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JSC KazMunaiGas Exploration Production 1H 2015 Financial Results

14.08.2015

JSC KazMunaiGas Exploration Production (“KMG EP” or “the Company”) announces condensed consolidated interim financial statements for the six months ended 30 June 2015.

  • Net profit for the first six months of 2015 was 2.9bn Tenge (US$16m[1]) compared with 210bn Tenge (US$1,193m) in the same period of 2014. A decline in net profit was largely due to lower revenue and devaluation effect in 2014.
  • Revenue in the first six months of 2015 was 241bn Tenge (US$1,302m), which is 48% lower compared with the same period of 2014. The lower revenue was the result of a 47% decline in Brent price from US$108.9 per bbl in 1H2014 to US$57.8 per bbl in 1H2015 and a 52% decline in average domestic realized price from 48 th. Tenge per tonne in 1H2014 to 23 th. Tenge per tonne in 1H2015.
  • Production expenses in the first six months of 2015 were 109bn Tenge (US$589m), a 23% increase compared with the same period of 2014 mainly due to increased employee benefit expenses of production personnel. Company agreed to implement a Unified System of Wages of employees from 1 April 2014 onwards and to increase wages by 10% in connection with the devaluation of the Tenge in February 2014.

Production Highlights

KMG EP, including its stakes in Kazgermunai (KGM), CCEL (CCEL) and PetroKazakhstan Inc. (PKI), produced 6,122 thousand tonnes of crude oil (250 kbopd) in the first six months of 2015, an 0.3% increase over the same period of 2014.

Ozenmunaigas JSC (OMG) production increased by 4% to 2,722 thousand tonnes (111 kbopd) in comparison with the same period of 2014, largely due to conducting geological and technical works to improve well efficiency. Embamunaigas JSC (EMG) produced 1,385 thousand tonnes (56 kbopd), slightly less than in the same period of 2014. The total volume of oil OMG and EMG produced was 4,107 thousand tonnes (167 kbopd), a 2% increase compared with the same period of 2014.

The Company’s share in production from CCEL, KGM and PKI for the first six months of 2015 amounted to 2,015 thousand tonnes (83 kbopd) which is 3% less than in the same period in 2014, due to the natural decline of production by 10% in PKI, in line with the production plan for 2015.


Crude oil and oil products sales

In the first six months of 2015, the Company’s combined export sales from OMG and EMG were 2,365 thousand tonnes (94 kbopd) or 57% of the total oil sales volumes. Domestic sales amounted to 1,231 thousand tonnes (49 kbopd) of which 1,101 thousand tonnes of oil (44 kbopd) were supplied to the Atyrau Refinery from OMG and EMG; 96 thousand tonnes of oil (4 kbopd) were supplied to the Pavlodar Refinery from EMG and 34 thousand tonnes (1.4 kbopd) of oil products were sold after processing. Additionally, 566 thousand tonnes of crude oil (23 kbopd) were shipped to Russia to fulfill obligations under the counter-oil supply agreement between the Government of Kazakhstan and the Russian Government.

The Company’s share in the sales from CCEL, KGM and PKI was 1,977 thousand tonnes of crude oil (81 kbopd), including 889 thousand tonnes (36 kbopd) shipped to export, which is 45% of the total sales volumes. The domestic sales volume was 1,019 thousand tonnes (43 kbopd) of which 683 thousand tonnes (29 kbopd) were supplied to the Pavlodar Refinery, 225 thousand tonnes (10 kbopd) were supplied to Shymkent Refinery, 39 thousand tonnes (1 kbopd) were supplied to Atyrau Refinery and 72 thousand tonnes (3 kbopd) to Aktau Bitumen Plant. 70 thousand tonnes of crude oil (3 kbopd) were shipped to Russia in order to fulfill obligations under the counter-oil supply agreement between the Government of Kazakhstan and the Russian Government.


Net Profit for the Period

Net profit in the first six months of 2015 was 2.9bn Tenge (US$16m) compared with 210bn Tenge (US$1,193m) in the same period of 2014. A decline in net profit is largely due to lower revenue and lower foreign exchange gain.


Revenue

The Company’s revenue in the first six months of 2015 was 241bn Tenge (US$1,302m), which is 48% lower compared with the same period of 2014. This is due to a 47% decline in Brent price and a 52% decline in average domestic realized price from 48 th. Tenge per tonne in 1H2014 to 23 th. Tenge per tonne in 1H2015. Domestic realized price in 1H2015 was 22.4 th. tenge per tonne at the Atyrau Refinery and 30.0 th. Tenge per tonne at the Pavlodar Refinery.

