Petrokazakhstan (NYSE:PKZ)
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PetroKazakhstan Inc. - Financial Results for the First Quarter
Ending March 31, 2005
CALGARY, May 3 /PRNewswire-FirstCall/ -- PetroKazakhstan Inc.
("PetroKazakhstan" or the "Company") announces its financial results for the
three months ending March 31, 2005. All amounts are expressed in U.S. dollars
unless otherwise indicated.
HIGHLIGHTS:
- Net income per share (diluted) of $2.16, cash flow per share
(diluted) of $2.43
- Production for the first quarter averaged 149,732 bopd an increase
of 4.8% over the same period in 2004
- Continued share buy-backs under the Company's Normal Course Issuer
Bid
- Successful completion of first horizontal production wells
- Drilled 20 development wells and 3 exploration wells in the first
quarter
- Dry gas pipeline to the City of Kyzylorda constructed and
commissioned
FINANCIAL HIGHLIGHTS:
-------------------------------------------------------------------------
Three Months ended
(in millions of US$ except per share amounts) March 31
-------------------------------------------------------------------------
2005 2004
---- ----
-------------------------------------------------------------------------
Gross Revenue $ 502.5 $ 325.3
-------------------------------------------------------------------------
Net income 165.6 87.5
-------------------------------------------------------------------------
Per share (basic) 2.18 1.11
-------------------------------------------------------------------------
Per share (diluted) 2.16 1.08
-------------------------------------------------------------------------
Cash flow 186.4 110.8
-------------------------------------------------------------------------
Per share (basic) 2.46 1.41
-------------------------------------------------------------------------
Per share (diluted) 2.43 1.37
-------------------------------------------------------------------------
Weighted Average Shares Outstanding
-------------------------------------------------------------------------
Basic 75,918,721 78,742,750
-------------------------------------------------------------------------
Diluted 76,612,892 80,658,736
-------------------------------------------------------------------------
Shares Outstanding at End of Period 75,728,337 79,865,009
-------------------------------------------------------------------------
For the first quarter of 2005, the Company recorded $165.6 million of net
income, an 89.3% increase over the first quarter of 2004 and $186.4 million of
cash flow, a 68.2% increase over the first quarter of 2004.
Share Buy-back program
In the first quarter of 2005 the Company repurchased and cancelled 732,800
shares at an average price of C$44.30 per share. Subsequent to the end of the
quarter, the Company repurchased and cancelled an additional 1,137,500 shares
at an average price of C$46.20 per share.
The Company has previously commented on its approved Normal Course Issuer bid
program on the Toronto Stock Exchange. Recently the Company announced the
expansion of its share buy-backs to the New York Stock Exchange. While this
does not increase the number of shares ultimately approved to be repurchased,
it does provide the Company greater flexibility in the execution of its open
market repurchases. Under its current Normal Course Issuer Bid program, the
Company is permitted to purchase an additional 3,963,629 Common Shares of which
up to 3,729,792 Common Shares may be purchased through the facilities of the
New York Stock Exchange.
The approved share repurchase program commenced on August 13, 2004 and will
terminate when PetroKazakhstan has purchased the maximum allowable number of
shares unless it provides earlier notice of termination. If not previously
terminated, the renewed share repurchase program will terminate on August 12,
2005.
UPSTREAM OPERATIONS REVIEW
--------------------------
Production
During the first quarter of 2005, PetroKazakhstan's production volumes totaled
13.48 million barrels of oil or an average of 149,732 barrels of oil per day
("bopd") representing a 4.8% increase over the first quarter 2004 production of
142,919 bopd.
During the first quarter of 2005 the Company experienced a temporary reduction
of production at the Kumkol South field as a result of significant remedial
work designed to improve field performance, including deepening wells and
increasing tubing sizes in its water injection wells. Production was also
constrained due to produced water handling capacity. This issue is being
addressed. At the end of March, the daily oil production from all fields had
increased to 158,200 bopd.
Field Developments
A total of 20 development wells were drilled in the first quarter. Eleven of
these were in the Aryskum field, 2 being horizontal wells. Production rates
from the first horizontal well exceed 3,000 bopd. This is significantly higher
than the average rate of 500 bopd from vertical wells. Test production rates
for the second well are being established. Three development wells were drilled
in Kyzylkiya.
Work continues on the upgrade of the Akshabulak processing facilities that will
enable production rates to increase to over 70,000 bopd (35,000 bopd net) by
end 2005. Two development wells were drilled in the first quarter of 2005.
Expansion of facilities at Kumkol North continues to increase production
volumes. Four wells were drilled in the first quarter.
Continued development and production from the East Kumkol field is on temporary
hold during the process of obtaining regulatory approvals and agreements with
the partner, Turgai Petroleum ("TP").
Enhanced Oil Recovery Project
During the quarter, pumping equipment was sourced and is currently on site to
start an initial test of injecting limited volumes of Liquefied Petroleum Gas
("LPG") to a Kumkol South well. This is a precursor to the pilot EOR project
being designed and planned to start later in the year.
Exploration and Appraisal
A total of 3 exploration wells were drilled during the first quarter, one in
the Aryskum field and two in the Kyzylkiya field.
The Aryskum well was the fifth in a program to discover oil in channel sands
below the gas cap. The findings from all of these Jurassic wells are being
incorporated into a revised geological model which will lead to further
appraisal drilling during the second half of 2005.
