KMG EP approves 2017 Budget and 2017-2021 Business Plan

KMG EP Jan-Sept Profit Jumps on Higher Crude Price

Yesterday KMG EP announces that its Board of Directors has approved the Company’s 2017 budget and 2017-2021 business plan. According to press releases, the budget for 2017 assumes a Brent price of $45/barrel and an exchange rate of 360 Tenge per US dollar.

The Company plans to cut oil supplies from OMG and EMG to the domestic market from the current 40% (9M2016) to 33% and the oil supplies of a stake in the JV (KGM, CCEL and PKI) from 49% to 45%, respectively.

As a result of adjustments to the price of oil and USD/KZT rate, waiting for more cost-effective oil implementation by increasing export sales, KMG EP expects free cash flows to be positive in the 2017-2021 period.

The Сompany commends operational capacity too, as evidenced by the planned increase in production volumes in the UMG and EMG by 2% yoy in 2017. At the same time, the Company’s share in the planned production of Kazgermunai (KGM), CCEL and PetroKazakhstan Inc. (PKI) in 2017 is 7% less than expected production in 2016 “mainly due to an anticipated natural decline of production at the PKI and KGM”.

Capital investment in 2017 is 15% higher than in the current year, despite the fact that it is planned to drill 1.3 times less (yoy). Thus, the rise in the cost of drilling due to increased tariffs affects capital costs.

The planned volume of production in 2017 exceeded our expectations by 4%. It is worthwhile to say that in the current month Kazakhstan expressed willingness to cut oil production by 20 ths. bopd. At the same time, according to the Minister of Energy of the RK K. Bozumbayev, the cutback will not affect the Kashagan and will be achieved at other fields. Taking into account the planned increase in production of KMG EP, it is not clear which other fields can help reducing oil production in Kazakhstan.

At the same time, we appreciate the more moderate need for capital investments compared to the Company’s plans: the amount of CapEx in the budget 2017 is above our expectations by 37%. In addition, in our opinion, the Company is excessively optimistic in assessing the results of the transition to a scheme of self-processing of oil and in terms of reducing supplies to the domestic market, given that oil exports will include Kashagan oil.

Given the relationship between the principal shareholder and independent directors, we still believe that the investment in shares of KMG EP are subject to significant risks. We maintain our “HOLD” recommendation.