Kazakh KMG EP 2016 Profit Drops After 2015 Fx Gain, Revenue Up

Kazakh KMG EP Q1 Oil Output Falls 5 pct y/y

Astana, 17 February 2016. JSC KazMunaiGas Exploration Production (“KMG EP” or “the Company”) announces its consolidated financial statements for the year ended 31 December 2016.

·    Revenue in 2016 was up 37% year on year and amounted to 727bn Tenge (US$2,128m[1]). This was largely the result of the switch to the processing scheme and 54% increase in the average Tenge – US dollar exchange rate, which was partially offset by 17% Brent price decrease.

·    Net profit in 2016 was 132bn Tenge (US$385m) and net cash generated from operating activities was 159bn Tenge (US$466m).

·    Net cash position[2] at 31 December 2016 was 1,172bn Tenge (US$3.5bn) representing a 79bn Tenge (US$295m) or 7% increase over the net cash position as of 31 December 2015.

 JSC KazMunaiGas Exploration Production Financial Results
for the year ended 31 December 2016

Production

Overall, KMG EP, including its stakes in Kazgermunai (“KGM”), CCEL (“Karazhanbasmunai”) and PetroKazakhstan Inc. (“PKI”), produced 12,155 thousand tonnes of crude oil (245 kbopd) for 2016, 2% decrease on 2015.

Ozenmunaigas JSC (“OMG”) produced 5,555 thousand tonnes (112 kbopd), 1% increase as compared to 2015. Embamunaigas JSC (“EMG”) produced 2,832 thousand tonnes (57 kbopd), on par with 2015. The total volume of oil OMG and EMG produced was 8,387 thousand tonnes (169 kbopd), which amounts to 1% increase compared to production in 2015.

The Company’s share in production from CCEL, KGM, and PKI for 2016 amounted to 3,768 thousand tonnes of crude oil (76 kbopd), 6% less than in 2015, mainly due to a natural decline in production of oil from PKI assets.

Crude oil supplies and sales of oil products

In 2016, the Company’s combined sales from OMG and EMG were 8,405 thousand tonnes (165 kbopd), of which 59% or 4,946 thousand tonnes (97 kbopd) of oil were exported and 3,459 thousand tonnes (68 kbopd) of oil were sold to the domestic market.

Out of 3,459 thousand tonnes (68 kbopd) of oil supplied by OMG and EMG to the domestic market, 2,578 thousand tonnes (51 kbopd) were supplied to the Atyrau Refinery and 881 thousand tonnes (17 kbopd) were supplied to the Pavlodar Petrochemical Plant.

In Q1 2016, before the Company switched to an independent oil processing scheme[3], domestic supplies were 830 thousand tonnes of crude oil. For the remainder of 2016, the Company supplied 2,629 thousand tonnes of crude oil to the domestic market for further refining. During April-December 2016 sales of oil products were 2,324 thousand tonnes as per the oil processing scheme.

The share of domestic supplies from the resources of OMG and EMG increased to 41% in 2016 as compared to 33% in 2015. As previously reported, it is expected that the share of domestic supplies in 2017 will be 2.9 million tonnes of oil (57 kbopd) or around 33% of the total sales.

The Company’s share in the sales from KGM, CCEL,  and PKI was 3,676 thousand tonnes of crude oil (75 kbopd), including 1,832 thousand tonnes (36 kbopd) supplied to the export markets, or 50% of the total sales volume. The domestic sales volume was 1,844 thousand tonnes (39 kbopd).

Net Profit for the Period

Net profit in 2016 was 132bn Tenge (US$385m) compared with 244bn Tenge (US$1,096m) in 2015. The decrease in net profit is largely due to a foreign exchange gain of 449bn Tenge (US$2,020m) in 2015. Compared with the 2015 net profit adjusted for this large foreign exchange gain of 449bn Tenge (US$2,020m) the net profit increased in 2016, , primarily as a result of the 37% increase in revenue, as well as lower tax accruals related to positive rulings on tax issues.

