OREANDA-NEWS. March 06, 2012. JSC KazMunaiGas Exploration Production (“KMG EP” or “the Company”) released its consolidated financial statements for the year ended December 31, 2011.

Revenues increased by 19% to 708bn Tenge (USD 4,832m) compared to 2010 on higher Brent and domestic prices offset by reduced export volumes. Average Brent price in 2011 increased by 41% to USD 111 per barrel from USD 79 per barrel in 2010.

Net profit in 2011 amounted to 209bn Tenge (USD 1,425m) and earnings per share – 2,950 Tenge (USD 3.4 per GDR), a decrease of 11% and 9%, respectively, compared to 2010.

The main factors that had a negative impact on KMG EP’s results were production and export decline due to the illegal strike that took place in May-August 2011 and introduction of export duty in 2010 and doubling of its rate in 2011.

Production Highlights

In 2011 KMG EP’s consolidated production was 12,341 thousand tonnes of crude oil (250 kbopd) including the Company’s stakes in LLP Kazgermunai JV (KGM), CCEL (CCEL, Karazhanbasmunai) and PetroKazakhstan Inc. (PKI). This was 944 thousand tonnes or 7% less than in 2010.

Uzenmunaigas (UMG) produced 5,082 thousand tonnes (102kbopd), which is 884 thousand tonnes less than in 2010. Embamunaigas (EMG) produced 2,818 thousand tonnes (57kbopd), which is 18 thousand tonnes more than in 2010, thereby the total volume of the oil produced at production facilities of UMG and EMG in 2011 was 7,900 thousand tonnes (159kbopd), which is 866 thousand tonnes, or 10% less than in 2010. The results were negatively affected by the illegal strike at UMG that took place in May-August 2011 and power cuts throughout the year. The loss of production has mainly impacted on the Company’s export volumes, which in turn was a major reason of Company’s weaker financial results compared to previous year.

Production plans

The Company is currently implementing a number of measures to increase production level at Uzen in the short term and ensure sustainability and efficiency of UMG operating activities going forward.

In early 2012 the Company followed a suggestion by Kazakh authorities to set up two new service subsidiaries which created jobs for approximately 2,000 people previously dismissed from KMG EP and one of its joint ventures. This measure has expanded oil service capacity in Mangistau region and has significantly contributed to social stability in the region thereby facilitating normal operations of UMG. Given the social nature of this initiative and the need to take into account the interests of all shareholders, it was agreed after discussions between the Board of directors of KMG EP, the Government, National Wealth Fund Samruk-Kazyna and the National Company KazMunaiGas that the subsidised price applied to most of the crude shipments by KMG EP to Atyrau refinery would be gradually increased during the course of 2012. The resulting economic benefit to KMG EP is estimated to reach 8.5bn Tenge in 2012 which will partly offset the expenditure associated with setting up the two service subsidiaries budgeted in 2012 at 20.6bn Tenge. Further offsets are being considered.

In 2012 the Company intends to implement a number of modernisation projects at Uzen field with the goal to improve efficiency, stability and safety of the field operation. In particular, the plan for 2012 and 2013 envisages construction of two subsurface equipment testing and service centers, two mud preparation units as well as a specialised vehicles service center. The Company will expand utilisation of higher quality pumps and will drill a number of horisontal wells. In addition, the Company will continue implementation of security, surveillance and vehicle monitoring projects.

Also during 2012 the production divisions UMG and EMG will be transformed into separate legal entities (joint stock companies 100% owned by KMG EP). This will give the business units necessary autonomy in the conduct of their operations and will ensure their management’s responsibility for the results. (See press-release of February 1, 2012.)

KMG EP management is confident that Uzen field and certain other mature assets offer significant potential in terms of production growth and maintaining stable production levels for years ahead. As previously announced (see press-release of January 9, 2012) the current plan envisages production growth at Uzen from 5.1 million tonnes in 2011 to 5.8 million tonnes in 2012. The combined production of EMG and UMG is expected to increase from 7.9 million tonnes in 2011 to 8.6 million tonnes in 2012. The set of technical and organisational measures being implemented by the Company this year is designed not only to meet these production targets for 2012 but also to achieve sustainable improvements of production practices at the Company’s mature assets.

Crude oil sales

The Company’s export sales and domestic sales volumes from the Uzenmunaigas and Embamunaigas production facilities in 2011 were 5,758 thousand tonnes (116kbopd) and 1,898 thousand tonnes (38kbopd), respectively.

