CALGARY, Alberta, Canada, Nov. 3, 2003 (PRIMEZONE) -- PetroKazakhstan Inc. ("PetroKazakhstan") announces its financial results for the three months ending September 30, 2003. All amounts are expressed in U.S. dollars unless otherwise indicated.
HIGHLIGHTS:
Third consecutive quarter of record earnings and cash flow KAM pipeline operational and realising material cost savings Record export shipments of crude oil Excellent results of exploration program in North Nurali
FINANCIAL HIGHLIGHTS:
(in millions Nine Months ended Sept. Three Months ended
of US$ except 30 Sept. 30
per share
amounts)
2003 2002 2003 2002
Gross Revenue $806.7 $568.7 $303.2 $248.0
Net income 227.2 117.4 90.7 60.5
Per 2.90 1.45 1.17 0.74
share (basic)
Per 2.79 1.39 1.12 0.71
share
(diluted)
Cash flow 288.4 160.4 108.5 79.1
Per 3.69 1.98 1.40 0.97
share (basic)
Per 3.55 1.90 1.34 0.93
share
(diluted)
Weight
Average
Shares
Outstanding
Basic 78,258,611 81,042,900 77,707,623 81,301,955
Diluted 81,288,890 84,483,117 81,266,718 84,742,172
Shares 77,771,788 81,041,485 77,771,788 81,041,485
Outstanding
at End of
Period
For the third quarter of 2003, PetroKazakhstan reports $90.7 million of net income, a 49.9% increase over the quarter ended September, 2002 and $108.5 million of cash flow, a 37.2% increase over the quarter ended September 30, 2002. This represents basic net income per share of $1.17 and basic cash flow per share of $1.40 for the quarter. The comparable figures for the quarter ended September 30, 2002 were $0.74 basic net income per share and $0.97 basic cash flow per share.
For the nine months ended September 30, 2003 net income was $227.2 million, a 93.5% increase over the same period of 2002, and cash flow of $288.4 million, a 79.8% increase over the same period of 2002. This represents basic net income per share of $2.90 and basic cash flow per share of $3.69. The comparable figures for the six months ended September 30, 2002, were net income per share of $1.45 and basic cash flow per share of $1.98.
On August 5, 2003 PetroKazakhstan received approval from the Toronto Stock Exchange to proceed with the renewal of its normal course issuer bid in connection with its share repurchase program. The share repurchase program enables PetroKazakhstan to repurchase in accordance with the rules and policies of the Toronto Stock Exchange up to 5,775,028 common shares through the facilities of the Toronto Stock Exchange, representing 10% of its public float from time to time during the next 12 months. All shares purchased under the share repurchase program by PetroKazakhstan will be cancelled.
The renewed share repurchase program commenced on August 7, 2003 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 6, 2004. No shares have yet been acquired under the new program.
UPSTREAM OPERATIONS REVIEW
Production
During the third quarter of 2003, PetroKazakhstan's production volumes totaled 14.2 million barrels or an average of 154,712 barrels of oil per day ("bopd"). This represents an 8.1% increase over the third quarter 2002 production of 143,175 bopd and a 6.6% increase over the second quarter of 2003 production rates of 145,066 bopd. The Company anticipates that the average production over the full year will be in the region of 155,000 bopd representing a 14.1% increase over 2002 average production of 135,842 bopd. For the week ending October 30th, 2003, production had increased to approximately 167,000 bopd.
PetroKazakhstan currently has 8 service rigs operating that are conducting repair and maintenance work on wells to optimize daily production.
Exploration and Appraisal
Appraisal of the North Nurali field continued in the third quarter with the drilling of 3 wells. Well NN-3 requires hydro-fracing stimulation. Wells NN-4 and NN-7 are being tested. Initial flow rates are very encouraging. One zone in NN-7 flowed at 170 bopd; two more zones are still to be examined. NN-4 has been production tested at 1,313 bopd and 2,361 bopd from two zones with one more zone still to be examined. An additional upper zone is still to be investigated. The Company plans to drill 2 further wells on the field before year-end, one in the southern area and a deeper well on the flank for which a new rig has been mobilized and is currently drilling. In addition, hydro-fracing stimulation will be conducted in two of the original discovery wells to establish full delivery potential. This appraisal work will enable estimation of commercial reserves by year-end and progression into the field development.