 

Revenue

The Company’s revenue in 2016 was 727bn Tenge (US$2,128m), up 37% compared to 2015. This increase is the result of the Company’s switch to the new processing scheme, as well as the 54% increase in the average Tenge – US dollar exchange rate, which was partially offset by a 17% decrease in the Brent price.

Net revenue achieved from the sale of refined oil products (net of all processing and marketing costs[4]) in April-December 2016 was 42,366 Tenge per tonne at ANPZ and 51,743 Tenge per tonne at PNHZ.

Production Expenses

Production expenses in 2016 were 275bn Tenge (US$804m), up 22% compared to 2015. This was mainly due to additional expenses related to the new processing scheme starting from April 2016 in the amount of 49bn Tenge (US$142m) for the period of April-December 2016, as well as higher repair and maintenance, and energy expenses, partially offset by a change in the estimate of environmental remediation and asset retirement obligation in 4Q2016 and 1% reduction in employee benefit expenses.

Repair and maintenance expenses were up due to an increased hydrofracturing of wells. Energy expenses are up due to the increase in tariffs of energy suppliers.

Employee benefit expenses were down by 1% due to the reduction of actuary obligations by the amount of 7.3bn Tenge as a result of subsoil contracts’ extensions at OMG and EMG in 2015. This was partially offset by 7% salary indexation of production units’ personnel since January 2016.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in 2016 totaled 115bn Tenge (US$337m), down 3% year on year. This was largely a result of reversal of accruals for fines and penalties related to the tax charges, partially offset by an increase in transportation expenses and an agency fee with JSC KazMunaiGas Refining & Marketing (“KMG RM”).

The increase in transportation expenses resulted mainly from a 54% increase in average Tenge – US dollar exchange rate (given the Caspian Pipeline Consortium (CPC) transportation tariff is US dollar denominated). Expenses increased also due to a domestic transportation tariff increase.

A fee related to the agency agreement between the Company and KMG RM for sales of oil products in April-December 2016 amounted to 5.4bn Tenge (US$16m).

Taxes other than on Income

Taxes, other than on income, in 2016 were 145bn Tenge (US$426m), down 20% year on year. This was largely due to a decline in the Mineral Extraction Tax (MET) and the rent tax, partially offset by a higher Export Customs Duty (ECD).

The decrease in MET was due to a lower average Brent price and a reduction of the MET rate for the OMG fields by the Government down to 9.0% for 2016 (compared to 13.0% in 2015), which was partially offset by a higher average Tenge – US dollar exchange rate. Additionally, in 4Q2016 MET was reduced by 6.1bn Tenge after the positive decision of the tax authorities on the 2009-2012 tax audit, which also led to a revision of MET accruals for 2012 by 6.6bn Tenge.

In September 2016, the MET rate for the OMG fields was set at 9.0% (compared to 13.0% in 2015) for 2016 provided that the OMG fields record losses under tax accounting for the year. Based on the 2016 results OMG is expecting a taxable loss in its 2016 tax filing. According to the Company’s estimates, effect from reduced MET rate in 2016 was 15bn Tenge.

Rent tax expenses were down mainly due to decline of the tax rate because of a lower Brent price, and the tax base for the rent tax. Moreover, the Company reduced the amount paid for the rent tax by 6.3bn Tenge in 3Q2016 and by 5.4bn Tenge in 4Q2016 due to a recovery of prior years’ payments.

The increase in ECD expenses was due to an increase in the export volumes of crude oil and export of oil products after the Company switched to the oil processing scheme in April 2016, as well as an increase in average Tenge – US dollar exchange rate. This was partially offset by a decline of the average ECD rate to US$39 per tonne in 2016 compared to US$66 per tonne in the previous year.

2006-2008 tax audit

The Company has included the reduction of the tax charge related to the 2006-2008 tax audit by 7.7bn Tenge in its financial statements for 2016. In August 2016, the Supreme Court ruled to decrease the tax charge related to the 2006-2008 tax audit by 4.1bn Tenge, including 2.4bn Tenge principal (income taxes) and 1.7bn Tenge penalty. Based on the decision of the Supreme Court, in October 2016 the Administrative Court of Astana decided to decrease the administrative fine by 3.6bn Tenge.