Evaluation of the northern extension of the Kyzylkiya field continued with the
drilling of an exploration well on the flank of the structure. Although the
well encountered oil shows and reservoir quality sands, the main interval was
water wet and post testing analysis shows the well encountered the main
reservoir at the edge of the structure. The results of this well along with the
previous successful wells are being used to update the interpretation of the
structure and a new four well exploration program is planned to be drilled this
year.
A well was drilled on the south eastern margin of the Kyzylkiya field to test
the flank potential. The well encountered 3.5 meters ("m") of net oil pay and a
testing program is being undertaken.
Interpretation of the 3D seismic data acquired during the second half of 2004
over recently acquired new acreage in South Kyzylkiya has been interpreted and
prospects are being selected for drilling during the second quarter 2005.
Appraisal activity on the North Nurali field is focused on interpretation of
the 3D seismic data acquired during the second half of 2004 over the potential
northern extension of the field. The interpretation of this data has already
resulted in the identification of a well to be drilled in the third quarter of
2005.
Continued evaluation of exploration acreage along with a recent update of the
Turgai Basin study has led to an inventory of more than 90 prospects. The
Company is now assessing the potential to increase the drilling program this
year and into 2006.
Conservation and Exploitation of Gas and LPG Reserves
PetroKazakhstan currently utilizes associated gas from the Kumkol fields,
including those of our joint venture asset, Kumkol North, in generating
electricity in the 55 megawatt ("MW") power plant.
Produced gas from certain Aryskum wells is now being injected into the field
gas cap for conservation and reservoir pressure maintenance purposes. The
volume of injected gas is gradually increasing as more wells are tied into the
main production process system. Ultimately, all of the Kyzylkiya, Aryskum and
Maibulak field produced gas will be re-injected.
As a 50% partner in the Kazgermunai Joint venture, PetroKazakhstan is
participating in the Akshabulak field LPG extraction plant. Construction is due
to be completed in the third quarter of 2005 when 2,900 bopd of LPG and 600
bopd of condensate will be extracted from produced gas. The residual dry gas
will be provided to the city of Kyzylorda through a pipeline already
constructed and commissioned.
In the first quarter, the Company initiated the design and implementation of a
full gas gathering and utilization scheme for the currently remaining flared
gas at Kumkol along with the recycling of Kyzylkiya, Aryskum and Maibulak wet
gas for the extraction of LPG. The target for completion is July 1, 2006.
Production cut backs imposed by the Kazakh regulators
As recently announced, PetroKazakhstan and TP have received instructions from
the Kazakh regulators to stop gas flaring immediately on all fields, in
accordance with new legislation passed in December 2004.
The Company estimates that compliance with these instructions will result in
production cut backs of about 35,000 bopd in total on all PetroKazakhstan
Kumkol Resources ("PKKR") operated oil fields and of about 30,000 bopd at TP's
Kumkol North field. Considering the Company's 50% share in TP, the Company's
net share of production will therefore be curtailed by about 50,000 bopd in
total.
The Company may be exposed to further production reductions if the same
instructions were applied to its KazGermunai Joint Venture, which is building
but has not yet completed its gas processing plant at Akshabulak. The Company's
share of KazGermunai's production could then be curtailed by up to 23,000 bopd.
The Company remains hopeful that, in view of its current investment program to
achieve full gas utilization by mid-2006, it will be allowed to resume
production at higher rate prior to the completion of its gas re-injection
program.
CRUDE OIL MARKETING & TRANSPORTATION
------------------------------------
Crude Oil Logistics
The volume of crude oil shipped from the company's various loading terminals
during the first quarter of 2005 was 6.9 million barrels ("mmbbls") (891.6
thousand tonnes). This represents a reduction of 16.8% against the shipments in
the last quarter of 2004. This reduction was due in part to the fact that the
state operated Karakoin to Atasu pipeline froze during the first quarter of
2005 restricting the flow of oil to China from Kumkol and the Bosporus straits
continued to have night shipping restrictions impacting crude oil flows from
the Black Sea. It is anticipated that the Atasu terminal will re-start during
the second quarter.
The shipments of crude oil from the Company's terminal at Dzhusaly continued to
grow and accounted for 83.5% of all shipments. In the fourth quarter of 2004
Dzhusaly handled 68.6% of shipments.
Shipments via the Caspian Pipeline Consortium ("CPC") pipeline grew to their
maximum contractual volume during the first quarter of 2005.
As a result of the closure of the Atasu terminal mentioned previously,
deliveries to China were reduced by 59% versus the volumes delivered to China
in the fourth quarter of 2004.
Crude Oil Prices and Transportation Differentials
International crude oil prices hit new highs during the first quarter of 2005.
The average of the daily Platt's quotation for Brent during the first quarter
of 2005 was $47.62 per barrel ("/bbl").
Differentials between heavy/sour crudes and light/sweet crudes continued to be
a significant market factor. Kumkol CIF Mediterranean traded between a premium
of $0.03/bbl and a discount of $0.58/bbl to Brent Dated. CPC blend traded in a
range of discounts to Brent dated between $0.48/bbl and $4.48/bbl. Iranian
Light on the Persian Gulf traded at a discount to Brent dated of between
$3.15/bbl and $8.21/bbl with an average for the quarter of $5.64/bbl impacting
the value of the crude oil shipped to the Tehran refinery in January.