The Company has concluded the purchase of a 160,668 acre license #952, which is to the north of the Kyzylkiya field, in October. At least one well will be drilled before year-end, with the intention to proceed with a second well and 3D seismic early in 2004.
Kumkol Facilities and Fields
Construction of two new Free Water Knockout (FWKO) facilities was completed and commissioning is in progress. These facilities will further enhance the fluid handling capabilities within the field as water production gradually increases.
Additional down-hole pumps were installed in Kumkol South and South Kumkol wells, which resulted in production increases. Debottlenecking of the Central Processing Facility (CPF) inlet began in September with the extension of a 12-inch oil gathering truck line directly to the Thermal Design Engineering (TDE) separation facility at the CPF. This extension will carry production from existing Kumkol South FWKO facilities and all of the production from South Kumkol to the TDE, reducing the process load on the CPF and creating additional process capacity.
Gas Utilization
The construction of the 55-megawatt gas power plant at Kumkol is complete and was being commissioned during October. This project will enable PetroKazakhstan to utilize associated produced gas and to establish a more reliable source of electricity within its fields. Excess electricity will be provided for sale into the Kazakhstan domestic market. The gas utilization project is jointly owned, with PetroKazakhstan and Turgai Petroleum CJSC ("Turgai"), each having an equal share.
KAM Fields
The 6-inch pipeline connecting Kyzylkiya to Aryskum is complete and the upgrade of the processing facility to handle water production was completed on schedule. Final commissioning is in progress. Construction of the Aryskum 8-inch pipeline to the main KAM pipeline, as well as the Aryskum truck offloading facility and oil processing facility was completed on schedule. Final commissioning is in progress for start up in early November. Crude oil trucking costs will be reduced with the start up of the Aryskum truck offloading facility and direct pipeline connection to the Dzhusaly terminal.
One more Aryskum appraisal well was drilled in October; it is expected to allow conversion of possible reserves into proven plus probable, and also to confirm the reservoir quality of 3D seismic amplitude anomalies interpreted along the flank of the field. One or two more additional appraisal wells are planned to be drilled before year-end.
Only one of the newly drilled Maibulak wells will be converted to an injector, while the other two will be designated as producers due to the discovery of new multiple productive horizons, in these wells initially intended for water injection. Equipment has been procured for the Maibulak water injection system; construction should be completed by the end of the fourth quarter. Pumps have now been installed in 5 producing wells and a pilot water injection operation was initiated in an existing well in August. KAM Pipeline
The 177 kilometer, 16-inch pipeline from Kumkol to Dzhusaly via the KAM fields has now been in use for a full quarter with no operational problems. The pipeline is capable of transporting and loading into rail cars 140,000 bopd and negates some 1,300 kilometers of pipeline and rail transportation currently in use. The KAM pipeline is the first high-pressure oil pipeline built in Kazakhstan and the Dzhusaly rail loading terminal is the fastest loading facility in Kazakhstan.
This material development has shown transportation cost savings in the region of $2.00 per barrel. These savings will vary depending on the ultimate destination of future shipments and will become apparent as the sales are completed. In addition to cost savings, this facility provides additional transportation and marketing capacity and flexibility.
East Kumkol
Joint Venture agreements with Turgai for the development and operation of the East Kumkol field, which extends unto the Kumkol North license, continue to progress. Government contracts, regulatory approvals and development projects are reaching final negotiating positions.
Kumkol North
A 27 well 2003 drilling program is progressing with 22 wells having been drilled to the end of September. Work has started on a new water injection plant due for commissioning in the fourth quarter and a new FWKO facility will be on line at the same time.
Kazgermunai
Two water injection wells were drilled in the Akshabulak field. The program, designed to increase field production by de-bottlenecking the system, has been completed with the installation of larger export pumps. In addition, construction of a water injection facility is continuing.
