TNK-BP reported its results for the first half of 2011.
Commenting on the results, Mikhail Fridman, Executive Chairman of TNK-BP Ltd., said, "This was an exceptional first half performance for TNK-BP. Thanks to management's continuous efforts to enhance operational efficiency and further develop our key business streams, the Company was able to deliver robust results. We have increased production, significantly expanded our resource base and nearly doubled net profit for the period. Growing our international business is a key priority for TNK-BP and we've made great progress thus far in 2011 by closing the deal to acquire BP's upstream assets in Venezuela and identifying several additional acquisition targets abroad."
1H11 OPERATIONAL HIGHLIGHTS
- In 1H11, oil and gas production (excluding JVs) continued to grow and reached 1,765 mboe/d, up 1.2% on 1H10. This growth was primarily driven by further production increases at our producing greenfields, Uvat and Verkhnechonskoye, and also by continued success in developing our Orenburg fields as well as increasing gas production at Rospan. We have developed and started implementation of a long-term West Siberia efficiency improvement program targeting a decrease in the annual production decline rate from the current 7% to approximately 2-3% per year.
- We have made good progress in our exploration and appraisal program aimed at growing the company’s resource base. Over 200 million boe of resources were added in 1H11 through exploration and appraisal. We have also demonstrated our ability to obtain new acreage by successfully acquiring 3 licenses through the federal auctions in the Orenburg region with estimated resources of 149 million boe.
- On the international front, we have closed the acquisition of upstream assets from BP in Venezuela in June, while the Vietnam deal close is expected in 3Q pending approval by the Vietnamese Ministry of Industry and Trade. We will now focus on the integration of these assets into our portfolio and ensuring their operational and financial efficiency. We have also just announced the signing of a Farm-out Agreement with Brazilian Petra Energia for the acquisition of a 45% stake in 21 blocks in the Brazilian Solimoes Basin. We hope to have the necessary agreements finalized before the end of August.
- Refining throughput was at 761 mb/d, increasing 11% y-o-y as a result of continuing debottlenecking efforts.
- We have progressed with expansion of our retail chain by opening the first two new-format highway service stations under the BP brand in Tver region within the framework of our long-term retail business development strategy. Opening these new service stations is the first step in implementing a strategy to develop highway retail sites in the European part of Russia. The operations of the sites have been very successful with initial fuel sale volumes exceeding the plan by 2-3 times.
- We also continued to reinforce our position in B2B by signing a long-term formula-based jet fuel supply agreement signed with Transaero Airlines, in line with the company’s strategy to strengthen its presence in Russia’s jet fuel market and increase transparency of fuel sales.
- Finally on the corporate side, we have embarked on an important initiative of improving the organizational structure of our business, led by Deputy Chairman of the Management Board, Maxim Barskiy. This involves switching from an asset-based management system, where local management has both wide functional and operational responsibility, to a functional governance model (or matrix model), with clear segregation of functions and more streamlined decision making. The first practical steps of this transition were the integration of Technology and Supply Chain Management streams into Upstream, as well as development and enactment of the new Delegation of Authority Matrix. The new organizational structure will improve decision-making, focus local management on its area of expertise, and improve our competitive advantage, as we continue our transformation into a global oil and gas player.
Commenting on the financial results, Jonathan Muir, Chief Financial Officer of TNK-BP Ltd., said, "In the first half 2011, TNK-BP continued to demonstrate strong financial results, supported by a favorable market environment, sustainable production growth and refinery throughput improvement. EBITDA increased by 59% y-o-y to USD 7.4 bn, underpinned by a 42% rise in the oil price, partially offset by cost increases due to higher excise rates, rising electricity and transportation tariffs, and continuing rouble appreciation. Our net income increased by 87% y-o-y to USD 4.5 bn on the back of EBITDA growth. Healthy cash flows from operations allowed us to raise organic capital expenditure by 33% y-o-y to USD 2.2 bn with particular focus on our key growth assets: Uvat, Verkhnechonskoye and Orenburg. Our financial discipline remained strong with good cash flow and successful debt portfolio management giving us the flexibility to pursue strategic inorganic opportunities."