Starting from 1 July 2015 domestic prices increased to 24.0 th. Tenge per tonne at the Atyrau Refinery and to 32.0 th. Tenge per tonne at the Pavlodar Refinery. But these prices have yet to be approved by independent directors.


Taxes other than on Income

Taxes, other than on income, in the first six months of 2015 were 83bn Tenge (US$446m), which is 54% lower than in the same period of 2014. Decline in rent tax and MET expenses is due to a 47% lower Brent price in 1H2015 compared with the same period of 2014 and lower export volumes. ECD declined largely due to a decrease in export volumes. ECD rate was reduced from US$80 to US$60 per tonne from 19 March 2015. Earlier, in April 2014 the ECD rate was increased from US$60 to US$80 per tonne.


Production Expenses

Production expenses in the first six months of 2015 were 109bn Tenge (US$589m), 23% higher than in the same period of 2014, mainly due to higher employee benefits of production personnel.

Expenses for employee benefits in the first six months of 2015 increased by 34% compared with the same period of 2014. This was largely due to an indexation of salary for production personnel by 7% in January 2015, the introduction of a Unified System of Wages for production employees from April 2014 and a 10% increase in wages related to the devaluation of the Tenge from April 2014 and an increase in production bonuses from 25% to 33% for supporting production personnel from September 2014.


Selling, General and Administrative Expenses

Selling, general and administrative expenses in 1H2015 were 53bn Tenge (US$289m), which is 8% higher than in 1H2014. This was largely due to higher employee benefits and an increase in accruals of fines and penalties partly offset by lower transportation expenses due to lower export volumes. In 1H2015 additional accruals of fines and penalties were made based on the preliminary results of tax audit for 2009-2012.


Cash Flows from Operating Activities

Cash flow from operating activities in the first six months of 2015 was 0.1bn Tenge (US$1m) compared with 149bn Tenge (US$844m) in the same period of 2014 mainly as a result of lower revenue in 1H2015.


Capital expenditure

Capital expenditure in the first six months of 2015 was 56bn Tenge (US$301m), which is 4% less compared with the same period of 2014 mainly due to lower investments in maintenance capex partly offset by increase in drilling activity. In the first six months of 2015, 162 wells were drilled at OMG and EMG compared with 154 wells in 1H2014.

Currently management of the Company is at the final stage of development of optimisation programme. It will cover both operational and financial targets to be achieved in the short-term period.


Cash and Debt

Cash and cash equivalents as at 30 June 2015 amounted to 183bn Tenge (US$1.0bn) compared with 180bn Tenge (US$1.0bn) as at 31 December 2014. Other financial assets as at 30 June 2015 were 526bn Tenge (US$2.8bn) compared with 554bn Tenge (US$3.0bn) as at 31 December 2014.

As at 30 June 2015, 91% of cash and financial assets were denominated in foreign currencies (mainly US$) and 9% were denominated in Tenge. Finance income accrued on cash, financial, and other assets in the first six months of 2015 was 12bn Tenge (US$63m) compared with 11bn Tenge (US$63m) in 1H2014.

Borrowings as at 30 June 2015 were 6.9bn Tenge (US$37m), compared with 7.2bn Tenge (USD$40m) as at 31 December 2014.

The net cash position as at 30 June 2015 amounted to 702bn Tenge (US$3.8bn) compared with 727bn Tenge (US$4.0bn) as at 31 December 2014.


Provision

In the first six months of 2015 the Company accrued tax provision in the amount of 16.7bn Tenge (US$90m), which relates to the preliminary results of complex tax audit for 2009-2012 years. These amounts relate to Corporate Income Tax and Excess Profit Tax in addition to fines and penalties.


Share of results of associate and joint ventures

In the first six months of 2015, KMG EP’s share of results of associate and joint ventures was 2bn Tenge (US$10m) compared with 38bn Tenge (US$218m) in 1H2014.

Kazgermunai

In the first six months of 2015, KMG EP recognised 8bn Tenge (US$43m) of income from its share in KGM. This amount represents 7.3bn Tenge (US$39m) corresponding to 50% of KGM’s net profit, with the effect of the 0.7bn Tenge (US$4m) impact from amortization of the fair value of licenses, the related deferred tax and revised effective income tax rate used to calculate deferred tax.

KGM’s net profit in US dollars in the first six months of 2015 declined by 73% compared with the same period of 2014. This was largely due to lower revenue because of a 47% decline in Brent price and 15% lower export volumes.