One production well has been drilled in the Aksai field. Four additional wells should be drilled in the Kazgermunai area in the fourth quarter; one in the Nurali field and three in the Akshabulak field.
CRUDE OIL MARKETING & TRANSPORTATION
Total shipments of crude oil destined for export during the third quarter were slightly higher than in the second quarter, registering a 1.5% increase. However, the month of September broke all previous records for shipments. The daily average shipments during September were just over 108,400 bopd (14,000 tonnes per day), with a 'high' recorded in excess of 193,600 barrels (25,000 tonnes) on one day.
The development of new destinations, new customers and the use of new loading terminals provided expansion in capacity, reductions in transportation costs and increased the flexibility of operations.
Liftings through the KAM pipeline and Dzhusaly terminal continued to grow and accounted for 45.9% of the volumes shipped in the third quarter.
Deliveries to China from the terminal at Atasu, which improves transportation costs to China, grew rapidly and accounted for 19.4% of all shipments in the third quarter, compared to 4.8% in the second quarter.
Shipments to the Fergana refinery in Uzbekistan grew by 29.1%, against the previous quarter.
Following the Memorandum of Understanding between the Company and Lukoil, proposing the shipment of Turgai Petroleum crude oil through the Caspian Pipeline Consortium (CPC), all the necessary contracts between Turgai Petroleum, Lukoil and CPC have been concluded. As a result shipments of Kumkol crude produced by Turgai Petroleum via CPC to Novorossiisk commenced during October and are planned to increase in the following months.
As a consequence of these developments, the dependence on Tekesu for exports declined. Tekesu accounted for 31.3% of shipments in the third quarter compared to 94.6% in the second quarter, and, historically, 100%.
The modifications being carried out by the National Iranian Oil Company (NIOC) and the Iranian Railways at the Rey terminal in Tehran are nearing completion. Whilst the NIOC has experienced procurement problems with some equipment, shipments through the Iranian swap are nevertheless still expected to commence during the fourth quarter.
The average Brent quotation during the third quarter was $28.41 per barrel, which was higher than the $26.03 per barrel seen during the second quarter. Prices remained volatile with a spread of a little over $4.50 per barrel between the high and low recorded in the third quarter.
Crude oil sales recorded during the third quarter 2003 were 22.2% higher than in the previous quarter and 14.0% up on the same period of 2002. The higher volumes and the more robust market prices generated higher gross revenue on crude exports. As a result of the improvements mentioned above, the net sales revenue after transportation costs improved by $3.14 per barrel versus the second quarter of 2003.
REFINING AND REFINED PRODUCT SALES
The refinery throughput in the third quarter of 2003 was increased by 10% to 8.29 million barrels compared to 7.52 million barrels in the previous quarter as domestic and export refined product market conditions continued to improve.
Refined product prices grew by $3.61 per barrel ($28 per tonne) on average against the previous quarter, a 25% increase.
The upgrade work at the refinery continues and nears completion with both the Vacuum Distillation Unit and the new energy saving boiler facility due for start up late in the fourth quarter.
MANAGEMENT DISCUSSION AND ANALYSIS ("MD&A")
A full MD&A of the Third Quarter of 2003 is available on the Company's website and can also be obtained on application from the Company.