2009-2012 tax audit

In accordance with a positive review of the Company’s 2009-2012 tax audit appeal by the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan, the initial tax charge was reduced by 25bn Tenge to 13.5bn Tenge. The Company has provided for 33bn Tenge in its accounts in 2015 in relation to this specific tax claim. This ruling was recorded in the Company’s 2016 annual financial statements as reductions to current year corporate income tax in the amount of 1.1bn Tenge, excess profit tax in the amount of 1.9bn Tenge, mineral extraction tax in the amount of 6.1bn Tenge and fines and penalties in the amount of 9.6bn Tenge, for a total of 18.8bn Tenge.

VAT recoverable

The Company recovered 24.6bn Tenge (US$71m) in October 2016 after a positive decision was made regarding the Company’s claim on VAT recoverability in an amount of 57.4bn Tenge (US$174m). This VAT claim was related to the period of 2012-2015, including the formation of OMG and EMG in 2012. KMG EP intends to continue the work to recover the remaining amount.

In the fourth quarter of 2015, the Company created the valuation allowance for 46.6bn Tenge in its profit and loss statement related to VAT recoverability. The Company has reversed 24.6bn Tenge of previously accrued VAT allowance in its financial statements in 2016.

Capital expenditure

Capital expenditure[5] in 2016 totaled 115bn Tenge (US$337m), up 17% year on year and in line with expectations. This was primarily due to an increase of expenses for construction of a gas treatment unit (GTU) for the Prorva group of fields at EMG and additional capital expenditures directed towards exploration drilling at EMG. This was partially offset by a reduction in volumes and costs of production drilling at OMG and a 15% discount obtained from the drilling service contractor.

 

Cash Flows from Operating Activities

Net cash generated from operating activities in 2016 was 159bn Tenge (US$466m), against net cash outflow of 70bn Tenge (US$316m) in 2015.

In July 2016, KMG RM paid the full amount of its overdue trade receivable amounting 44bn Tenge (US$129m), which contributed towards decrease of the Company’s trade receivables to 74bn Tenge (US$222m) as at the end of 2016, from 105bn Tenge (US$311m) as at the end of 2015.

Net cash

The net cash position[6] at 31 December 2016 was 1,172bn Tenge (US$3.5bn), representing 79bn Tenge (US$295m) or 7% increase over the net cash position of 1,093bn Tenge (US$3.2bn) as of 31 December 2015. 97% of cash and financial assets were denominated in foreign currencies (predominantly US dollars) and 3% were denominated in Tenge.

Finance income accrued on cash, financial, and other assets in 2016 totaled 30bn Tenge (US$88m), compared with 26bn Tenge (US$117m) in 2015.

 

Share of results of associate and joint ventures

During 2016, KMG EP reported a loss of 12.6bn Tenge (US$37m) in its share of the results of associate and joint ventures, compared to a loss of 20.1bn Tenge (US$90m) in 2015.

Kazgermunai

KMG EP recognized 4.3bn Tenge (US$13m) of income from its share in KGM in 2016. This represents the Company’s 50% share in KGM’s net profit of 8.5bn Tenge (US$25m) adjusted for the 4.2bn Tenge (US$12m) amortization of the fair value of licenses and the related deferred tax benefit.

KGM’s revenue in US dollar terms in 2016 declined by 28% compared to 2015. This was largely driven by 17% decline in Brent price, lower domestic prices and a decrease in sales volumes.

KGM made a dividend payment of US$80.5m to KMG EP in 2016, including US$37.5m for the year of 2015 and US$43.0m for the year of 2016.

PetroKazakhstan Inc.

KMG EP recognized a loss of 15.3bn Tenge (US$45m) from its share in PKI in 2016. This represents the Company’s 33% share in PKI’s net loss of 4.2bn Tenge (US$12m) adjusted for the 11.1bn Tenge (US$32m) amortization of the fair value of licenses.

