 per barrel to US$108.2 per barrel.

·         Net profit forthe first three months of 2014 was 123.5bn Tenge (US$727m) largely due to a before taxforeign exchange gain of 108bn Tenge (US$635m) as a result of theTenge devaluation in February 2014.

·         Production expenses in the first three months of 2014 were 43.8bn Tenge (US$258m), which is 2% higher compared with the same period of 2013 mainly due to increased expenses for employee benefits.

 

Production Highlights

In the first three months of 2014,KMG EP produced 3,048 thousand tonnes of crude oil (250kbopd), including the Company’s stakes in Kazgermunai (KGM), CCEL (CCEL) and PetroKazakhstan Inc. (PKI), which is 1% more than inthe same period in2013.

Ozenmunaigas JSC (OMG) produced 1,301 thousand tonnes (106kbopd), an increase of 5% compared with the same period of 2013. Embamunaigas JSC (EMG) produced 684 thousand tonnes (56kbopd), which is 1% less than in the same period of 2013. The total volume of oil produced at OMG and EMG in the first three months of 2014 was 1,985 thousand tonnes (162kbopd), which is 3% more than the same period for 2013.

The Company’s share in production from KGM, CCEL and PKI for the first three months of 2014amounted to 1,063 thousand tonnes of crude oil (88kbopd), 1% lower than in the same period of 2013. 

Crude oil sales

In the first three months of 2014 the Company’s combined export sales from OMG and EMG were 1,459 thousand tonnes (117kbopd), or 74% of the total sales volume from core assets. Domestic sales amounted to 519 thousand tonnes (42kbopd), or 26% of total sales volume.

The Company’s share in sales from KGM, CCEL and PKI was 1,051 thousand tonnes of crude oil (87kbopd), including 598 thousand tonnes (49kbopd), or 57% supplied to export markets.

Net Profit for the Period

Net profitin the first three months of 2014 was 123.5bn Tenge (US$727m) compared to a net loss of 0.7bn Tenge (US$4m) in the same period of 2013. In 1Q 2014 the Company recognized a foreign exchange gain of 108bn Tenge (US$637m) as a result of the Tenge devaluation in February 2014.In the first three months of 2014 KMG EPmade an impairment charge of 27bn Tenge(US$162m)of the recoverable amount of JSC “Ozenmunaigas”. 

Revenues

The Company’s revenuesin the first three months of 2014were 220.8bn Tenge (US$1,301m), a 9% increase compared to the same period of 2013. This was mainly due to an increase in the average Tenge-US Dollar exchange rate by 13% as a result of Tenge devaluation in February 2014, and an increase of the average domestic sales price from 40,000Tenge per tonne in 1Q2013 to 48,000Tenge per tonne in 1Q2014. 

Taxes other than on Income

Taxes, other than on income,in the first three months of 2014 were 80.3bn Tenge (US$473m), some5% higher than the same period in2013, largely because export customs duty was US$60 per tonneas opposed to US$40 per tonnein the first quarter of 2013 and becausethe average Tenge-US Dollar exchange rate was13% higher as a result of Tenge devaluation in February 2014.Export customs duty was raised from US$60 to US$80 per tonne,effective 1 April 2014. 

Production Expenses

Production expenses in the first three months of 2014were 43.8bn Tenge (US$258m), which is 2% higher than in the same period of 2013mainly due to higher expenses for employee benefits.

Expenses for employee benefits in the first three months of 2014 increased by 12% compared tothe same period of 2013,largely due to an indexation of salary for production personnel by 7% in  January 2014, and the introduction of mandatory professional pension contributions for production employees, fixed at 5% of monthly income.

As previously announced, the employee benefits expenses will increase further due to the implementation of a Unified System of Wagesof production employees and a 10% increase of wagesrelated to the devaluation of the Tenge from 1 April 2014 onwards. 

Selling, General and Administrative Expenses

Selling, general and administrative expenses in the first three months of 2014 were 22bn Tenge (US$131m), which is 1% higher than in the same period of 2013, largely due to an increase in transportation expenses, which was offset by a decline in fines and penalties.  Transportation costs increased by 7% due to the increase of domestic tariffs from 1 January 2014,higher transportation expenses on the CPC routeresulting from the transportation of larger volumes and the increase in the average Tenge - US Dollar exchange rate, as the CPC tariff is denominated inUS Dollars. 