PetroKazakhstan Inc. is an independent, vertically integrated, international energy company, celebrating its seventh 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 worldwide symbol PKZ. The Company's website can be accessed at 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 20-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
(DEFICIT)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE
AMOUNTS)
UNAUDITED
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
REVENUE
Crude oil 163,955 143,820 440,372 319,606
Refined products 137,355 101,031 359,769 240,476
Processing fees 678 449 2,112
Interest and 1,842 2,433 6,086 6,497
other income
303,152 247,962 806,676 568,691
EXPENSES
Production 15,812 15,256 49,961 41,669
Royalties and 24,729 21,538 54,149 43,709
taxes
Transportation 56,319 50,194 171,591 100,131
Refining 3,519 5,280 10,921 17,607
Crude oil and 16,978 11,765 42,394 50,414
refined product
purchases
Selling 6,960 8,102 19,150 18,724
General and 14,780 14,440 40,354 42,270
administrative
Interest and 7,635 8,828 28,761 26,078
financing costs
Depletion and 22,377 11,686 60,878 29,064
depreciation
Foreign exchange 1,950 1,362 (3,576) 1,771
(gain) loss
171,059 148,451 474,583 371,437
INCOME BEFORE 132,093 99,511 332,093 197,254
UNUSUAL ITEM
UNUSUAL ITEM
Arbitration - 43 - 7,134
settlement
INCOME BEFORE 132,093 99,468 332,093 190,120
INCOME TAXES
INCOME TAXES
(Note 10)
Current 45,891 36,358 109,143 64,706
provision
Future income (5,082) 2,206 (6,040) 6,312
tax
40,809 38,564 103,103 71,018
NET INCOME
BEFORE MINORITY 91,284 60,904 228,990 119,102
INTEREST
MINORITY 551 391 1,822 1,672
INTEREST
NET INCOME 90,733 60,513 227,168 117,430
RETAINED
EARNINGS 204,008 (9,465) 78,821 (66,366)
(DEFICIT),
BEGINNING OF
PERIOD
Normal course - (2,164) (11,232) (2,164)
issuer bid (Note
9)
Preferred share (8) (7) (24) (23)
dividends
RETAINED 294,733 48,877 294,733 48,877
EARNINGS, END OF
PERIOD
BASIC NET INCOME 1.17 0.74 2.90 1.45
PER SHARE (Note
11)
DILUTED NET 1.12 0.71 2.79 1.39
INCOME PER SHARE
(Note 11)
See accompanying notes to the interim consolidated financial statements.
INTERIM CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
UNAUDITED
September 30, December 31,
2003 2002
ASSETS
CURRENT
Cash and cash 255,140 74,796
equivalents (Note 4)
Accounts receivable 146,551 92,431
(Note 5)
Inventory 33,462 40,529
Prepaid expenses 45,297 44,594
Current portion of 10,911 9,049
future income tax
asset
491,361 261,399
Deferred charges 7,109 5,321
Restricted Cash 15,600 -
(Note 6)
Future income tax 25,596 24,529
asset
Property, plant and 471,731 405,479
equipment
TOTAL ASSETS 1,011,397 696,728
LIABILITIES
CURRENT
Accounts payable and 96,766 96,076
accrued liabilities
Short-term debt 92,474 25,947
(Note 7)
Prepayments for 2,388 3,540
crude oil and
refined products
191,628 125,563
Long-term debt (Note 299,639 266,603
8)
Provision for future 7,940 4,167
site restoration
costs
Future income tax 13,903 17,015
liability
513,110 413,348
Minority interest 12,575 10,753
Preferred shares of 80 83
subsidiary
COMMITMENTS AND
CONTINGENCIES (Note
15)
SHAREHOLDERS' EQUITY
Share capital (Note 190,899 193,723
9)
Retained earnings 294,733 78,821
485,632 272,544
TOTAL LIABILITIES 1,011,397 696,728
AND SHAREHOLDERS'
EQUITY
See accompanying notes to the interim consolidated financial statements.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
UNAUDITED
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