In the first six months of 2015 KMG EP received US$25m as dividends from KGM.


PetroKazakhstan Inc.

In the first six months of 2015, KMG EP recognised 5.2bn Tenge (US$28m) of loss from its share in PKI. This amount represents 2.2bn Tenge (US$12m) corresponding to 33% of PKI’s net loss, net of the 3.0bn Tenge (US$16m) effect of amortization of the fair value of the licenses.

In the first six months of 2015, PKI’s net loss in US dollars was US$36m compared with net profit of US$349m in the same period of 2014, which was largely due to a 26% decline in export sales volumes and lower Brent and domestic prices.


CCEL

As of 30 June 2015, the Company had 20.2bn Tenge (US$108m) as a receivable from CCEL, a jointly controlled entity with CITIC Resources Holdings Limited. The Company has accrued 1.3bn Tenge (US$7.3m) of interest income in the first six months of 2015 related to the US$26.87m annual priority return from CCEL.


Tax and environmental audits

As at 30 June 2015 the Company had several claims related to tax and environmental matters outstanding. More detailed information is provided in the condensed consolidated interim financial statements for the six months ended 30 June 2015.

Value-added-tax (VAT) recoverability. As at June 30, 2015 total recoverable VAT related to the Company’s sale of assets to OMG and EMG in 2012 is 46.6bn Tenge. The tax authorities have conducted various audits and have repeatedly denied the Company’s requests to have these VAT amounts recognized as recoverable. The Company disagrees with the tax authorities’ position and has initiated court proceedings.

Upon consideration of the complaint of the OMG by the court of first instance, court of appeal and cassation of Mangistau region a positive decision was received. The court rulings have not been complied with by the tax authorities. On 28 July 2015 the Tax authorities filed an appeal of the court of first instance’s judgment to the Supreme Court.

As a result of the complaint by the EMG, on 29 January 2015 the Specialized Interdistrict Economic Court of Atyrau region ruled to dismiss the complaint in its entirety. On 31 July 2015 EMG filed an appeal to the Cassation Panel.

Management believes that they will ultimately be successful in each of the above cases and has not provided for any allowances for collectability. Due to the uncertainty with respect to the ultimate timing of the receipt of the VAT amounts the receivable has been classified as a long term asset and discounted at 7.93%.

JSC NC KazMunayGas

JSC KazMunaiGas Exploration Production (“KMG EP” or “the Company”) announces condensed consolidated interim financial statements for the six months ended 30 June 2015.

  • Net profit for the first six months of 2015 was 2.9bn Tenge (US$16m[1]) compared with 210bn Tenge (US$1,193m) in the same period of 2014. A decline in net profit was largely due to lower revenue and devaluation effect in 2014.
  • Revenue in the first six months of 2015 was 241bn Tenge (US$1,302m), which is 48% lower compared with the same period of 2014. The lower revenue was the result of a 47% decline in Brent price from US$108.9 per bbl in 1H2014 to US$57.8 per bbl in 1H2015 and a 52% decline in average domestic realized price from 48 th. Tenge per tonne in 1H2014 to 23 th. Tenge per tonne in 1H2015.
  • Production expenses in the first six months of 2015 were 109bn Tenge (US$589m), a 23% increase compared with the same period of 2014 mainly due to increased employee benefit expenses of production personnel. Company agreed to implement a Unified System of Wages of employees from 1 April 2014 onwards and to increase wages by 10% in connection with the devaluation of the Tenge in February 2014.

Production Highlights

KMG EP, including its stakes in Kazgermunai (KGM), CCEL (CCEL) and PetroKazakhstan Inc. (PKI), produced 6,122 thousand tonnes of crude oil (250 kbopd) in the first six months of 2015, an 0.3% increase over the same period of 2014.

Ozenmunaigas JSC (OMG) production increased by 4% to 2,722 thousand tonnes (111 kbopd) in comparison with the same period of 2014, largely due to conducting geological and technical works to improve well efficiency. Embamunaigas JSC (EMG) produced 1,385 thousand tonnes (56 kbopd), slightly less than in the same period of 2014. The total volume of oil OMG and EMG produced was 4,107 thousand tonnes (167 kbopd), a 2% increase compared with the same period of 2014.

The Company’s share in production from CCEL, KGM and PKI for the first six months of 2015 amounted to 2,015 thousand tonnes (83 kbopd) which is 3% less than in the same period in 2014, due to the natural decline of production by 10% in PKI, in line with the production plan for 2015.