Encouraging discussions are underway with the National Oil Company of Iran to
modify the swap terms in order to compensate swappers for quality differences
between crude oil supplied and Iranian Light received under the swap.
These market fluctuations together with the demurrage costs in the Black Sea
due to the night shipping restrictions and the additional transportation costs
to China as a result of the closure of the Atasu terminal had a negative impact
on our crude export differentials in the first quarter of this year compared to
those of the last quarter of 2004. The differential increased to $15.93 as
compared to $13.83 in the fourth quarter of 2004.
REFINING AND REFINED PRODUCT SALES
----------------------------------
Exports of refined products continued to improve as Free Carrier ("FCA") sales
were replaced by sales closer to the end consumer. At the same time refinery
yields of higher value products continued to improve. The average weighted
value of refined product prices continued to improve on the back of firmer
market prices and a greater proportion of direct export sales.
During the first quarter the refinery experienced a malfunction in the reformer
unit used to produce gasoline which required repair. The repairs were carried
out quickly but as a result the production of high octane gasoline was reduced.
Net Returns for the first quarter were an improvement over 2004 and would have
been even better without this temporary malfunction.
Trial shipments of Russian domestic crude for processing at the refinery were
carried out during the first quarter, with the objective to displace higher
value Kumkol crude to the export market. The results of the trial to date are
positive. One consequence of changing the crude feed to the refinery is the
need to re-certify kerosene production. Under Former Soviet Union GOST
procedures the kerosene is certified by reference to the specific producing
refinery and the crude source. Kerosene produced at the Shymkent refinery from
a blend of Kumkol and Russian crudes requires re-certification. This process of
re-certification is underway. During this process the production of kerosene
may be reduced.
Vacuum Gasoil ("VGO") production and exports to the Baltic Sea continued to
perform well. It is anticipated that a new and more economical export route for
VGO will be opened during the second quarter of 2005.
MANAGEMENT DISCUSSION AND ANALYSIS ("MD&A")
-------------------------------------------
A full MD&A of the First Quarter of 2005 is available on the Company's website
and can also be obtained on application from the Company.
PetroKazakhstan Inc. is a vertically integrated, international energy company,
celebrating its eighth year of operations in the Republic of Kazakhstan. It is
engaged in the acquisition, exploration, development and production of oil and
gas, refining of oil and the sale of oil and refined products.
PetroKazakhstan shares trade on the New York Stock Exchange, The Toronto Stock
Exchange, the London Stock Exchange, and the Frankfurt exchange under the
symbol PKZ. As of December 27, 2004, PetroKazakhstan shares began trading on
the Kazakhstan Stock Exchange under the symbol CA_PKZ. The Company's website
can be accessed at http://www.petrokazakhstan.com/.
The Toronto Stock Exchange has neither approved nor disapproved the
information contained herein.
This news release contains statements that constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ
materially from those in the forward-looking statements as a result of various
factors. You are referred to our Annual Report on Form 40-F and our other
filings with the U.S. Securities and Exchange Commission and the Canadian
securities commissions for a discussion of the various factors that may affect
our future performance and other important risk factors concerning us and our
operations.
INTERIM CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE AMOUNTS)
UNAUDITED
-------------------------------------------------------------------------
Three Months Ended
March 31
2005 2004
----------- -----------
REVENUE
Crude oil 280,410 207,478
Refined products 218,342 115,947
Service fees 2,553 1,380
Interest income 1,179 443
----------- -----------
502,484 325,248
----------- -----------
EXPENSES
Production 22,396 22,464
Royalties and taxes 24,839 22,374
Transportation 101,206 68,616
Refining 4,447 4,088
Crude oil and refined product purchases 28,212 32,805
Selling 5,132 5,448
General and administrative 16,439 13,043
Interest and financing costs 4,221 6,795
Depletion, depreciation and accretion 28,478 21,941
Foreign exchange loss (gain) 1,682 (4,684)
----------- -----------
237,052 192,890
----------- -----------
INCOME BEFORE INCOME TAXES 265,432 132,358
----------- -----------
INCOME TAXES (Note 10)
Current provision 109,431 45,359
Future income tax benefit (9,896) (1,134)
----------- -----------
99,535 44,225
----------- -----------
NET INCOME BEFORE NON-CONTROLLING INTEREST 165,897 88,133
NON-CONTROLLING INTEREST 258 648
----------- -----------
NET INCOME 165,639 87,485
RETAINED EARNINGS, BEGINNING OF PERIOD 693,336 378,819
Normal course issuer bid (Note 9) (24,878) -
Common share dividends (12,191) -
Preferred share dividends (5) (9)
----------- -----------
RETAINED EARNINGS, END OF PERIOD 821,901 466,295
----------- -----------
----------- -----------
BASIC NET INCOME PER SHARE (Note 11) 2.18 1.11
----------- -----------
----------- -----------
DILUTED NET INCOME PER SHARE (Note 11) 2.16 1.08
----------- -----------
----------- -----------
See accompanying notes to the interim consolidated financial statements.
