KMG EP website

RESULTS OF OPERATIONS

Company prepares financial statements in tenge, amounts shown in US dollars are included solely for the convenience of the user of information at the average exchange rate over the applicable period. Assets and liabilities are translated at the closing rate. Income and expenses are translated at the average exchange rate. See “Business Environment and Outlook”.

Key Indexes

Q4 2011

Q3 2011

Q4 2010

Q4 on Q4 change

 

2011

2010

Change

(KZT thousands, unless otherwise stated)

%

(KZT thousands,

unless otherwise stated)

%

175 447 580

145 688 364

164 212 856

7%

Revenue

721 194 169

609 242 398

18%

29 618 398

25 148 870

30 061 954

-1%

Production expenses

117 465 026

110 747 524

6%

23 746 316

17 162 683

22 740 153

4%

Selling, general and administrative expenses

100 173 285

92 276 532

9%

66 029 291

56 127 601

54 279 249

22%

Taxes other than on income

284 027 851

179 709 999

58%

3 355 758

1 951 378

1 172 261

186%

Exploration expenses

5 985 224

2 072 263

189%

12 601 727

11 308 128

10 197 074

24%

Depreciation, depletion and amortization

45 494 136

35 486 128

28%

646 193

1 269 323

875 866

-26%

Loss on disposal of fixed assets

4 043 980

2 200 613

84%

39 449 897

32 720 381

44 886 300

-12%

Profit from operations

164 004 667

186 749 339

-12%

44 282 243

50 310 508

77 693 561

-43%

Profit for the period

208 930 886

234 501 890

-11%

2 004

1 923

1 848

8%

Production expenses

(KZT per bbl) (1)

2 020

1 717

18%

13,55

13,12

12,53

8%

Production expenses

(US$ per bbl) (1)

13,78

11,65

18%

37 506 462

20 913 686

36 406 044

3%

Capital Expenditures (2)

104 977 365

88 251 917

19%

1 Converted at 7.36 barrels per tonne of crude oil.
2 Capital expenditures includes expenditures for exploration and evaluation assets as per consolidated statement of cash flows for the period ending December 31, 2011 (see Company website for a copy).

Transport Routes

The Company delivers its crude oil through three principal routes: export markets via the pipeline owned by Caspian Pipeline Consortium (CPC) and the Uzen-Atyrau-Samara pipeline (UAS) owned by KazTransOil JSC (in Kazakhstan) and the domestic market, as outlined in the following table:

Q4 2011

Q3 2011

Q4 2010

 

2011

2010

 

Exports sales via UAS

 

0.9

0.6

1.0

Volume of crude oil (in million tonnes)

3.5

4.3

46%

38%

48%

% total crude oil sales volume

46%

50%

57%

49%

56%

% total sales value of crude oil

56%

58%

 

Exports sales via CPC

 

0.5

0.5

0.7

Volume of crude oil (in million tonnes)

2.2

2.5

28%

29%

31%

% total crude oil sales volume

29%

29%

35%

41%

38%

% total sales value of crude oil

37%

35%

 

Domestic sales

 

0.5

0.5

0.4

Volume of crude oil (in million tonnes)

1.9

1.8

26%

32%

21%

% total crude oil sales volume

25%

21%

8%

10%

7%

% total sales value of crude oil

7%

7%

The relative profitability of the two export routes depends on the quality of oil in the pipeline, the prevailing international market prices and the relevant pipeline tariffs. Specifically, CPC tends to be the more advantageous route owing to the higher quality of crude oil in the CPC pipeline in a higher price oil environment, even after taking into account quality bank payments. It should be noted that the volume of crude oil that can be shipped through the pipelines has to be agreed with the Kazakh Ministry for Oil and Gas (MOG); the Company’s ability to allocate export volume to different pipelines is, therefore, limited.