Crude oil and oil products sales

In the first six months of 2015, the Company’s combined export sales from OMG and EMG were 2,365 thousand tonnes (94 kbopd) or 57% of the total oil sales volumes. Domestic sales amounted to 1,231 thousand tonnes (49 kbopd) of which 1,101 thousand tonnes of oil (44 kbopd) were supplied to the Atyrau Refinery from OMG and EMG; 96 thousand tonnes of oil (4 kbopd) were supplied to the Pavlodar Refinery from EMG and 34 thousand tonnes (1.4 kbopd) of oil products were sold after processing. Additionally, 566 thousand tonnes of crude oil (23 kbopd) were shipped to Russia to fulfill obligations under the counter-oil supply agreement between the Government of Kazakhstan and the Russian Government.

The Company’s share in the sales from CCEL, KGM and PKI was 1,977 thousand tonnes of crude oil (81 kbopd), including 889 thousand tonnes (36 kbopd) shipped to export, which is 45% of the total sales volumes. The domestic sales volume was 1,019 thousand tonnes (43 kbopd) of which 683 thousand tonnes (29 kbopd) were supplied to the Pavlodar Refinery, 225 thousand tonnes (10 kbopd) were supplied to Shymkent Refinery, 39 thousand tonnes (1 kbopd) were supplied to Atyrau Refinery and 72 thousand tonnes (3 kbopd) to Aktau Bitumen Plant. 70 thousand tonnes of crude oil (3 kbopd) were shipped to Russia in order to fulfill obligations under the counter-oil supply agreement between the Government of Kazakhstan and the Russian Government.


Net Profit for the Period

Net profit in the first six months of 2015 was 2.9bn Tenge (US$16m) compared with 210bn Tenge (US$1,193m) in the same period of 2014. A decline in net profit is largely due to lower revenue and lower foreign exchange gain.


Revenue

The Company’s revenue in the first six months of 2015 was 241bn Tenge (US$1,302m), which is 48% lower compared with the same period of 2014. This is due to a 47% decline in Brent price and a 52% decline in average domestic realized price from 48 th. Tenge per tonne in 1H2014 to 23 th. Tenge per tonne in 1H2015. Domestic realized price in 1H2015 was 22.4 th. tenge per tonne at the Atyrau Refinery and 30.0 th. Tenge per tonne at the Pavlodar Refinery.

Starting from 1 July 2015 domestic prices increased to 24.0 th. Tenge per tonne at the Atyrau Refinery and to 32.0 th. Tenge per tonne at the Pavlodar Refinery. But these prices have yet to be approved by independent directors.


Taxes other than on Income

Taxes, other than on income, in the first six months of 2015 were 83bn Tenge (US$446m), which is 54% lower than in the same period of 2014. Decline in rent tax and MET expenses is due to a 47% lower Brent price in 1H2015 compared with the same period of 2014 and lower export volumes. ECD declined largely due to a decrease in export volumes. ECD rate was reduced from US$80 to US$60 per tonne from 19 March 2015. Earlier, in April 2014 the ECD rate was increased from US$60 to US$80 per tonne.


Production Expenses

Production expenses in the first six months of 2015 were 109bn Tenge (US$589m), 23% higher than in the same period of 2014, mainly due to higher employee benefits of production personnel.

Expenses for employee benefits in the first six months of 2015 increased by 34% compared with the same period of 2014. This was largely due to an indexation of salary for production personnel by 7% in January 2015, the introduction of a Unified System of Wages for production employees from April 2014 and a 10% increase in wages related to the devaluation of the Tenge from April 2014 and an increase in production bonuses from 25% to 33% for supporting production personnel from September 2014.


Selling, General and Administrative Expenses

Selling, general and administrative expenses in 1H2015 were 53bn Tenge (US$289m), which is 8% higher than in 1H2014. This was largely due to higher employee benefits and an increase in accruals of fines and penalties partly offset by lower transportation expenses due to lower export volumes. In 1H2015 additional accruals of fines and penalties were made based on the preliminary results of tax audit for 2009-2012.


Cash Flows from Operating Activities

Cash flow from operating activities in the first six months of 2015 was 0.1bn Tenge (US$1m) compared with 149bn Tenge (US$844m) in the same period of 2014 mainly as a result of lower revenue in 1H2015.


Capital expenditure

Capital expenditure in the first six months of 2015 was 56bn Tenge (US$301m), which is 4% less compared with the same period of 2014 mainly due to lower investments in maintenance capex partly offset by increase in drilling activity. In the first six months of 2015, 162 wells were drilled at OMG and EMG compared with 154 wells in 1H2014.