INTERIM CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
UNAUDITED
-------------------------------------------------------------------------
As at As at
March 31, December
2005 31, 2004
----------- -----------
ASSETS
CURRENT
Cash 294,881 199,105
Accounts receivable (Note 5) 234,533 198,504
Inventory (Note 6) 73,671 61,242
Prepaid expenses 60,446 62,179
Current portion of future income tax asset 72,732 65,431
----------- -----------
736,263 586,461
Deferred charges 4,407 4,662
Restricted cash (Note 4) 89,400 47,741
Future income tax asset 29,073 28,470
Property, plant and equipment 599,686 601,747
----------- -----------
TOTAL ASSETS 1,458,829 1,269,081
----------- -----------
----------- -----------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities
(Note 7) 204,124 161,759
Short-term debt (Note 8) 40,330 15,541
Prepayments for crude oil and refined products 7,909 9,916
----------- -----------
252,363 187,216
Long-term debt 134,705 134,862
Asset retirement obligations 33,321 32,499
Future income tax liability 7,052 9,936
----------- -----------
427,441 364,513
----------- -----------
Non-controlling interest 12,248 14,411
Preferred shares of subsidiary 80 80
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY
Share capital (Note 9) 190,913 191,529
Contributed surplus 6,246 5,212
Retained earnings 821,901 693,336
----------- -----------
1,019,060 890,077
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,458,829 1,269,081
----------- -----------
----------- -----------
See accompanying notes to the interim consolidated financial statements.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED MARCH 31
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
UNAUDITED
-------------------------------------------------------------------------
Three Months Ended
March 31
2005 2004
----------- -----------
OPERATING ACTIVITIES
Net income 165,639 87,485
Items not affecting cash:
Depletion, depreciation and accretion 28,478 21,941
Future income tax benefit (9,896) (1,134)
Non-controlling interest 258 648
Stock-based compensation 1,034 764
Amortization of deferred charges 255 387
Other non-cash items 616 738
----------- -----------
Cash flow 186,384 110,829
Changes in non-cash operating working capital
items (13,025) (15,709)
----------- -----------
Cash flow from operating activities 173,359 95,120
----------- -----------
FINANCING ACTIVITIES
Short-term debt proceeds 24,593 -
Short-term debt repayment - (24,494)
Long-term debt repayment - (15,933)
Common share dividends (12,382) -
Preferred share dividends (5) (9)
Purchase of common shares under normal course
issuer bid (Note 9) (26,736) -
Proceeds from issue of share capital, net of
share issuance costs 1,243 3,577
----------- -----------
Cash flow used in financing activities (13,287) (36,859)
----------- -----------
INVESTING ACTIVITIES
Restricted cash (41,659) (1,400)
Capital expenditures (22,328) (35,036)
Purchase of preferred shares of subsidiary (309) -
----------- -----------
Cash flow used in investing activities (64,296) (36,436)
----------- -----------
INCREASE IN CASH 95,776 21,825
CASH, BEGINNING OF PERIOD 199,105 184,660
----------- -----------
CASH, END OF PERIOD 294,881 206,485
----------- -----------
----------- -----------
See accompanying notes to the interim consolidated financial statements.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS TABULAR AMOUNTS IN
THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)
UNAUDITED
-------------------------------------------------------------------------
1 SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements of PetroKazakhstan Inc.
("PetroKazakhstan" or the "Corporation") have been prepared by
management in accordance with generally accepted accounting
principles in Canada. PetroKazakhstan's main operating subsidiaries
are PetroKazakhstan Kumkol Resources ("PKKR") and PetroKazakhstan Oil
Products ("PKOP"). Certain information and disclosures normally
required to be included in the notes to the annual financial
statements have been omitted or condensed. The interim consolidated
financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto in
PetroKazakhstan's Annual Report for the year ended December 31, 2004.
The accounting principles applied are consistent with those as set
out in the Corporation's annual financial statements for the year
ended December 31, 2004.
The presentation of certain amounts for previous periods has been
changed to conform with the presentation adopted for the current
period.
2 SEGMENTED INFORMATION
On a primary basis the business segments are:
- Upstream comprising the exploration, development and production of
crude oil and natural gas.
- Downstream comprising refining and the marketing and
transportation of refined products and the management of the
marketing and transportation of crude oil.
Upstream results include revenue from crude oil sales to Downstream,
reflected as crude oil purchases in Downstream, as this presentation
properly reflects segment results. This revenue is eliminated on
consolidation.
The Corporation does not disclose export revenue attributable to
individual countries as it is impractical to obtain the information.