Impairment Charge

In the first quarter of 2014 the management of the Company has updated its formal assessment of the recoverable amount of JSC “Ozenmunaigas”. As a result,a 27bn Tenge (US$162m) impairment charge was made. The impairment charge relates to an increase in employee benefits and an increase in export customs duty from US$60 to US$80 per tonne effective 1 April 2014. 

ForeignExchangeGain

In the first quarter of 2014 a foreign exchange gain of 108bn Tenge (US$637m) resulted from the 19% Tenge devaluation in February 2014.

On 11 February 2014, the National Bank of Kazakhstan (NBK) made a decision to abandon its support of the Tenge, reducing foreign exchange interventions and efforts to control the exchange rate of the Tenge. To prevent destabilisation of the financial markets and the economy as a whole, NBK established a Tenge-US Dollar fluctuation band at 185 Tenge per US Dollar plus or minus 3 Tenge, thus continuing the bank’s policy of smoothing over exchange rate spikes and short-term volatility. 

Cash Flows from Operating Activities

Operating cash flow in the first three months of 2014 was 98bn Tenge (US$579m) compared with 30bn Tenge (US$200m)in the corresponding period of 2013, largely due to a foreign exchange gain seen in 1Q 2014. 

Capex

Capital expenditures[2]in the first three months of 2014 were 23bn Tenge (US$134m), whichis 3% higherthan in the same period of 2013. 

Cash distribution to stockholders

On 18 March 2014 the Board of Directors of KMG EP recommended a dividend for 2013 financial year of 1,976Tengeper ordinary and preferred share which is equivalent to about 135 billion Tenge[3] (approximately US$730 million[4]). This proposal will be voted upon at the AGM. 

Cash and Debt

Cash and cash equivalents as at 31 March 2014amounted to 283bn Tenge (US$1.6bn) compared to 119bn Tenge (US$0.8bn) as at 31 December 2013.

Other financial assets as at 31 March 2014 were 481bn Tenge (US$2.6bn) compared to 504bn Tenge (US$3.3bn) as at 31 December 2013.

As at 31 March 2014,86% of cash and financial assetswere denominated in US Dollars and 14% were denominated in Tenge and other foreign currencies. Finance income accrued on cash,financial,and other assetsin the first three months of 2014 was 5.2bn Tenge (US$31m).

Borrowings as at 31 March 2014were 7.9bn Tenge (US$43m),compared to 6.8bn Tenge (USD$44m) as at31 December 2013.

The net cash position[5]as at 31 March 2014 amounted to 756bn Tenge (US$4.2bn) compared to616bn Tenge (US$4.0bn) as at 31 December 2013.

Income from associates and joint ventures

In the first three months of 2014, KMG EP’s share of results of associates and joint ventures was 16bn Tenge (US$95m) compared with 21bn Tenge (US$137m) in the same period of 2013. 

Kazgermunai

In the first three months of 2014, KMG EP recognised 10.5bn Tenge (US$62m) of income from its share in KGM. This amount represents 11.5bn Tenge (US$68m) corresponding to 50% of KGM’s net profit net of the 0.9bn Tenge (US$5m) effect of amortization of the fair value of licenses and the related deferred tax.

KGM’s net profit in the first three months of 2014 declined by 27% compared with the same period of 2013. This wasmainly due to lower export volumes with corresponding volumes reallocated to the domestic market, and an increase in the export customs duty from US$40 to US$60 per tonne from April 2013.

On 25 April 2014, the Company received US$100m as dividends from KGM in accordance with its ownership interest (50% share in KGM).

 

PetroKazakhstan Inc.

In the first three months of 2014,KMG EP recognised 8.0bnTenge (US$47m) of income from its share inPKI. This amount represents 9.2bn Tenge (US$54m) corresponding to 33% of PKI’s net profit net of the 1.2bn Tenge (US$7m) effect of amortization of the fair value of the licenses.

In the first three months of 2014,PKI’s net profit declined by 27% compared with the same period of 2013. The decline is primarily due to lower export volumes with corresponding volumes reallocated to the domestic market, and an increase in export customs duty from US$40 to US$60 per tonne from April 2013. 