Currently management of the Company is at the final stage of development of optimisation programme. It will cover both operational and financial targets to be achieved in the short-term period.


Cash and Debt

Cash and cash equivalents as at 30 June 2015 amounted to 183bn Tenge (US$1.0bn) compared with 180bn Tenge (US$1.0bn) as at 31 December 2014. Other financial assets as at 30 June 2015 were 526bn Tenge (US$2.8bn) compared with 554bn Tenge (US$3.0bn) as at 31 December 2014.

As at 30 June 2015, 91% of cash and financial assets were denominated in foreign currencies (mainly US$) and 9% were denominated in Tenge. Finance income accrued on cash, financial, and other assets in the first six months of 2015 was 12bn Tenge (US$63m) compared with 11bn Tenge (US$63m) in 1H2014.

Borrowings as at 30 June 2015 were 6.9bn Tenge (US$37m), compared with 7.2bn Tenge (USD$40m) as at 31 December 2014.

The net cash position as at 30 June 2015 amounted to 702bn Tenge (US$3.8bn) compared with 727bn Tenge (US$4.0bn) as at 31 December 2014.


Provision

In the first six months of 2015 the Company accrued tax provision in the amount of 16.7bn Tenge (US$90m), which relates to the preliminary results of complex tax audit for 2009-2012 years. These amounts relate to Corporate Income Tax and Excess Profit Tax in addition to fines and penalties.


Share of results of associate and joint ventures

In the first six months of 2015, KMG EP’s share of results of associate and joint ventures was 2bn Tenge (US$10m) compared with 38bn Tenge (US$218m) in 1H2014.

Kazgermunai

In the first six months of 2015, KMG EP recognised 8bn Tenge (US$43m) of income from its share in KGM. This amount represents 7.3bn Tenge (US$39m) corresponding to 50% of KGM’s net profit, with the effect of the 0.7bn Tenge (US$4m) impact from amortization of the fair value of licenses, the related deferred tax and revised effective income tax rate used to calculate deferred tax.

KGM’s net profit in US dollars in the first six months of 2015 declined by 73% compared with the same period of 2014. This was largely due to lower revenue because of a 47% decline in Brent price and 15% lower export volumes.

In the first six months of 2015 KMG EP received US$25m as dividends from KGM.


PetroKazakhstan Inc.

In the first six months of 2015, KMG EP recognised 5.2bn Tenge (US$28m) of loss from its share in PKI. This amount represents 2.2bn Tenge (US$12m) corresponding to 33% of PKI’s net loss, net of the 3.0bn Tenge (US$16m) effect of amortization of the fair value of the licenses.

In the first six months of 2015, PKI’s net loss in US dollars was US$36m compared with net profit of US$349m in the same period of 2014, which was largely due to a 26% decline in export sales volumes and lower Brent and domestic prices.


CCEL

As of 30 June 2015, the Company had 20.2bn Tenge (US$108m) as a receivable from CCEL, a jointly controlled entity with CITIC Resources Holdings Limited. The Company has accrued 1.3bn Tenge (US$7.3m) of interest income in the first six months of 2015 related to the US$26.87m annual priority return from CCEL.


Tax and environmental audits

As at 30 June 2015 the Company had several claims related to tax and environmental matters outstanding. More detailed information is provided in the condensed consolidated interim financial statements for the six months ended 30 June 2015.

Value-added-tax (VAT) recoverability. As at June 30, 2015 total recoverable VAT related to the Company’s sale of assets to OMG and EMG in 2012 is 46.6bn Tenge. The tax authorities have conducted various audits and have repeatedly denied the Company’s requests to have these VAT amounts recognized as recoverable. The Company disagrees with the tax authorities’ position and has initiated court proceedings.

Upon consideration of the complaint of the OMG by the court of first instance, court of appeal and cassation of Mangistau region a positive decision was received. The court rulings have not been complied with by the tax authorities. On 28 July 2015 the Tax authorities filed an appeal of the court of first instance’s judgment to the Supreme Court.

As a result of the complaint by the EMG, on 29 January 2015 the Specialized Interdistrict Economic Court of Atyrau region ruled to dismiss the complaint in its entirety. On 31 July 2015 EMG filed an appeal to the Cassation Panel.

Management believes that they will ultimately be successful in each of the above cases and has not provided for any allowances for collectability. Due to the uncertainty with respect to the ultimate timing of the receipt of the VAT amounts the receivable has been classified as a long term asset and discounted at 7.93%.
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