Revenue

The following table shows sales volumes and realized prices:

Q4 2011

Q3 2011

Q4 2010

Q4 on Q4 change

 

2011

2010

Change

(KZT thousands, unless otherwise stated)

%

(KZT thousands,

unless otherwise stated)

%

 

Export sales of crude oil

 
 

UAS pipeline

 

97,677,046

69,691,891

89,561,927

9%

Net sales

395,582,658

345,485,101

15%

863

638

1,032

-16%

Volume

(in thousand tonnes)

3,521

4,314

-18%

113,216

109,318

86,748

31%

Average price (KZT/tonne)

112,344

80,086

40%

105.87

103.17

81.35

30%

Average price (US$/bbl)(1)

105.98

75.17

41%

 

CPC pipeline

 

60,743,134

57,706,736

60,452,326

0%

Net sales

260,012,252

211,081,198

23%

530

484

672

-21%

Volume
(in thousand tonnes)

2,237

2,546

-12%

114,590

119,345

89,965

27%

Average price (KZT/tonne)

116,239

82,893

40%

107.15

112.63

84.37

27%

Average price (US$/bbl)(1)

109.65

77.81

41%

158,420,180

127,398,627

150,014,253

6%

Total sales

of crude oil-exported

655,594,910

556,566,299

18%

 

Domestic sales

of crude oil

 

13,706,987

14,787,515

10,932,163

25%

Domestic sales

of crude oil

52,882,316

40,707,699

30%

489

536

443

10%

Volume

(in thousand tonnes)

1,898

1,783

6%

28,013

27,564

24,665

14%

Average price (KZT/tonne)

27,858

22,830

22%

26.44

26.01

23.13

14%

Average price (US$/bbl)(1)

26.28

21.43

23%

 

Total sales

 

172,127,167

142,186,142

160,946,416

7%

Total sales of crude oil

708,477,226

597,273,998

19%

1,882

1,658

2,148

-12%

Total volume

(in thousandtonnes)

7,656

8,643

-11%

91,452

85,783

74,942

22%

Average price (KZT/tonne)

92,535

69,101

34%

86.31

80.96

70.28

23%

Average price (US$/bbl)(1)

87.29

64.86

35%

3,320,413

3,502,222

3,266,441

2%

Other sales

12,716,943

11,968,400

6%

     

175,447,580

145,688,364

164,212,857

7%

Total revenue

721,194,169

609,242,398

18%

1 Average sales price under financial statement (realized price), converted at 7.23 barrels per tonne of crude oil.

Crude Oil Sales

The total sales of crude oil in 2011 increased by 19% to KZT708 billion compared to 2010. This was due to a 34% increase in the average sales price. The overall volume of crude oil sales in 2011 were decreased by 11% to 7,656 ktonnes in 2011.

Export – UAS Pipeline

Sales of crude oil exported via the UAS pipeline in 2011 increased by 15% to KZT396 billion owing to the increase of the average realized price by 40% to KZT112,344 per tonne which was partially offset by the decrease of volume exported via the UAS pipeline that declined by 793 ktonnes, or 18%.

The decrease of sales volume in 2011 was caused by a 15% decrease in UMG oil production, or 884 thousand tonnes, in comparison with 2010.

Export – CPC Pipeline

In 2011 sales of exported crude oil via the CPC pipeline increased by 23% to KZT260 billion in comparisons with 2010. This is due to an increase of 40% to KZT116,239 per tonne in the average realized price and was partially offset by the decrease in volume exported via the CPC which declined by 12%.

Domestic Market – Sales of Crude Oil

Domestic sales of crude oil in 2011 increased by 30% to KZT53 billion, compared with 2010, due to a 22% increase in the average sales price and also by the increase in sales volume by 6% or 115k tonnes.

The following table shows the Company’s realized sales prices adjusted for crude oil transport and other expenses:

Q4 2011

Q3 2011

Q4 2010

Q4 on Q4 change

 

2011

2010

Change

(US$/bbl)

%

(US$/bbl)

%

 

UAS

 

109.36

113.41

86.46

26%

Benchmark end-market quote (1)

111.26

79.18

41%

105.83

109.18

81.53

30%

Sales price (2)

106.06

75.35

41%

0.04

(0.18)

(0.17)

-125%

Premium of bbl difference

(0.08)

(0.18)

-57%

105.87

109.00

81.36

30%

Realized price (3)

105.98

75.17

41%

(23.72)

(25.92)

(15.00)

58%

Rent tax

(24.51)

(13.17)

86%

(5.53)