The Company’s share in the production volumes from KGM, CCEL and PKI amounted to 4,442 thousand tonnes of crude oil (91kbopd), which is 78 thousand tonnes or 2% less than in 2010 in line with production plans of these companies.

The Company’s share in the sales volumes from KGM, CCEL and PKI was 4,848 thousand tonnes of crude oil (100kbopd), including 3,795 thousand tonnes (78kbopd) or 78% supplied to export markets. PKI sales volumes include sales of refined products produced from crude oil purchased under swap arrangements with third parties.

Net Profit for the Period

Profit after tax (net income) in 2011 was 209bn Tenge (USD 1,425m). This represents an 11% decline compared to 2010, which is mainly explained by production and export decline and increase in operating taxes partly offset by an increase in oil price.

Sales of Crude Oil and Refined Products

The Company’s sales of crude oil and refined products in 2011 increased by 19% compared to 2010 and amounted to 708bn Tenge (USD 4,832m). This was due to a 34% increase in the average realized price, from 69,101 Tenge per tonne (USD 64.86 per barrel) to 92,535 Tenge per tonne (USD 87.29 per barrel) partly offset by reduced export volumes due to decreased production.

Taxes other than on Income

Taxes, other than on income, in 2011 were 284bn Tenge (USD 1,937m), which is 58% higher compared to 2010. The increase is due to the higher applicable tax rates as a result of the higher oil price, as well as reintroduction of crude oil customs export duty (CED) on 16th August 2010 at USD 20 per tonne and its subsequent increase to USD 40 per tonne from 1st January 2011. This was partially offset by reduced production and export volumes.

Production Expenses

Production expenses in 2011 were 117bn Tenge (USD 801m), which is 6% higher compared to 2010. A significant part of the production cost increase is due to an increase in payroll which reflects salary increase at the production units in the second half of 2010 and salary indexation from 1st January 2011.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in 2011 were 100bn Tenge (USD 683m), which is 9% higher compared to 2010, mainly due to increases in fines and penalties, as well as an increase in sponsorship expenditures partly offset by lower transportation expenses caused by the production decrease.

The increase in fines and penalties was mainly due to recognition of the penalty as a result of 2004-2005 tax audit dispute, the fine for late payment of export customs duty of 2009 and environmental fine accrual (please see press-releases on first half and 9 months 2011 financial results dated 5 September and 14 November 2011 for details).

The environmental fine of 2.6bn accrued in 1Q 2011 is related to gas flaring at Prorva group of fields when it was not feasible to obtain the required regulatory permissions in time. The Company is contesting the matter in the court. The gas flaring permissions for the remainder of 2011 were obtained in March 2011.

Growth in sponsorship expenditures was mainly due to construction of social infrastructure and financial aid to Uralsk to recover from the floods in the region.

Cash Flows from Operating Activities

Operating cash flow in 2011 was 148bn Tenge (USD 1,011m) compared to 116bn Tenge (USD 785m) in 2010, mainly due to the increase in oil price, decrease in the amount of paid income tax and lower spending on working capital build-up.

Capex

Purchases of property, plant and equipment and intangible assets (as per Cash Flow Statement) in 2011 were 105bn Tenge (USD 716m), including 8.2bn Tenge (USD 56m) on exploratory drilling. This is 19% higher compared to 2010, mainly due to an increase in production drilling from 215 wells in 2010 to 237 wells in 2011 and an expansion of the exploration activities .

Additionally the Company made further investment in Ural Group Limited (UGL) in the form of a loan granted in several tranches during May-December 2011 amounting 1.9bn Tenge (USD 13m).

Total expenditures on exploration activities, including operating expenses, planned for 2012 is 31bn Tenge (USD 208m at 148.5 KZT/USD rate).

Cash distribution to stockholders

On 5 May, 2011 KMG EP declared 57bn Tenge (USD 386m) as dividends for the year 2010, of which 34bn Tenge (USD 235m) attributable to the National Company “KazMunaiGas” (NC KMG) was offset against an outstanding amount of the debt instrument (“the Bond”, see below in “cash and debt”) issued by the NC KMG.

In 2011 the Company spent 12.8bn Tenge (USD 87m) to buy back 727,063 preferred shares. Since the beginning of the preferred shares buy-back program in 23 February 2010 to 31 December 2011, the Company spent 37bn Tenge (USD 253m) to buy 2,073,276 preferred shares (50% of all preferred shares issued).