Three months ended March 31, 2005
Elimi- Consol-
Upstream Downstream Corporate nations idated
REVENUE
Crude oil 313,160 - - (32,750) 280,410
Refined
products 122,244 112,365 - (16,267) 218,342
Service fees 1,432 997 124 - 2,553
Interest
income 953 143 83 - 1,179
----------- ----------- ----------- ----------- -----------
437,789 113,505 207 (49,017) 502,484
----------- ----------- ----------- ----------- -----------
EXPENSES
Production 22,396 - - - 22,396
Royalties and
taxes 22,196 2,643 - - 24,839
Transportation 93,780 7,426 - - 101,206
Refining - 4,447 - - 4,447
Crude oil and
refined
product
purchases 22,508 54,721 - (49,017) 28,212
Selling 2,286 2,846 - - 5,132
General and
administrative 10,047 3,796 2,596 - 16,439
Interest and
financing
costs 4,219 2 - - 4,221
Depletion,
depreciation
and accretion 25,244 3,157 77 - 28,478
Foreign
exchange loss
(gain) (670) 936 1,416 - 1,682
----------- ----------- ----------- ----------- -----------
202,006 79,974 4,089 (49,017) 237,052
----------- ----------- ----------- ----------- -----------
INCOME (LOSS)
BEFORE INCOME
TAXES 235,783 33,531 (3,882) - 265,432
----------- ----------- ----------- ----------- -----------
INCOME TAXES
Current
provision 96,658 12,586 187 - 109,431
Future income
tax benefit (8,240) (1,656) - - (9,896)
----------- ----------- ----------- ----------- -----------
88,418 10,930 187 - 99,535
NON-CONTROLLING
INTEREST - 258 - - 258
----------- ----------- ----------- ----------- -----------
NET INCOME
(LOSS) 147,365 22,343 (4,069) - 165,639
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Eliminations are intersegment revenue.
As at March 31, Consol-
2005 Upstream Downstream Corporate idated
Total
assets 1,251,498 170,602 36,729 1,458,829
Total
liabilities 385,671 37,966 16,132 439,769
Capital
expenditures
in the
quarter 20,781 9,251 535 30,567
Three months ended Consol-
March 31, 2005 Export Domestic idated
Crude oil 258,876 21,534 280,410
Refined
products 119,801 98,541 218,342
Three months ended March 31, 2004
Elimi- Consol-
Upstream Downstream Corporate nations idated
REVENUE
Crude oil 224,136 - - (16,658) 207,478
Refined
products 32,385 95,508 - (11,946) 115,947
Service fees 1,129 180 71 - 1,380
Interest income 132 34 277 - 443
----------- ----------- ----------- ----------- -----------
257,782 95,722 348 (28,604) 325,248
----------- ----------- ----------- ----------- -----------
EXPENSES
Production 22,464 - - - 22,464
Royalties and
taxes 15,992 6,382 - - 22,374
Transportation 66,710 1,906 - - 68,616
Refining - 4,088 - - 4,088
Crude oil and
refined
product
purchases 33,691 27,718 - (28,604) 32,805
Selling 2,118 3,330 - - 5,448
General and
administrative 7,343 3,164 2,536 - 13,043
Interest and
financing
costs 6,326 469 - - 6,795
Depletion,
depreciation
and accretion 16,761 4,869 311 - 21,941
Foreign
exchange loss
(gain) 8,472 (13,610) 454 - (4,684)
----------- ----------- ----------- ----------- -----------
179,877 38,316 3,301 (28,604) 192,890
----------- ----------- ----------- ----------- -----------
INCOME (LOSS)
BEFORE INCOME
TAXES 77,905 57,406 (2,953) - 132,358
----------- ----------- ----------- ----------- -----------
INCOME TAXES
Current
provision 31,908 11,883 1,568 - 45,359
Future income
tax benefit (5,878) 4,744 - - (1,134)
----------- ----------- ----------- ----------- -----------
26,030 16,627 1,568 - 44,225
NON-CONTROLLING
INTEREST - 648 - - 648
----------- ----------- ----------- ----------- -----------
NET INCOME
(LOSS) 51,875 40,131 (4,521) - 87,485
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Eliminations are intersegment revenue.
As at March 31, Consol-
2004 Upstream Downstream Corporate idated
Total
assets 798,430 171,311 142,546 1,112,287
Total
liabilities 391,518 50,870 6,393 448,781
Capital
expenditures
in the
quarter 35,598 3,245 282 39,125
Three months ended Consol-
March 31, 2004 Export Domestic idated
Crude oil 190,334 17,144 207,478
Refined
products 33,912 82,035 115,947
3 JOINT VENTURES
The Corporation has the following interests in two joint ventures:
a) a 50% equity shareholding with equivalent voting power in Turgai
Petroleum CJSC ("Turgai"), which operates the northern part of the
Kumkol field in Kazakhstan.
b) a 50% equity shareholding with equivalent voting power in LLP
Kazgermunai ("Kazgermunai"), which operates three oil fields in
Kazakhstan: Akshabulak, Nurali and Aksai.
The following amounts are included in the Corporation's interim
consolidated financial statements as a result of the proportionate
consolidation of its joint ventures before consolidation
eliminations:
Three months ended
March 31, 2005 Turgai Kazgermunai Total
Cash 76,085 82,000 158,085
Current assets, excluding cash 93,539 73,610 167,149
Property, plant and equipment, net 86,075 62,207 148,282
Current liabilities 84,769 34,524 119,293
Long-term debt - - -
Revenue 86,918 75,235 162,153
Expenses 59,063 38,214 97,277
Net income 27,855 37,021 64,876
Cash flow from operating
activities 45,224 35,355 80,579
Cash flow used in financing
activities - - -
Cash flow used in investing
activities (3,817) (4,155) (7,972)
Three months ended
March 31, 2004 Turgai Kazgermunai Total
Cash 18,681 28,010 46,691
Current assets, excluding cash 41,570 35,994 77,564
Property, plant and equipment 81,831 65,725 147,556
Current liabilities 79,880 13,900 93,780
Long-term debt - 38,353 38,353
Revenue 59,635 38,535 98,170
Expenses 41,279 22,929 64,208
Net income 18,356 15,606 33,962
Cash flow from operating
activities 11,260 19,780 31,040
Cash flow used in financing
activities - - -
Cash flow used in investing
activities (949) (2,203) (3,152)
Revenue for the three months ended March 31, 2005 and 2004 for Turgai
includes $26.2 million and $10.3 million of crude oil sales made to
Downstream, respectively, and $0.4 million and $10.3 million of crude
oil sales to Upstream, respectively. These amounts were eliminated on
consolidation.