PKI’s net loss in US dollar terms in 2016 amounted to US$38m, compared to a net loss of US$194m in 2015. This is largely due to lower transportation and operating expenses, lower taxes and penalties, which partially offset a decline in revenue due to 17% drop in Brent price and a decrease in sales volumes resulting from lower production levels. In addition, in 4Q2016 PKI recognized an impairment of its 100% subsidiary PetroKazakhstan Kumkol Resources JSC assets for US$83m.

CCEL

As of 31 December 2016, the Company had 34.3bn Tenge (US$103m) as a receivable from CCEL, a jointly controlled entity with CITIC Resources Holdings Limited. The Company has accrued 4.6bn Tenge (US$13.4m) of interest income in 2016, which is a part of the annual priority return in an amount of US$26.87m from CCEL.

***

The consolidated financial statements for year ended 31 December 2016 and the operating and financial review for the period is available on the Company’s website (www.kmgep.kz).

APPENDIX

Consolidated Statement of Comprehensive Income

Tenge million

 

 

For the year ended

December 31,

727,154

529,812

(12,600)

(20,062)

Finance income

30,037

26,094

Total revenue and other income

744,591

535,844

(274,753)

(225,049)

(115,022)

(118,601)

Exploration expenses

(2,535)

(1,892)

(30,776)

(20,110)

(145,431)

(181,501)

13,362

(46,753)

(2,050)

(4,618)

(5,842)

(14,999)

Foreign exchange (loss)/

(12,892)

448,869

Profit before tax

168,652

371,190

Income tax expense

(37,076)

(127,521)

Profit for the year

131,576

243,669

Foreign currency translation difference

(11,771)

257,554

Other comprehensive (loss) / income for the period to be reclassified to profit and loss in subsequent periods

(11,771)

257,554

Actuarial gain, net of tax

563

Other comprehensive income for the period not to be reclassified to profit and loss in subsequent periods

563

Total comprehensive income for the year, net of tax

120,368

501,223

EARNINGS PER SHARE – Tenge thousands

Basic and diluted

1.93

3.57

Consolidated Statement of Financial Position

Tenge million

 

                  As at December 31,

 

Property, plant and equipment

311,597

234,367

Intangible assets

11,607

9,619

Investments in joint ventures

144,532

154,453

Investments in associate

135,633

154,241

Receivable from a jointly controlled entity

16,696

21,602

Loans receivable from joint ventures

29,638

27,941

Other financial assets

35,961

33,760

Deferred tax asset

51,459

71,904

Other assets

970

5,717

738,093

713,604

Inventories

24,774

23,102

Income taxes prepaid

51,567

36,225

Taxes prepaid and VAT recoverable

22,567

16,132

Mineral extraction and rent tax prepaid

15,676

6,064

Prepaid expenses

20,713

30,135

Trade and other receivables

74,121

105,443

Receivable from a jointly controlled entity

17,617

8,822

Other financial assets

983,257

833,912

Cash and cash equivalents

162,091

237,310

Total current assets

1,372,383

1,297,145

2,110,476

2,010,749

EQUITY

Share capital

165,343

163,004

Other capital reserves

2,448

3,945

Retained earnings

1,444,351

1,311,759

Foreign currency translation reserve

321,370

333,141

1,933,512

1,811,849

LIABILITIES

Non-current liabilities

Borrowings

3,844

5,990

Deferred tax liability

138

240

Provisions

45,300

45,264

Total non-current liabilities

49,282

51,494

Current liabilities

Borrowings

5,483

5,585

45,926

70,010

33

13

8,571

22,249

67,669

49,549

Total current liabilities

127,682

147,406

Total liabilities

176,964

198,900

Total liabilities and equity

2,110,476

2,010,749

Consolidated Statement of Cash Flows

Tenge million

For the year ended

December 31,

2016

2015

Cash flows from operating activities

Profit before tax

168,652

371,190

Adjustments to add / (deduct) non-cash items

Depreciation, depletion and amortization

30,776

20,110

Share of results of associate and joint ventures

12,600

20,062

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

2,050

4,618

Recognition of share-based payments

1,410

1,598

Forfeiture of share-based payments

(63)

(8)

Unrealised foreign exchange loss/(gain) on non-operating activities 

12,003

(424,585)

Net (reversal) / allowance on VAT recoverable

(13,362)