CCEL

As of 31 March 2014 the Company had 21.1bn Tenge (US$116m) as a receivable from CCEL, a jointly controlled entity with CITIC Resources Holdings Limited. The Company has accrued 0.7bnTenge (US$4m) of interest income in the first three months of 2014 related to the US$26.87m annual priority return from CCEL. 

Tax and environmental audits

As at 31 March2014 the Company had several claims related to tax and environmental matters.More detailed information is provided in the consolidated financial statements for the three months ended 31 March 2014.

Tax audit for 2006-2008.During 2013-2014 the tax authorities’ assessments of additional taxes payable werereduced from 16.9bn Tenge (US$100m) to 12.2bn Tenge (US$72m).As at 31 March 2014 existing tax provisions amounted to 14.8bn Tenge (US$87m).

PetroKazakhstanKumkolResources JSC (PKKR) tax audit.As a result of the comprehensive tax auditfor 2009-2012 of PKKR (100% subsidiary of PKI Inc.) the Tax Department concluded that there wereadditional taxes payable of 10.0bnTenge (US$54m). PKKR disagreed with the tax audit results andplan to file an appeal to the Tax Committee of the Ministry of Finance. No provision has been accrued for this matter as at March 31, 2014.

PKKR continues appealing a notification for environmental emissionsfor the total amount (including fines and penalties) of 19.4bn Tenge (US$105m). On 12 February 2014, the Tax Committee of the Ministry of Finance made a decision in favour of Kyzylorda Regional Tax Department. PKKR disagreed with the decision of the Tax Committee and on 20 February2014 filed a claim to the Interregional Kyzylorda Economic Court.

Ozenmunaigasenvironmental audit 2011-2012.In February 2014 the Cassation Judicial Panelof the Mangystau Regional Court has fully cancelled a 59.3bn Tenge (US$321m) fine for environmental damagesbut there remains the remote possibility that the Department of Ecology will file an appeal to the Supreme Court. No provision has been accrued for this claim as at 31 March 2014.

Ozenmunaigasenvironmental audit 2012-2013.In 2014 JSC “Ozenmunaigas” (OMG)has received a notification to pay a fine of 212.6bn Tenge (US$1,249m) and an administrative fine for environmental damage of 327.9bn Tenge (US$1,926m)caused by the disposal of excessive waste to the environment at 11 waste collection pointsfrom the Department of Ecology of the Mangystau Region.

As of to date there is no avenue for appeal from the Department of Ecology of Mangystau Regionon 212.6bn Tenge(US$1,249m) with the remote possibility that the Court's ruling can be revisited by the Prosecutor's office. In April 2014, the Court decision on the 327.9bn Tenge (US$1,926m)fine upheld in favour of OMG by the Judicial Panel of Appeals of the Mangystau Regional Court.No provision has been accrued for this matter as at March 31, 2014.

Embamunaigas gas flaring. The Company is currently in the process of appealing a notificationfrom the Department of Ecology of Atyrau Regionin the amount of 37.2bn Tenge (US$201m) in fines for environmental damage caused by violations of ecology law to the General Prosecutor’s office of RK and the Specialized Interregional EconomicCourt of Atyrau Region.No provision has been made for this claim as at 31 March 2014.

The condensed consolidated interim financial statements for the three months ended March 31, 2014, the notes thereto, and the operating and financial review for the period is available on the Company’s website (www.kmgep.kz).

 APPENDIX

Consolidated Interim Statement of Comprehensive Income (unaudited)

Tengemillion

 

Three months ended March 31,

 

2014

2013

 

 

 

Revenue

220,824

202,185

Share of results of associate and joint ventures

16,160

20,700

Finance income

5,236

5,813

Total revenue and other income

242,220

228,698

 

 

 

Production expenses

(43,793)

(42,801)

Selling, general and administrative expenses

(22,244)

(22,058)

Exploration expenses

(258)

(6,620)

Depreciation, depletion and amortization

(15,056)

(12,400)

Taxes other than on income

(80,280)

(76,239)

Impairment of property, plant and equipment

(27,448)

(57,164)

Loss on disposal of property, plant and equipment

(223)

(656)

Finance costs

(806)

(1,954)

Foreign exchange gain, net

108,113

876

Profit before tax

160,225

9,682

Income tax expense

(36,767)

(10,342)

Profit / (loss) for the period

123,458

(660)

 

 

 

Exchange difference on translating foreign operations

52,334

160

Other comprehensive incomefor the period to be reclassified to profit and loss in subsequent periods