On 11 October, 2011 KMG EP commenced its common shares (Shares) and depositary receipts (GDR) buyback programme. Under the buyback programme the Company has the option to purchase its shares listed on the Kazakhstan Stock Exchange and GDRs listed on the London Stock Exchange up to an aggregate value of USD 300 million. The programme will end before 31 December 2012. In 2011 the Company spent 56mn Tenge (USD 0.4m) to buy 3,831 shares and USD 20m to buy 1,279,749 GDRs.

Cash and Debt

Cash and cash equivalents as at 31 December 2011 amounted to 207bn Tenge (USD 1.4bn) compared to 99bn Tenge (USD 0.7bn) as at 31 December 2010.

Other financial assets (current and non-current) at 31 December 2011 were 511bn Tenge (USD 3.4bn) compared to 600bn Tenge (USD 4.1bn) as at 31 December 2010. Other financial assets include the NC KMG Bond, deposits, and other financial instruments. As at 31 December 2011 the outstanding amount of the Bond was 188bn Tenge (USD 1,267m). KMG EP recognized 14.1bn Tenge (USD 96m) interest income from NC KMG Bond in 2011.

As at 31 December 2011, 73% of cash and financial assets (including the Bond) were denominated in foreign currency and 27% were denominated in Tenge. Interest accrued on deposits in banks in 2011 was 10.3bn Tenge (USD 70m).

Borrowings were 88bn Tenge (USD 593m) as at 31 December 2011 compared to 122bn Tenge (USD 831m) as at 31 December 2010. Borrowings include 79.8bn Tenge (USD 538m) of non-recourse debt of KMG PKI Finance B.V. related to the acquisition of the 33% interest in PKI. As per the terms of the deal, on 5 July 2011 the Company paid principal and accrued interest related to this debt in the amount of 34bn Tenge (USD 234m) and 4.7bn Tenge (USD 32m) respectively.

Net cash position at 31 December 2011 amounted to 629bn Tenge (USD 4.2bn) compared to 576bn Tenge (USD 3.9bn) as at 31 December 2010.

Income from Strategic Acquisitions

In 2011 KMG EP’s share of results of associates and joint ventures was 84bn Tenge (USD 575m) compared to 57bn Tenge (USD 384m) in 2010. The financial results of associates and joint ventures in 2011 were primarily driven by the higher oil price compared to 2010.

Kazgermunai

In 2011 KMG EP recognised a 38bn Tenge (USD 262m) income from its share in KGM. This amount represents 50% of KGM’s net profit of 46bn Tenge (USD 314m) and a 1.0bn Tenge (USD 7m) deferred income tax benefit net of 8.7bn Tenge (USD 59m) from the effect of purchase price premium amortization.

In 2011 KGM’s net income increased by 47% compared to 2010 due to higher oil price, optimization of the structure of crude oil supplies and purchases for the purposes of meeting domestic supply requirements. This was partly offset by accrual of fines related to customs export duty (CED) on crude oil exported in December 2008 and reintroduction of CED on crude oil on 16th August 2010 and its subsequent increase to USD 40 per tonne from 1st January 2011.

In 2011 the Company received dividends from KGM in the amount of 36.6bn Tenge (USD 250m).

PetroKazakhstan Inc.

In 2011 KMG EP recognised a 46bn Tenge (USD 312m) income from its share in PKI. This amount represents 33% of PKI’s net profit of 57bn Tenge (USD 391m) net of 12bn Tenge (USD 79m) from the effect of purchase price premium amortization.

PKI’s net income increased by 17% in the reported period compared to 2010 mainly due to higher oil price and consolidating of 50% of the results of JSC “Turgai Petroleum” in the reported period (for more details refer to KMG EP’s press-release of 20 August 2010).

In 2011 the Company received dividends from PKI in the amount of 53bn Tenge (USD 363m), 80% of this amount is directed to blocked account as security for the repayment of the long term debt of KMG PKI Finance B.V.

CCEL

As of 31 December 2011 the Company has recognised the amount of 19.5bn Tenge (USD 131m) as a receivable from CCEL, a jointly controlled entity with CITIC Group. The Company has accrued 3.0bn Tenge (USD 20m) of interest income in 2011 related to the USD 26.87m annual priority return from CCEL. Remaining USD 6.7m was recognised as reduction of receivable from CCEL.