Revenue for the three months ended March 31, 2005 and 2004 for
Kazgermunai includes $1.5 million and $5.8 million crude oil sales to
Upstream, respectively, and $1.1 million (nil for the three months
ended March 31, 2004) sales to Downstream. These amounts were
eliminated on consolidation.
4 RESTRICTED CASH
Restricted cash as at March 31, 2005 includes $89.4 million of cash
dedicated to a margin account for the Corporation's hedging program.
As at December 31, 2004 restricted cash comprised $39.0 million of
cash dedicated to the margin account for the hedging program and
$8.7 million of cash dedicated to a debt service reserve account for
the Corporation's term facility. The Corporation discharged all
hedging liabilities related to this facility as at December 31, 2004.
The debt service reserve account was released in January 2005.
Restricted cash is not available for current purposes.
5 ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
March 31, December
2005 31, 2004
Trade 186,537 150,462
Value added tax recoverable 32,838 29,316
Due from joint ventures 3,153 6,942
Other 12,005 11,784
----------- -----------
234,533 198,504
----------- -----------
----------- -----------
6 INVENTORY
Inventory consists of the following:
March 31, December
2005 31, 2004
Refined products 20,477 16,682
Crude oil produced 23,639 22,535
Crude oil purchased 7,720 2,740
Materials and supplies 21,835 19,285
----------- -----------
73,671 61,242
----------- -----------
----------- -----------
7 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
March 31, December
2005 31, 2004
Trade 90,975 70,160
Due to joint ventures 13,634 19,668
Royalties 9,075 18,259
Income taxes 69,441 30,175
Common share dividends 12,397 12,588
Other 8,602 10,909
----------- -----------
204,124 161,759
----------- -----------
----------- -----------
8 SHORT-TERM DEBT
March 31, December
2005 31, 2004
Current portion of term loans 2,039 2,039
Kazgermunai debt 13,698 13,502
Secured borrowing 24,593 -
----------- -----------
40,330 15,541
----------- -----------
----------- -----------
Secured borrowing
On March 24, 2005 the Corporation sold a receivable of $24.6 million
to a financial institution for cash. The Corporation accounted for
the transfer as a secured borrowing. The transfer was subject to a
right of limited recourse in the event the Corporation made false
representations or in the event of force-majeure. The effective
interest was 2.97% and the settlement date was April 4, 2005.
9 SHARE CAPITAL
The Corporation's common shares are listed on the New York, Toronto,
London, Frankfurt and Kazakhstan Stock Exchanges.
Authorized share capital consists of an unlimited number of Class A
common shares, and an unlimited number of Class B redeemable
preferred shares, issuable in series.
Issued Class A common shares:
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
----------------------- -----------------------
Number Amount Number Amount
----------------------- -----------------------
Balance, beginning
of period 76,223,130 191,528 77,920,226 191,695
Shares repurchased
and cancelled
pursuant to normal
course issuer bid (732,800) (1,858) - -
Stock options
exercised for cash 229,848 1,240 1,916,225 3,567
Corresponding
convertible
securities,
converted 8,159 3 28,558 10
------------ ---------- ------------ ----------
Balance, end of
period 75,728,337 190,913 79,865,009 195,272
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
In August 2004 the Corporation renewed its Normal Course Issuer Bid
program which enabled the Corporation to repurchase 7,091,429 Class A
common shares during the period from August 13, 2004 to August 12,
2005. The Corporation repurchased and cancelled 732,800 shares at an
average price of C$44.3 per share during the three months ended
March 31, 2005. The excess of cost over the book value for the shares
repurchased was applied to retained earnings.
A summary of the status of the Corporation's stock option plan as of
March 31, 2005 and the changes during the three months ended
March 31, 2005 are presented below (weighted average exercise price
expressed in Canadian dollars):
Weighted
Average
Exercise
Options Price
----------- -----------
Outstanding at December 31, 2004 2,086,656 25.17
Granted 36,000 52.38
Exercised (238,007) 6.39
Forfeited (12,334) 24.09
-----------
Outstanding at March 31, 2005 1,872,315 28.09
Options exercisable as at:
December 31, 2004 866,903 16.29
March 31, 2005 651,298 19.99
10 INCOME TAXES
The provision for income taxes differs from the results, which would
have been obtained by applying the statutory tax rate of 30% to the
Corporation's income before income taxes. This difference results
from the following items:
Three Months Ended
March 31,
2005 2004
Income before income taxes 265,432 132,358
Statutory Kazakhstan income tax rate 30% 30%
Expected tax expense 79,630 39,707
Higher tax rate in Kazgermunai 1,479 -
Excess profit tax provision 15,393 3,000
Non-deductible amounts, net 3,033 1,518
----------- -----------
Income tax expense 99,535 44,225
----------- -----------
----------- -----------
11 NET INCOME PER SHARE
The net income per share calculations are based on the weighted
average and diluted numbers of Class A common shares outstanding
during the period as follows:
Three Months ended
March 31
2005 2004
Weighted average number of common shares
outstanding 75,918,721 78,742,750
Dilution from exercisable options
(including convertible securities) 694,171 1,915,986
------------ ------------
Diluted number of shares outstanding 76,612,892 80,658,736
------------ ------------
------------ ------------
36,000 options were excluded from the calculation of diluted number
of shares outstanding for the three months ended March 31, 2005 as
the exercise price was in excess of the average market price. No
options were excluded from the calculation of diluted number of
shares outstanding for the three months ended March 31, 2004 as the
market price was in excess of the exercise price.