52,334

160

Total comprehensive income /(loss) for the period, net of tax

175,792

(500)

EARNINGS / (LOSS)  PER SHARE – Tenge thousands

 

 

Basic and diluted

1.81

(0.01)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Interim Statement of Financial Position

Tengemillion

 

March 31, 2014

December 31, 2013

 

Unaudited

Audited

ASSETS

 

 

Non-current assets

 

 

Property, plant and equipment

330,540

350,675

Intangible assets

11,701

12,064

Investments in joint ventures

110,255

88,967

Investments in associate

131,769

107,095

Receivable from a jointly controlled entity

16,352

13,222

Loans receivable from joint ventures

22,555

18,402

Other financial assets

18,879

21,711

Deferred tax asset

38,071

34,356

Other assets

18,660

19,542

Total non-current assets

698,782

666,034

Current assets

 

 

Inventories

25,147

27,422

Income taxes prepaid

35,032

43,684

Taxes prepaid and VAT recoverable

74,871

72,169

Mineral extraction tax prepaid

1,967

1,967

Prepaid expenses

22,290

22,067

Trade and other receivables

145,970

153,219

Receivable from a jointly controlled entity

4,704

3,969

Loans receivable from joint ventures

5,355

3,933

Other financial assets

462,306

482,006

Cash and cash equivalents

282,962

119,036

Total current assets

1,060,604

929,472

Total assets

1,759,386

1,595,506

EQUITY

 

 

Share capital

162,969

162,969

Other capital reserves

2,482

2,482

Retained earnings

1,309,273

1,185,815

Other components of equity

74,843

22,509

Total equity

1,549,567

1,373,775

LIABILITIES

 

 

Non-current liabilities

 

 

Borrowings

4,896

4,291

Deferred tax liability

881

881

Provisions

34,968

34,203

Total non-current liabilities

40,745

39,375

Current liabilities

 

 

Borrowings

2,994

2,503

Provisions

20,126

20,067

Income taxes payable

34,350

29,341

Mineral extraction tax and rent tax payable

60,895

61,956

Trade and other payables

50,709

68,489

Total current liabilities

169,074

182,356

Total liabilities

209,819

221,731

Total liabilities and equity

1,759,386

1,595,506

 

 

Consolidated Interim Statement of Cash Flows (unaudited)

Tengemillion

 

Three months ended March 31,

 

2014

2013

Cash flows from operating activities

 

 

Profit before tax

160,225

9,682

Adjustments to add / (deduct) non-cash items

 

 

Depreciation, depletion and amortisation

15,056

12,400

Share of result of associate and joint ventures

(16,160)

(20,700)

Loss on disposal of property, plant and equipment (PPE)

223

656

Impairment of  PPE

27,448

57,168

Dry well expense on exploration and evaluation assets

46

6,215

Recognition of share-based payments

54

Forfeiture of share-based payments

(8)

Unrealised foreign exchange gain on non-operating activities 

(57,640)

(285)

Other non-cash income and expense

(136)

840

Add finance costs

806

1,954

Deduct finance income

(5,236)

(5,813)

Working capital adjustments

 

 

Change in other assets

14

230

Change in inventories

2,665

7,089

Change in taxes prepaid and VAT recoverable

(2,702)

(3,799)

Change in prepaid expenses

(225)

205

Change in trade and other receivables

7,249

(14,250)

Change in trade and other payables

(6,376)

(14,540)

Change in mineral extraction and rent tax payable

(1,061)

10,163

Change in provisions

419

6,432

Income tax paid

(26,278)

(23,519)

Net cash generated from operating activities

98,337

30,174

Cash flows from investing activities

 

 

Purchases of PPE

(33,017)

(34,279)

Proceeds from sale of PPE

247

10

Purchases of intangible assets

(515)

(2,634)

Loans provided to joint ventures

(519)

(2,711)

Sale of  financial assets heldtomaturity

97,077

26,111

Interest received

2,635

2,692

Net cash generated from / (used) in investing activities

65,908

(10,811)

Cash flows from financing activities

 

 

Repayment of borrowings

(267)

(267)

Dividends paid to Company’s shareholders

(29)

(1)

Net cash used in financing activities

(296)

(268)

Net change in cash and cash equivalents

163,949

19,095

Cash and cash equivalents at beginning of the period

119,036

154,705

Exchange (losses) / gain on cash and cash equivalents

(23)

16

Cash and cash equivalents at the end of the period

282,962

173,816

 

 

 

 

The following tables show the Company’s realised sales prices adjusted for oil transportation and other expenses for the three months ended March 31, 2014.