OPERATING
ACTIVITIES
Net income 90,733 60,513 227,168 117,430
Items not
affecting
cash:
Depletion and 22,377 11,686 60,878 29,064
depreciation
Amortization 510 388 3,562 1,013
of deferred
charges
Minority 551 391 1,822 1,672
interest
Other non-cash (591) 3,917 1,001 4,923
charges
Future income (5,082) 2,206 (6,040) 6,312
tax
Cash flow 108,498 79,101 288,391 160,414
Changes in (3,094) (6,400) (45,462) (31,548)
non-cash
operating
working
capital items
Cash flow from 105,404 72,701 242,929 128,866
operating
activities
FINANCING
ACTIVITIES
Short-term (8,294) 20,659 8,381 18,721
debt
Purchase of - (3,066) (14,847) (3,066)
common shares
(Note 9)
Long-term debt (16,268) (8,581) 82,540 16,614
Deferred - - (3,601) -
charges paid
Proceeds from 322 127 792 740
issue of share
capital, net
of share
issuance costs
Preferred (8) (7) (24) (23)
share
dividends
Cash flow used (24,248) 9,132 73,241 32,986
in financing
activities
INVESTING
ACTIVITIES
Restricted (15,600) - (15,600) -
cash (note 6)
Long-term - - - 40,000
investment
Capital (36,016) (48,055) (121,480) (101,559)
expenditures
Proceeds from 1,258 - 1,258 -
sale of fixed
assets
Purchase of - (2,854) (4) (2,859)
preferred
shares of
subsidiary
Cash flow used (50,358) (50,909) (135,826) (64,418)
in investing
activities
INCREASE IN
CASH 30,798 30,924 180,344 97,434
CASH AND CASH 224,342 131,322 74,796 64,812
EQUIVALENTS,
BEGINNING OF
PERIOD
CASH AND CASH 255,140 162,246 255,140 162,246
EQUIVALENTS,
END OF PERIOD
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 Inc. was formerly known as Hurricane Hydrocarbons Ltd. Its main operating subsidiaries Hurricane Kumkol Munai ("HKM") and Hurricane Oil Products ("HOP") were renamed PetroKazakhstan Kumkol Resources ("PKKR") and PetroKazakhstan Oil Products ("PKOP"), respectively. 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, 2002. The accounting principles applied are consistent with those as set out in the Corporation's annual financial statements for the year ended December 31, 2002.
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 of refined products and the management of the marketing 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.
3 months ended September 30, 2003
Upstream Downstream Corporate Elimin-
ations Consolidated
REVENUE
Crude oil 185,389 - - (21,434) 163,955
Refined 26,399 123,911 - (12,955) 137,355
products
Processing fees - - - - -
Interest and 1,218 (6) 630 - 1,842
other income
213,006 123,905 630 (34,389) 303,152
EXPENSES
Production 15,812 - - - 15,812
Royalties and 24,553 176 - - 24,729
taxes
Transportation 54,307 2,012 - - 56,319
Refining - 3,519 - - 3,519
Crude oil and 15,415 35,952 - (34,389) 16,978
refined
product
purchases
Selling 3,371 3,589 - - 6,960
General and 8,415 4,980 1,385 - 14,780
administrative
Interest and 6,936 699 - - 7,635
financing costs
Depletion and 17,569 4,784 24 - 22,377
depreciation
Foreign 1,390 427 133 - 1,950
exchange loss
147,768 56,138 1,542 (34,389) 171,059
INCOME (LOSS) 65,238 67,767 (912) - 132,093
BEFORE INCOME
TAXES
INCOME TAXES
Current 28,908 15,317 1,666 - 45,891
provision
Future income (7,856) 2,774 - - (5,082)
tax
21,052 18,091 1,666 - 40,809
MINORITY - 551 - - 551
INTEREST
NET INCOME 44,186 49,125 (2,578) - 90,733
(LOSS)
Intersegment 21,434 12,955 - - -
revenue
As at September 30, Upstream Downstream Corporate Consolidated
2003
Total 693,862 170,266 147,269 1,011,397
assets
Total 455,686 56,318 1,106 513,110