12 FINANCIAL INSTRUMENTS
The Corporation's financial instruments include cash, accounts
receivable, all current liabilities and long-term debt. The fair
value of cash, accounts receivable and current liabilities
approximates their carrying amounts due to the short-term maturity of
these instruments. The fair value of Kazgermunai debt and the term
loans approximates their carrying value as they bear interest at
market rates. The fair value of the 9.625% Notes is $136.3 million
versus the carrying value of $125.0 million as at March 31, 2005 as
determined through reference to the market price.
The Corporation has entered into a commodity-hedging program where it
is utilizing derivative instruments to manage the Corporation's
exposure to fluctuations in the price of crude oil. The Corporation
had entered into the following contracts with major financial
institutions.
Contract Price
Amount Ceiling or
(bbls per Contract Contracted Price
month) Contract Period Type Price Floor
120,000 January 2005 to March 2005 IPE Future 26.30-26.52 -
40,000 April 2005 to June 2005 IPE Future 25.92 -
458,333 January 2005 to December
2005 IPE Future 25.65-25.90 -
During the three months ended March 31, 2005 the Corporation has
foregone revenue of $38.3 million through these contracts.
The unrealized loss under these hedges as at March 31, 2005 is
$113.5 million. This amount is deferred and recognized in the
consolidated statement of income when the related contract is
settled. The fair value of these hedges was determined based on
forward prices as at March 31, 2005.
13 CASH FLOW INFORMATION
Interest and income taxes paid:
Three Months ended
March 31
2005 2004
Interest paid 6,414 8,510
----------- -----------
----------- -----------
Income taxes paid 70,165 42,413
----------- -----------
----------- -----------
14 COMMITMENTS AND CONTINGENCIES
Turgai tax assessments
During 2004, Turgai was subject to a tax audit for the years 2002-
2003 and received a tax assessment for approximately $148.0 million
including penalties and interest (the Corporation's 50% share is
$74.0 million).
The major issue was an assessment for excess profit taxes of
approximately $100.0 million including fines (the Corporation's 50%
share is $50.0 million). The Ministry of Finance had adopted the
position that expenditures relating to construction in progress are
not allowed as a cash outflow when computing the internal rate of
return. The Corporation believes this position is contrary to the
concept of an internal rate of return calculation and counter to the
legislation of the Republic of Kazakhstan. The Corporation, fellow
shareholder Lukoil and Turgai entered into discussions regarding this
assessment with the Ministry of Finance. These discussions will be
held to determine the correct method of calculating excess profit tax
and to clarify the interpretation of current legislation.
The remaining amount of $48.0 million was reduced upon discussions
with the Ministry of Finance and the assessment was re-issued for
$27.0 million (the Corporation's 50% share is $13.5 million). An
additional assessment may be issued depending on the outcome of the
discussions. The Corporation will continue to work with government
authorities, Turgai, and Lukoil to resolve the dispute. No provision
has been made in the interim consolidated financial statements for
this assessment.
Turgai claims
In February 2005 the Corporation, through PKKR, received a claim
filed by Turgai for $18.3 million in damages. This claim relates to
the temporary production curtailment of Turgai in late December 2004
and alleges lost revenue from export sales.
The claim was split into two separate cases. The first case for
$13.1 million relates to the alleged lost revenue from export sales
of 60,000 tonnes. In March 2005, the Kyzylorda Interregional Economic
Court issued a decision in favor of Turgai. PKKR filed an appeal, the
hearing of which was scheduled for late April 2005. See Note 15
"Subsequent Events".
The second case for $5.1 million relates to compensation for damages
from the curtailment of production. The hearing was scheduled for
late April 2005. No provision has been made in the interim
consolidated financial statements for this claim.
Kazgermunai capital commitment
In February 2005 the Corporation, through its joint venture
Kazgermunai, received a court claim filed by the Kyzylorda Akimat for
failure to fulfill infrastructure obligations. The claim is for
approximately $102.0 million (our 50% share is $51.0 million),
$28.1 million relating to infrastructure obligations with the
remainder being interest charges.
The Corporation believes the claim is without merit as a substantial
portion of the obligation has been met and the agreement does not
impose deadlines. Accordingly, no provision has been made for this
claim in the interim consolidated financial statements. See Note 15
"Subsequent Events".
