News Column

JSC KazMunaiGas Exploration Production 1Q 2014 financial results

May 5, 2014



ENP Newswire - 05 May 2014

Release date- 02052014 - Astana - JSC KazMunaiGas Exploration Production 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), a 9% increase compared with the same period for 2013. 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 for the first three months of 2014 was 123.5bn Tenge (US$727m) largely due to a before tax foreign exchange gain of 108bn Tenge (US$635m) as a result of the Tenge 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 in the same period in 2013.

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 2014 amounted 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 profit in 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 EP made an impairment charge of 27bn Tenge (US$162m) of the recoverable amount of JSC 'Ozenmunaigas'.

Revenues

The Company's revenues in the first three months of 2014 were 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 40,000 Tenge per tonne in 1Q2013 to 48,000 Tenge 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), some 5% higher than the same period in 2013, largely because export customs duty was US$60 per tonne as opposed to US$40 per tonne in the first quarter of 2013 and because the average Tenge-US Dollar exchange rate was 13% 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 2014 were 43.8bn Tenge (US$258m), which is 2% higher than in the same period of 2013 mainly due to higher expenses for employee benefits.

Expenses for employee benefits in the first three months of 2014 increased by 12% compared to the 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 Wages of production employees and a 10% increase of wages related 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 route resulting from the transportation of larger volumes and the increase in the average Tenge - US Dollar exchange rate, as the CPC tariff is denominated in US 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.

Foreign Exchange Gain

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 in the first three months of 2014 were 23bn Tenge (US$134m), which is 3% higher than 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 1,976 Tenge per ordinary and preferred share which is equivalent to about 135 billion Tenge (approximately US$730 million). This proposal will be voted upon at the AGM.

Cash and Debt

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

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

The net cash position as at 31 March 2014 amounted to 756bn Tenge (US$4.2bn) compared to 616bn 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 was mainly 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 8.0bn Tenge (US$47m) of income from its share in PKI. 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 0.7bn Tenge (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 March 2014 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 were reduced 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).

Petro Kazakhstan Kumkol Resources JSC (PKKR) tax audit. As a result of the comprehensive tax audit for 2009-2012 of PKKR (100% subsidiary of PKI Inc.) the Tax Department concluded that there were additional taxes payable of 10.0bn Tenge (US$54m). PKKR disagreed with the tax audit results and plan 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 emissions for 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 February 2014 filed a claim to the Interregional Kyzylorda Economic Court.

Ozenmunaigas environmental audit 2011-2012. In February 2014 the Cassation Judicial Panel of the Mangystau Regional Court has fully cancelled a 59.3bn Tenge (US$321m) fine for environmental damages but 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.

Ozenmunaigas environmental 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 points from 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 Region on 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 notification from the Department of Ecology of Atyrau Region in 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 Economic Court 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).

Investor Contact:

Asel Kaliyeva

Tel: +7 7172 97 5433

Email: ir@kmgep.kz

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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Source: ENP Newswire


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