(5.53)

(2.70)

104%

Export customs duty (4)

(5.20)

(0.65)

703%

(7.91)

(7.86)

(7.17)

10%

Transportation

(7.75)

(7.32)

6%

(0.07)

(0.07)

(0.06)

18%

Sales commissions

(0.07)

(0.07)

1%

68.64

69.63

56.43

22%

Netback price

68.45

53.96

27%

 

CPC

 

109.36

113.41

86.46

26%

Benchmark end-market quote (1)

111.26

79.18

41%

108.70

112.75

85.28

27%

Sales price (3)

109.98

78.70

40%

(10.83)

(9.86)

(7.75)

40%

Quality bank

(9.65)

(6.98)

38%

9.28

9.75

6.84

36%

Premium of bbl difference

9.32

6.09

53%

107.15

112.63

84.37

27%

Realized price (3)

109.65

77.81

41%

(23.72)

(25.92)

(14.95)

59%

Rent tax

(24.57)

(13.21)

86%

(5.53)

(5.53)

(2.87)

93%

Export customs duty (4)

(5.20)

(0.76)

587%

(7.59)

(7.37)

(8.20)

-7%

Transportation

(7.56)

(7.62)

-1%

(0.07)

(0.07)

(0.06)

18%

Sales commissions

(0.07)

(0.07)

1%

70.24

73.74

58.29

20%

Netback price

72.25

56.15

29%

 

Domestic Market

 

26.19

26.01

23.13

21%

Sales price (3)

26.28

21.43

23%

(1.45)

(1.21)

(1.92)

-17%

Transportation

(1.38)

(1.58)

-12%

24.74

24.80

21.21

24%

Netback price

24.90

19.85

25%

 

Average

 

86.47

83.27

71.00

22%

Sales price (3)

87.96

65.50

34%

(3.05)

(2.96)

(2.43)

25%

Quality bank

(2.82)

(2.06)

37%

2.28

2.39

1.71

33%

Premium of bbl difference

2.30

1.41

63%

85.70

82.69

70.28

22%

Realized price (3)

87.44

64.85

35%

(17.55)

(17.27)

(11.89)

48%

Rent tax

(18.45)

(10.47)

76%

(4.09)

(3.68)

(2.20)

86%

Export customs duty (4)

(3.91)

(0.55)

616%

(6.07)

(5.44)

(6.40)

-5%

Transportation

(6.08)

(6.20)

-2%

(0.05)

(0.05)

(0.05)

3%

Sales commissions

(0.05)

(0.06)

-12%

57.94

56.25

49.74

16%

Netback price

58.94

47.58

24%

1 The Brent (DTD) quoted price is used as benchmark.
2 Netback results have been corrected for the netting of gross margin on sale of crude oil for KZT1.7 billion produced from Uaz and Kondybay blocks, which have been transferred from an exploration to a development stage fields in accordance with the IFRS 6.
3 Average realized price by financial report converted at 7.23 barrels per tonne of crude oil.
4 Export customs duty without including a claim of KZT15.2 billion by the decision of the Supreme Court, export customs duty for crude oil export shipments in 2008.

The difference between the benchmark quote and the realized price of sales mainly comprises freight expenses, port charges, customs fees, certain sales commissions and averaging effects. Averaging effects usually appear because of the difference between the average mean of the quoted price on the sale date and the average published price over the whole period. This difference may be significant on account of the high volatility of oil prices.

Production expenses

The following table presents a breakdown of the Company’s production expenses:

Q4 2011

Q3 2011

Q4 2010

Q4 on Q4 change

 

2011

2010

Change

(KZT thousands, unless otherwise stated)

%

(KZT thousands,

unless otherwise stated)

%

14,740,890

14,883,352

14,585,139

1%

Employee benefits

59,769,131

54,129,594

10%

8,518,604

7,324,186

7,909,532

8%

Repairs and maintenance

29,972,825

28,119,436

7%

5,730,159

2,216,844

4,127,674

39%

Materials and supplies

13,571,313

11,829,948

15%

2,915,848

2,248,016

2,893,745

1%

Energy

10,546,572

10,962,880

-4%

680,259

1,140,225

388,741

75%

Transportation service

2,894,028

1,625,868

78%

256,663

208,412

460,275

-44%

Processing expenses

1,040,996

1,250,805

-17%

(3,830,638)