liabilities
Capital 34,346 2,313 420 37,079
expenditures
in the
quarter
3 months ended September 30, 2002
Upstream Downstream Corporate Eliminations Consolidated
REVENUE
Crude oil 161,128 - - (17,308) 143,820
Refined 62,617 42,340 - (3,926) 101,031
products
Processing - 678 - - 678
fees
Interest 1,706 425 302 - 2,433
and other
income
225,451 43,443 302 (21,234) 247,962
EXPENSES
Production 15,256 - - - 15,256
Royalties 20,899 639 - - 21,538
and taxes
Transportati 50,194 - - - 50,194
on
Refining - 5,280 - - 5,280
Crude oil (21,234)
and refined 13,947 19,052 - 11,765
product
purchases
Selling 4,883 3,219 - - 8,102
General and 8,821 4,391 1,228 - 14,440
administrati
ve
Interest 2,024 489 6,315 - 8,828
and
financing
costs
Depletion 8,351 3,311 24 - 11,686
and
depreciation
Foreign 294 1,004 64 - 1,362
exchange
loss
124,669 37,385 7,631 (21,234) 148,451
INCOME 100,782 6,058 (7,329) - 99,511
(LOSS)
BEFORE
UNUSUAL
ITEMS
UNUSUAL ITEM
Arbitration 43 - - - 43
settlement
INCOME 100,739 6,058 (7,329) - 99,468
(LOSS)
BEFORE
INCOME TAXES
INCOME TAXES
Current 28,959 5,593 1,806 - 36,358
provision
Future 5,705 (3,499) - - 2,206
income tax
34,664 2,094 1,806 - 38,564
MINORITY - 391 - - 391
INTEREST
NET INCOME 66,075 3,573 (9,135) - 60,513
(LOSS)
Intersegment 17,308 3,926 - - -
revenue
As at September 30, Upstream Downstream Corporate Consolidated
2002
Total 494,809 132,353 110,222 737,384
assets
Total 225,675 39,443 214,601 479,719
liabilities
Capital 45,428 2,567 60 48,055
expenditures
in the
quarter
9 months ended September 30, 2003
Upstream Downstream Corporate Eliminations Consolidated
REVENUE
Crude oil 524,088 - - (83,716) 440,372
Refined 42,942 339,048 - (22,221) 359,769
products
Processing - 449 - - 449
fees
Interest 3,937 790 1,359 - 6,086
and other
income
570,967 340,287 1,359 (105,937) 806,676
EXPENSES
Production 49,961 - - - 49,961
Royalties 50,886 3,263 - - 54,149
and taxes
Transportati 169,579 2,012 - - 171,591
on
Refining - 10,921 - - 10,921
Crude oil 32,335 115,996 - (105,937) 42,394
and refined
product
purchases
Selling 7,878 11,272 - - 19,150
General and 23,536 13,910 2,908 - 40,354
administrati
ve
Interest 18,117 1,881 8,763 - 28,761
and
financing
costs
Depletion 46,691 14,105 82 - 60,878
and
depreciation
Foreign (2,278) (2,023) 725 - (3,576)
exchange
(gain) loss
396,705 171,337 12,478 (105,937) 474,583
INCOME 174,262 168,950 (11,119) - 332,093
(LOSS)
BEFORE
INCOME TAXES
INCOME TAXES
Current 67,956 39,393 1,794 - 109,143
provision
Future (13,578) 7,538 - - (6,040)
income tax
54,378 46,931 1,794 - 103,103
MINORITY - 1,822 - - 1,822
INTEREST
NET INCOME 119,884 120,197 (12,913) - 227,168
(LOSS)
Intersegment 83,716 22,221 - - -
revenue
As at September 30, Upstream Downstream Corporate Consolidated
2003
Total 693,862 170,266 147,269 1,011,397
assets
Total 455,686 56,318 1,106 513,110
liabilities
Capital
expenditure 111,772 11,561 761 124,094
s for
nine months
9 months ended September 30, 2002
Upstream Downstream Corporate Eliminations Consolidated
REVENUE
Crude oil 384,797 - - (65,191) 319,606
Refined 91,416 178,535 - (29,475) 240,476
products
Processing - 2,112 - - 2,112
fees
Interest 4,443 755 1,299 - 6,497
and other
income
480,656 181,402 1,299 (94,666) 568,691
EXPENSES
Production 41,669 - - - 41,669
Royalties 42,343 1,366 - - 43,709
and taxes
Transportati 100,131 - - - 100,131
on
Refining - 17,607 - - 17,607
Crude oil (94,666)
and refined 51,149 93,931 - 50,414
product
purchases