1H11 FINANCIAL HIGHLIGHTS
- Revenues for 1H11 increased by 41% relative to 1H10 reflecting a 42% higher Urals price and 21 mboe/d (1.2%) production growth partly offset by a decrease of export sales in favor of the domestic market to avail of higher netbacks.
- Export duties and taxes other than income tax increased by 38% for 1H11 relative to 1H10 as a result of the impact of higher Urals prices on export duty and mineral extraction tax rates as well as the growth in excise rates in Russia partly offset by a significant duty lag benefit.
- Underlying materials, service and payroll inflation on cash costs amounted to only 4% year-on-year. However, electricity and transport tariff growth inflated cash costs by 8%. Rouble appreciation added 4% year-on-year. In addition, a one-off increase on an environmental provision in 2Q11 related to reassessment of some legacy issues increased costs by 3%.
- EBITDA for 1H11 amounted to USD 7.4 bn which is 59% higher compared to 1H10 largely due to the higher prices and duty lag benefit supported on the operations side by higher production and sales volumes. These positive factors were partly offset by a negative exchange rate impact as well as tariff and excise rates growth.
- 1H11 Net income amounted to USD 4.5 bn which is 87% up on the same period of 2010. This increase outpaced the EBITDA growth primarily due to relatively flat DD&A.
- Operating cash flow for 1H11 totaled USD 5.9 bn, up 51% compared to 1H10. This is a reflection of the higher EBITDA (adjusted for non-cash provisions), partly offset by a USD 0.5 bn increase in working capital primarily due to a price-driven growth in inventory and accounts receivable balances.
- Net debt increased by USD 0.6 bn compared to year end 2010 resulting in gearing growing to 22%.
- Organic capital investment in 1H11 amounted to USD 2.2 bn, 33% above 1H10, largely associated with increased investments in our growth greenfields (VCNG, Uvat) and Orenburg.
- Revenues for 2Q11 increased by 11% relative to 1Q, reflecting primarily the increase in Urals price.
- Export duties and other taxes increased 20% q-o-q driven by a 12% increase from the price effect on export duties and MET and a decrease in duty lag benefit in 2Q, partly offset by the effect of lower export sales volumes.
- Cash costs (operating expenses, transportation and SG&A) increased by 15% largely due to rouble appreciation, increase in wellwork, contracting and other activities compared to a seasonally slower 1Q as well as increased environmental provisions.
- EBITDA for 2Q11 was 12% lower compared to 1Q. The most significant reason is the decrease of duty lag benefit further exacerbated by price-driven growth in duties, taxes and costs of purchases that effectively eliminated all q-o-q benefit of higher prices on revenues. Other factors include a comparative negative impact of one-offs - disposal gains in 1Q and higher provisions in 2Q, as well as rouble appreciation and increased spending on well-work together with annual wages and salary indexation and Moscow offices relocation cost.
- 2Q11 Net Income decreased by 14%, generally following the EBITDA trend.
- Operating cash flow in 2Q increased by 55% compared to 1Q attributed primarily to lower working capital. This is mainly due to a comparative USD 1.3 bn reduction in accounts receivable balances driven by a general decrease of trade accounts receivable due to lower crude export sales in June as well as shorter receivables collection terms.
- Organic capital investments were $0.4bn higher than in 1Q11, representing primarily a seasonally higher activity level.
- Compared to the 2Q 2010 results, 2Q 2011 EBITDA and net income increased by 45% and 81%, respectively. This reflects a stronger external environment with the Urals price increasing by 48% and a higher duty lag benefit supported by an increase in trading volumes and an improvement in trading mix, including in particular a 6% higher share of refined products. These positive factors were partly offset by the effect of a stronger rouble and inflationary pressure on costs and a USD 0.1 bn comparative net loss related to one-off impacts.
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