JSC KazMunaiGas Exploration Production released its consolidated financial statements for the year ended December 31, 2010:
Commenting on the financial results for the year, Kenzhebek Ibrashev, CEO of KMG EP, said, "2010 was an eventful year, rich with business, operational and financial activity. Strong financial results are the evidence of our ability to benefit from the favorable oil price environment and today's announcement further endorses the success of the Company's acquisition strategy. We remain confident that the business will successfully continue to grow and strengthen in 2011 as planned, consolidating our position as a leader in the Kazakhstan oil & gas sector, through the enhanced effectiveness of operations, cost reductions and exploration."
In 2010 KMG EP's consolidated production was 13,285 thousand tonnes of crude oil (270kbopd) including the Company's stakes in LLP Kazgermunai JV (KGM), JSC Karazhanbasmunai (CCEL) and PetroKazakhstan Inc. (PKI). The consolidated production for the year is 16% higher than for the same period of 2009 mainly due to the acquisition of a 33% stake in PKI in December 2009.
In 2010 the Company produced 8,766 thousand tonnes (177kbopd) of oil at Uzenmunaigas and Embamunaigas production facilities, which is 196 thousand tonnes (4kbopd) or 2% less than for the same period of last year. Embamunaigas outperformed the production plan by 1%, while Uzenmunaigas produced less than the target by 1%. The decline in production was mainly caused by the failure to perform well-service operations and timely oilfield equipment repairs amid a labor action by Uzenmunaigas workers over the period of 4-18 March, 2010. In addition, in the period from June to September 2010 there were a number of emergency power cuts in the fields, caused by severe weather conditions.
The Company's export sales volumes, excluding its share in KGM, CCEL and PKI, were 6,860 thousand tonnes (138kbopd) and its domestic sales volumes were 1,783 thousand tonnes (36kbopd).
The Company's share in the production volumes from KGM, CCEL and PKI in 2010 amounted to 4,519 thousand tonnes of crude oil (93kbopd).
The Company's share in the sales volumes from KGM, CCEL and PKI was 5,0042 thousand tonnes of crude oil (103kbopd), including 3,8012 thousand tonnes (78kbopd) or 76% supplied to export markets.
Profit After Tax
Profit after tax (net income) for 2010 was 234.5B Tenge (US $1,591MM). This represents a 12% growth compared with 2009, which is mainly explained by a 28% increase in oil price and higher share in income of associates and JVs. The growth was partially offset by a large foreign exchange gain of 89.5B Tenge recognized in 2009 as a result of Tenge devaluation, not recurring in 2010. Excluding the foreign exchange gain/loss profit after tax increased by 72% compared with 2009.
The Company's revenue increased by 25% to 609.2B Tenge (US $4,135MM) compared with 2009. This was due to a 30% increase in the average realized price per tonne, from 53,082 Tenge (US $49.78 per bbl) to 69,101 Tenge (US $64.86 per bbl), partially offset by a 3% decrease in sales volume.
Operating expenses in 2010 were 422.5B Tenge (US $2,867MM), which is 28% higher compared with 2009. A significant part of the opex increase is due to the higher rent and mineral extraction taxes (MET) resulting from the increased oil price and customs export duty (CED) reintroduced from 16 August 2010. Excluding taxes and CED, operating expenses in 2010 increased by 15% compared with 2009. This was driven mainly by an increase in payroll, repairs and maintenance, transportation expenses, depreciation and amortization.
Increase of payroll expenses reflects salary indexation from the 1st of January 2010 and a salary increase at the production units from June 1, 2010. Growth in repairs and maintenance expenses was due to increased number of repaired wells and higher repair cost per well. Growth in transportation expenses was mainly due to increased volume of transportation through CPC pipeline and a 10% increase of transportation tariffs imposed by Transneft from January 1, 2010. Opex growth was partially offset by lower fines and penalties in 2010 (see details in Fines and penalties section).
Operating cash flow for 2010 was 115.7B Tenge (US $785MM), which is 22% lower than in 2009. The decrease is mainly due to significant foreign exchange gain incurred in 2009 (partially recognized as cash from operating activity) as a result of Tenge devaluation, not recurring in 2010.