46,753

Change in provisions

(15,566)

35,993

Other non-cash income and expense

2,829

1,196

Add finance costs

5,842

14,999

Deduct finance income

(30,037)

(26,094)

Working capital adjustments

Change in other assets

(1,025)

3,676

Change in inventories

(1,949)

2,841

Change in taxes prepaid and VAT recoverable

6,095

9,888

Change in prepaid expenses

9,421

(123)

Change in trade and other receivables

20,500

(34,792)

Change in trade and other payables

9,956

(15,330)

Change in mineral extraction and rent tax payable and prepaid

(18,384)

(2,906)

Income tax paid

(42,398)

(99,422)

Net cash  generated from / (used in) operating activities

159,350

(70,336)

Cash flows from investing activities

Purchases of PPE

(101,233)

(88,174)

Proceeds from sale of PPE

784

171

Purchases of intangible assets

(3,672)

(1,901)

Loans provided to the joint ventures

(5,146)

(3,389)

Dividends received from joint ventures and associate, net of withholding tax

27,515

13,822

(Placement)/withdrawal of term deposits

(170,927)

144,960

Repayments of receivable from a jointly controlled entity

6,815

Interest received

15,972

14,839

Net cash (used in) / generated from investing activities

(236,707)

87,143

Cash flows from financing activities

Repayment of borrowings

(2,128)

(1,241)

Dividends paid to Company’s shareholders

(137)

(28,988)

Net cash used in financing activities

(2,265)

(30,229)

Net change in cash and cash equivalents

(79,622)

(13,422)

Cash and cash equivalents at the beginning of the year

237,310

180,245

Net foreign exchange difference on cash and cash equivalents

4,403

70,487

Cash and cash equivalents at the end of the year

162,091

237,310

The following tables show the Company’s realized sales prices adjusted for oil transportation and other expenses for 2016[7].

                          2016

(US$/bbl.)

UAS

CPC

ANPZ

2-4Q

PNHZ

2-4Q

ANPZ

1Q

PNHZ

1Q

Benchmark end-market quote

43,7

43,7

 –  

Quality bank

(3,2)

 –  

Price differential

(2,4)

(0,7)

 –  

Realized price

41,3

39,8

17,4

21,2

5,7

 10,7

Rent tax

(2,6)

(2,4)

 –  

Export customs duty

(5,4)

(5,4)

 –  

MET

(3,7)

(3,7)

(0,8)

(0,7)

(1,1)

(0,5)

Transportation

(5,6)

(7,3)

(1,2)

(3,7)

(1,4)

 (4,0)

Netback

24,0

21,0

15,4

16,8

3,2

6,2

Premium of bbl. difference

4,0

Effective netback incl. premium of bbl. difference

24,0

25,0

15,4

16,8

3,2

6,2

                          2015

(US$/bbl.)

UAS

CPC

ANPZ

PNHZ

Russia

Benchmark end-market quote

52,4

52,4

 –  

Quality bank

(3,7)

 –  

Price differential

(3,7)

(2,8)

 –  

Realized price

48,7

45,9

23,0

23,0

 31,3

Rent tax

(5,3)

(5,4)

 –  

Export customs duty

(8,8)

(8,8)

 –  

MET

(5,2)

(5,5)

(1,8)

(1,1)

(3,4)

Transportation

(6,4)

(7,7)

(1,0)

(5,7)

 (4,5)

Netback

23,0

18,5

20,2

16,2

 23,4

Premium of bbl. difference

4,4

Effective netback incl. premium of bbl. difference

23,0

22,9

20,2

16,2

23,4

Reference information

Average exchange US$/KZT rate

222,25

341,76

End of period US$/KZT rate

339,47

333,29

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 KGM 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 producers based on the 2016 results. The overall production in 2016 was 12.2 million tonnes (245 kbopd) of crude oil, including the Company’s share in Kazgermunai, CCEL and PKI. The Company’s volume of proved and probable reserves excluding shares in the associates, at the end of 2015 was 193 million tonnes (1,409 mmbbl). 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 at its IPO in September 2006.

 

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.

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