(4,012,394)

(1,728,626)

122%

Change in crude oil balance

(3,918,657)

(1,538,597)

155%

606,613

1,140,229

1,425,474

-57%

Other

3,588,818

4,367,590

-18%

29,618,398

25 148 870

30,061,954

-1%

Total

117,456,026

110,747,524

6%

Production expenses in 2011 increased by 6% or KZT6.7 billion compared with 2010. This is primarily due to increased expenses for employee benefits, repairs and maintenance, materials and supplies and transportation services.

Employee benefits expenses for 2011 increased by 10% compared with 2010 owing to the increase in salaries of production personnel at production divisions, due to the new compensation plan introduced on June 1, 2010 and also because of indexation of basic tariffs by 7% according to the collective agreement.

Repairs and maintenance expenses during 2011 increased by 7% compared with 2010 mainly due to increase in cost of workovers, which were partially offset by decrease in volumes of work done. The cost of materials mainly increased because of higher prices for materials in 2011 and also due to increase in expenses for workwear of production personnel according to the collective agreement.

Transportation service expenses increased by 78% mainly due to increase in volume of transport services provided by third parties. This relates to massive absence of production staff at UMG, during which UMG’s own transport units were left idle.

Selling, general and administrative expenses

The following table presents a breakdown of the Company’s selling, general and administrative expenses:

Q4 2011

Q3 2011

Q4 2010

Q4 on Q4 change

 

2011

2010

Change

(KZT thousands, unless otherwise stated)

%

(KZT thousands,

unless otherwise stated)

%

12,370,076

9,365,059

14,646,864

-16%

Transportation expenses

49,577,574

56,168,909

-12%

3,922,383

3,387,633

3,887,436

1%

Employee benefits

13,768,236

12,112,201

14%

427,172

(1,055,945)

(2,626,333)

-116%

Accrual/(Reverse)

of fines and penalties

12,737,805

2,805,102

354%

2,184,402

2,160,353

2,071,698

5%

Management fees

and commissions

8,751,610

8,281,574

6%

1,183,280

791,092

1,439,694

-18%

Sponsorship

6,434,359

4,137,051

56%

755,812

396,308

883,215

-14%

Consulting and audit services

1,668,823

3,030,945

-45%

327,220

217,584

337,396

-3%

Repairs and maintenance

840,290

738,136

14%

2,575,971

1,900,599

2,100,183

23%

Other

6,394,588

5,002,614

28%

23,746,316

17,162,683

22,740,153

4%

Total

100,173,285

92,276,532

9%

Selling, general and administrative expenses increased by 9% or KZT7.9 billion compared to 2010. This is primarily due to the increased expenses, for fines and penalties, employee benefits and sponsorship and was partially offset by a decrease in transportation expenses and consulting and audit services expenses.

The increase in fines and penalties is explained by accruals of fines and penalties due to results of Complex Tax Audit for 2004-2005 for total amount of KZT6.6 billion, accrual of fines of KZT2.3 billion for export customs duty, and accrual of an environmental fine of KZT2.6 billion. The environmental fine for burning gas is related to gas flaring at Prorva fields group in the first quarter of 2011.

Employee benefits expenses, including general and administrative personnel of UMG and EMG for 2011 increased by 14% compared with 2010 owing to the increase in salary due to the new compensation plan introduced on June 1, 2010 and the indexation increase of basic tariffs by 7% according to the collective agreement.

The increase in expenditure on social projects is mainly due to fact that Company committed KZT1 billion more funds to finance Uralsk city for restoration after flooding and committed funds to social funds for the social support of Mangystau and Atyrau regions.

The decrease in consulting and audit services expenses is related to the decrease in expenses for consultation for acquisition of new assets.

The decrease in transportation expenses is explained by the drop in volumes shipped for export by 16%. This drop is explained by the decrease in production of crude oil at Uzen field.