Purchases of property, plant and equipment (as per Cash Flow Statement) in 2010 were 86.7B Tenge (US $588MM) compared with 43.3B Tenge (US $294MM) in 2009, representing 100% increase. Capex growth is associated with the increase in production drilling from 95 wells in 2009 to 215 wells in 2010 and the increase in exploration drilling from 4 wells in 2009 to 8 wells in 2010.
In 3Q10 KMG EP discovered an oil accumulation in South-East Novobogat structure of the Liman block. The accumulation is located on the southern slope of the Novobogatinsk Salt Dome 70 km west of Atyrau and is in close proximity to the Novobogatinsk Southeast oil field operated by Embamunaigaz. The Company is currently testing the well and plans to evaluate commercial reserves in 2011.
At the R-9 block the Company completed construction of 2 exploration wells with a depth of 1,600m and 1,850m on Kulsary and Koikara structures, respectively. The wells turned out to be dry and were liquidated. In addition, at the same block KMG EP developed the technical project plan for the field work, processing and interpretation of 3D seismic data of 400 square kilometers and 2D seismic data for 40 kilometers. As a result of the processing and interpretation, post-salt structures with high potential were determined for exploration drilling in 2011-2012.
In the Nurzhanov field KMG EP commenced drilling 3 exploration wells with a total planned depth of 9,000 meters.
In 2010 exploration drilling costs amounted to 3.7B Tenge (US $25MM) compared to 2.0B Tenge (US $14MM) in 2009.
Cash and debt
Cash and cash equivalents as at 31 December 2010 amounted to 98.5B Tenge (US $668m) compared with 107.6B Tenge (US $725MM) as at 31 December 2009.
Other financial assets (current and non-current) at 31 December 2010 were 599.6B Tenge (US $4,068MM) compared with 535.1B Tenge (US $3,607MM) as at 31 December 2009. Other financial assets include the debt instrument ("the Bond", see below) issued by National Company "KazMunaiGas" (NC KMG), deposits and other financial instruments.
On July 16, 2010, the Company purchased the Bond issued by NC KMG in the amount of 220 billion Tenge (US $1.5B) which carry an annual coupon of 7% and will mature in June 2013 as per previously disclosed information. KMG EP recognized 7.1B Tenge (US $48MM) interest income from NC KMG Bonds as of 31 December 2010.
As at December 31, 2010, 81% of cash and financial assets (including the Bond) were denominated in USD and 19% were denominated in Tenge. At the reporting date 22% of the financial assets and cash were held with two Kazakh banks, Kazkomertzbank and Halyk bank compared with 75% at the same date of 2009. According to KMG EP's treasury policy amendments adopted in 2010, the amount of financial assets held with Kazkomertzbank and Halyk bank is being gradually decreased. As of the end of 2010 this amount was 151.6BTenge (US $1B). Interest accrued on deposits in banks in 2010 was 27.6B Tenge (US $187MM).
Borrowings and obligations were 122.5B Tenge (US $831MM) as at 31 December 2010 compared with 137.7B Tenge (US $928m) as at 31 December 2009. Borrowings include 114.3B Tenge (US $776MM) of non-recourse debt of KMG PKI Finance B.V. related to the acquisition of the 33% stake in PKI.
Net cash position at 31 December 2010 amounted to 575.7B Tenge (US $3,905MM) compared with 505.0B Tenge (US $3.4B) as at 31 December 2009.
Outlook for 2011
Production in 2011 at Uzenmunaigas and Embamunaigas is expected to be 9,100 thousand tonnes (183 kbopd), which is 4% higher compared with 2010. According to preliminary estimates consolidated production in 2011 is expected to increase 2% up to 13.5 million tonnes including KMG EP's share in KGM, CCEL and PKI.
The annual plan on shipments to domestic market from Core fields in 2011 is expected at the level of 1.9 million tonnes (38kbopd).
The Company's Budget for 2011 was based on the oil price of US $65 per barrel which is in line with the Government's macroeconomic forecast and the oil price assumption used by the Company's parent, National Company KazMunayGas.
In 2011 the Company is planning to spend about 106.4B Tenge (US $709MM) on capital expenditure, which is 23% more than in 2010, due to increased production and exploration drilling, including first subsalt well at "Zharkamys East-1" oilfield at LLP "SapaBarlauService" ("SBS"), as well as the implementation of the associated gas utilization program.
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