 

1Q14

 

 

 

(US$/bbl)

UAS

CPC

Domestic

Benchmark end-market quote

 108,2

 108,2

 -  

Quality bank

 -  

 (6,9)

 -  

Price differential

(3,2)

(1,7)

 -  

Realised price

 105,0

99,6

 39,3

Rent tax

 (23,1)

 (21,0)

 -  

Export customs duty

 (8,0)

 (7,3)

 -  

Transportation

 (8,5)

 (7,2)

 (2,1)

Netback

 65,4

64,1

 37,2

Premium of bbl difference

-

8,4

-

Effective netback incl. premium of bbl. difference

65,4

72,5

37,2

 

 

1Q13

 

 

 

(US$/bbl)

UAS

CPC

Domestic

Benchmark end-market quote

 112,6

 112,6

 -  

Quality bank

 -  

 (7,8)

 -  

Price differential

(3,6)

(2,4)

 -  

Realised price

 109,0

 102,4

 37,2

Rent tax

 (24,8)

 (24,8)

 -  

Export customs duty

 (5,50)

 (5,1)

 -  

Transportation

 (9,0)

 (7,6)

 (1,8)

Netback

 69,7

64,9

 35,4

Premium of bbl difference

-

8,4

 

Effective netback incl. premium of bbl. difference

69,7

73,3

35,4

 

Reference information

1Q2013

1Q2014

Average exchange US$/KZT rate

150,67

169,77

End of period US$/KZT rate

150,84

182,04

Coefficient barrels to tonnes for KMG EP crude (production)

7.36

Coefficient barrels to tonnes for KMG EP crude (sales)

7.23

Coefficient barrels to tonnes for Kazgermunai crude

7.70

Coefficient barrels to tonnes for CCEL crude

6.68

Coefficient barrels to tonnes for PKI crude

7.75

 Notes to editors

KMG EP is among the top three Kazakh oil and gas producers. The overall production in 2013 was 12.4 million tonnes (an average of 251kbopd) of crude oil, including the Company’s share in Kazgermunai, CCEL and PKI. The Company’s total consolidated volume of proved and probable reserves including shares in the associates, as at the end of 2013 was 200 million tonnes (1.5 bnbbl), out of which 148.8 million tonnes (1.1 bnbbl) relates to Ozenmunaigas, Embamunaigas, and UOG (Rozhkovskoye field, Fyodorovskiy block). The Company’s shares are listed on the Kazakhstan Stock Exchange and the GDRs are listed on The London Stock Exchange. The Company raised over US$2bn in its IPO in September 2006. The International rating agency Standard & Poor's (S&P) confirmed KMG EP’s “BBB-” corporate credit rating in May 2013. 

For further details please contact us at:

KMG EP. Investor Relations (+7 7172 97 5433)

Asel Kaliyeva

e-mail: ir@kmgep.kz 

KMG EP. Public Relations (+7 7172 97 79 08)

Elena Pak

e-mail: pr@kmgep.kz 

Brunswick Group (+44 207 404 5959)

AndrewMitchell

e-mail: KMGEP@brunswickgroup.com

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.


Amounts shown in US dollars (“US$” or “$”) have been translated solely for the convenience of the reader at the average rate over the applicable period for information derived from the consolidated statements of income and consolidated statements of cash flows and the end of the period rate for information derived from the consolidated balance sheets (average rates for 1Q2014 and 1Q2013 was 169.77 and 150.67Tenge/US$, respectively; period-end rates at March 31, 2014 and December 31, 2013 was 182.04 and 153.61Tenge/US$, respectively).

 The Company revised its approach to calculation of Capex. Starting from 4Q 2013 the Capex represents amount of additions to property, plant and equipment. Formerly it represented purchases of property, plant and equipment and intangible assets according to the Cash Flow Statement.

Calculated based on number of shares outstanding as at March 18, 2014

 Translated at the rate of 185 KZT/USD (a midpoint of the current indicative range established by the National Bank of Kazakhstan)

 Cash, cash equivalents and other financial assets less borrowings

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