Taxes other than on income

The following table presents a breakdown of the Company’s taxes other than on income:

Q4 2011

Q3 2011

Q4 2010

Q4 on Q4 change

 

2011

2010

Change

(KZT thousands, unless otherwise stated)

%

(KZT thousands,

unless otherwise stated)

%

35,331,095

29,443,087

28,222,445

25%

Rent tax

149,771,267

97,484,646

54%

20,449,977

16,714,049

19,740,317

4%

Mineral extraction tax

78,680,221

70,932,591

11%

8,239,972

6,280,585

5,032,165

64%

Export customs duty

46,979,482

6,477,735

625%

939,458

941,634

777,756

21%

Property tax

3,453,888

2,990,971

15%

1,068,789

2,748,246

506,566

111%

Other taxes

5,142,993

1,824,056

182%

66,029,291

56,127,601

54,279,249

22%

Total

284,027,851

179,709,999

58%

Taxes other than on income expenses in 2011 increased by 58% or KZT104 billion compared to 2010. This is primarily due to the increased expenses for rent tax, mineral extraction tax , export customs duty and other taxes.

Rent tax expenses in 2011 increased by 54% in comparison with 2010 due to the increase in crude oil market prices. In 2011 Brent price increased by 41% to US$111.26 per barrel. As a result the rent tax rate increased from 16% during 2010 to 22% in 2011.

The increase of Mineral Extraction Tax expenses in 2011 compared to 2010 is due to the increased crude oil market prices.

The change in export customs duty is explained by re-introduction of export customs duties starting from August 16, 2010. Also, starting from January 1, 2011 export customs duty rate increased up to US$40 per ton from previous US$20 per ton. Also in the Q2 2011, Company recognized export customs duty in the amount of KZT15.2 billion for volume of oil shipped in 2008 and realized in 2009 after the introduction of the rent tax. Company has recognized this amount after an unsuccessful appeal to the additional charges of customs bodies and dismissal of the appeal of the Company by the Supreme Court of the RK.

Increase in other taxes is explained by the writing off of VAT receivable for total amount of KZT2.1 billion in connection with the received recommendations and explanations of the relevant sections of the Tax Code from consultants and tax officials.

Finance Income

Net finance income, including foreign exchange gain for 2011 was KZT24.3 billion, as compared to KZT27.1 billion for 2010. The drop is mainly explained by the decrease in interest income. Interest income decreased due to a reduction in the average rate of interest on deposits, which was partially offset with increase in interest income on debt instrument of NC KMG.

Share of Income in Associateand Joint Ventures

The Company’s income from its share in associate and joint ventures in 2011 was KZT84.3 billion compared to KZT56.6 billion in 2010. This increase was mainly due to high crude oil prices during 2011. Share of income from JV Kazgermunai LLP was KZT38.4 billion and from PetroKazakhstan Inc. was KZT45.7 billion. For further details please refer to section: Overview of Associate and Joint Ventures Operations.

Income Tax Expense 

Q4 2011

Q3 2011

Q4 2010

Q4 on Q4 change

 

2011

2010

Change

(KZT thousands)

%

(KZT thousands)

%

60,829,793

64,497,888

83,548,990

-27%

Profit before tax

272,592,108

291,947,153

-7%

46,317,654

43,312,690

51,050,145

-9%

Profit before tax

(net of JV's and associates results)

188,315,796

213,834,120

-12%

16,547,550

14,187,380

5,855,429

183%

Income tax

63,661,222

57,445,263

11%

27%

22%

7%

288%

Effective tax rate

23%

20%

19%

36%

33%

11%

212%

Effective tax rate (net of JV's and associate results)

34%

27%

26%

The effective tax rate (net of JV’s results) increased due to non-deductible expenses increase in 2011, such as amounts of fines and penalties paid on 2004-2005 tax audit results. Also, increase in income tax is explained by submission of additional declarations for 2006-2008 periods due to revision of the position of the Company to the risks identified in the comprehensive tax audit for 2004-2005.

The income tax expenses in Q4 2011 in comparison with Q4 2010 increased mainly due to significant deductions related to double tax depreciation for full 2010 made in Q4 2010.

Profit for the Period

As a result of the factors mentioned above, in 2011 the Company’s profit for the period decreased by 11% to KZT208.9 billion compared to 2010.