Lukoil litigation
On July 6, 2004, PetroKazakhstan filed a Request for Arbitration with
the Arbitration Institute of the Stockholm Chamber of Commerce
against Lukoil Overseas Kumkol BV ("Lukoil") seeking compensation for
lost profits which PetroKazakhstan would have received as a 50%
shareholder of Turgai Petroleum but for Lukoil's failure to finance
the joint venture as provided under the Foundation Agreements for the
Joint Venture and for Lukoil's actions in violation of corporate
governance obligations and tender approval requirements. Preliminary
amount of the damage claims by PetroKazakhstan indicated to the
Arbitration Institute was $200 million. Under the agreed schedule of
arbitration proceedings, the Corporation is due to file its final
statement of claim by April 22, 2005 and Lukoil is due to respond by
June 30, 2005.
On July 21, 2004, PKKR filed a claim in the District Court of
Amsterdam against Lukoil for damages suffered by PKKR as a result of
unlawful actions by Lukoil related to the shut-in of certain wells
located at the border of the Kumkol North and the Kumkol South
fields. The preliminary amount of the claim, as at the date of the
filing, was an initial $65 million. This amount increases daily as
the production of Kumkol South continues to be partly constrained.
As of March 31, 2005 the outcome of this litigation could not be
determined, and, accordingly, no amounts were recorded in the interim
consolidated financial statements.
The Corporation is involved in certain other litigation and claims
associated with the normal course of operations. Management believes
that settlements, if any, would not have a material impact on the
Corporation's financial statements.
15 SUBSEQUENT EVENTS
Turgai claims
On April 19, 2005, the Kyzylorda Interregional Economic Court issued
a decision that PKKR shall pay to Turgai approximately $5.1 million
as compensation for damages from the curtailment of production. The
Corporation believes the claim is without merit. PKKR is planning to
appeal the decision. No provision has been made in the financial
statements for this claim.
On April 20, 2005, the Kyzylorda Interregional Economic Court issued
a decision on PKKR's appeal against the March 2005 court decision to
pay Turgai $13.1 million for the alleged lost revenues from export
sales of 60,000 tonnes. According to the decision, Turgai must
transfer, in return, title to the 60,000 tonnes of crude oil to PKKR.
PKKR does not plan to appeal this ruling. The Corporation has
recorded this transaction as an increase in accounts receivable and
accounts payable.
On April 4, 2005, Turgai filed a claim against PKOP for $5.6 million
for the alleged difference between market price and the price paid by
PKOP for crude oil purchased from Turgai during September and October
of 2004. On April 15, 2005, Turgai filed an additional claim for
$1.4 million against PKOP regarding the same issue for November of
2004. The hearings are scheduled to be held in May 2005.
The Corporation believes these claims are without merit as the price
paid was in accordance with prevailing agreements. No provision has
been made in the interim consolidated financial statements for these
claims.
Lukoil claim
In April 2005, the Corporation received a copy of a Request for
Arbitration filed with the Arbitration Institute of the Stockholm
Chamber of Commerce by Lukoil and Turgai against PetroKazakhstan Inc.
for $100 million. This amount is the alleged difference between
market prices and the prices paid by PKOP for crude oil purchased
from Turgai during the period from October 2003 to November 2004.
The Corporation believes the claim is without merit, as the price
paid was in accordance with prevailing agreements. No provision has
been made in the interim consolidated financial statements for this
claim.
Recent tax assessments
In April 2005, the Corporation, through its subsidiaries, received
two assessments on transfer pricing for 2002 and 2003, including
$64.3 million for PKKR and $12.2 million for PKOP. The assessments
challenge the discounts negotiated with purchasers of the
Corporation's crude oil. For refined products the assessment applies
prices at a sales point in the Mediterranean Sea to the Corporation's
sales made in Central Asia.
The Corporation believes these assessments are incorrect, as they
fail to incorporate arms length negotiations between third parties
and actual market prices in each distinct market. No provision has
been made in the interim consolidated financial statements for these
assessments. The Corporation will appeal both assessments.
Kazgermunai capital commitment
In April 2005, the Economic Court in the Kyzylorda Oblast ruled in
favor of the Kyzylorda Akimat. The Corporation through Kazgermunai
will appeal this decision. No provision has been made in the interim
consolidated financial statements.
Curtailment of production
On April 26, 2005 the Corporation's subsidiary PKKR commenced the
process of reducing production to a level that will eliminate gas
flaring in accordance with new legislation passed in December 2004.
The Corporation estimates that compliance with these instructions
will result in production cut backs of about 35,000 bopd in total on
all PKKR operated oil fields and of about 30,000 bopd at Turgai
Petroleum's Kumkol North field. Considering the Corporation's 50%
share in Turgai, the Corporation's net share of production will
therefore be curtailed by about 50,000 bopd in total.
The Corporation may be exposed to further production reductions if
the same instructions were applied to its Kazgermunai joint venture,
which is building, but has not yet completed a gas processing plant
at Akshabulak. The Corporation's share of Kazgermunai's production
could then be curtailed by up to 23,000 bopd.
The Corporation remains hopeful that, in view of its current
investment program to achieve full gas utilization by mid - 2006, it
will be allowed to resume production at higher rates prior to the
completion of its gas re-injection program.
DATASOURCE: PetroKazakhstan Inc.
CONTACT: Ihor P. Wasylkiw, Vice President, Investor Relations,
(403) 221-8658, (403) 383-2234 (cell); Jeffrey D. Auld, Vice President,
Treasurer, +44 (1753) 410-020, +44 79-00-891-538 (cell)