Selling 6,020 12,704 - - 18,724
General and 24,985 11,815 5,470 - 42,270
administrative
Interest 6,295 1,165 18,618 - 26,078
and
financing
costs
Depletion 20,163 8,831 70 - 29,064
and
depreciation
Foreign 884 760 127 - 1,771
exchange
loss
293,639 148,179 24,285 (94,666) 371,437
INCOME 187,017 33,223 (22,986) - 197,254
(LOSS)
BEFORE
UNUSUAL
ITEMS
UNUSUAL ITEM
Arbitration 7,134 - - - 7,134
settlement
INCOME 179,883 33,223 (22,986) - 190,120
(LOSS)
BEFORE
INCOME TAXES
INCOME TAXES
Current 48,000 14,535 2,171 - 64,706
provision
Future 9,922 (3,610) - - 6,312
income tax
57,922 10,925 2,171 - 71,018
MINORITY - 1,672 - - 1,672
INTEREST
NET INCOME 121,961 20,626 (25,157) - 117,430
(LOSS)
Intersegment 65,191 29,475 - - -
revenue
As at September 30, Upstream Downstream Corporate Consolidated
2002
Total 494,809 132,353 110,222 737,384
assets
Total 225,675 39,443 214,601 479,719
liabilities
Capital 94,885 6,462 212 101,559
expenditures
for nine
months
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 consolidated financial statements as a result of the proportionate consolidation of its joint ventures before consolidation eliminations:
3 months ended September 30, 2003 Turgai Kazgermunai Total Cash 18,106 11,105 29,211 Current assets, excluding cash 5,647 28,966 34,613 Property, plant and equipment, 65,365 59,940 125,305 net Current liabilities 27,395 6,712 34,107 Long-term debt - 40,626 40,626 Revenue 30,132 32,673 62,805 Expenses 20,092 20,763 40,855 Net income 10,040 11,910 21,950 Cash flow from operating 13,551 7,977 21,528 activities Cash flow used in financing - - - activities Cash flow used in investing (8,651) (5,153) (13,804) activities
Revenue for the three months ended September 30, 2003 includes $11.8 million of crude oil sales made by Turgai to Downstream. This amount was eliminated on consolidation.
3 months ended September 30, 2002 Turgai Kazgermunai Total Cash 3,863 17,465 21,328 Current assets, excluding cash 11,620 14,942 26,562 Property, plant and equipment 24,583 57,021 81,604 Current liabilities 13,069 5,167 18,236 Long-term debt - 62,684 62,684 Revenue 22,209 17,767 39,976 Expenses 13,160 12,687 25,847 Net income 9,049 5,080 14,129 Cash flow from operating 5,383 12,713 18,096 activities Cash flow used in financing - 243 243 activities Cash flow used in investing (3,132) (4,395) (7,527) activities 9 months ended September 30, 2003 Turgai Kazgermunai Total Cash 18,106 11,105 29,211 Current assets, excluding cash 5,647 28,966 34,613 Property, plant and 65,365 59,940 125,305 equipment, net Current liabilities 27,395 6,712 34,107 Long-term debt - 40,626 40,626 Revenue 89,842 75,460 165,302 Expenses 58,902 49,336 108,238 Net income 30,940 26,124 57,064 Cash flow from operating 47,865 25,670 73,535 activities Cash flow used in financing - (6,016) (6,016) activities Cash flow used in investing (30,067) (11,404) (41,471) activities
Revenue for the nine months ended September 30, 2003 includes $30.5 million of crude oil sales made by Turgai to Downstream. This amount was eliminated on consolidation.
9 months ended September 30, 2002 Turgai Kazgermunai Total Cash 3,863 17,465 21,328 Current assets, excluding cash 11,620 14,942 26,562 Property, plant and equipment 24,583 57,021 81,604 Current liabilities 13,069 5,167 18,236 Long-term debt - 62,684 62,684 Revenue 52,795 33,022 85,817 Expenses 31,303 26,473 57,776 Net income 21,492 6,549 28,041 Cash flow from operating 9,766 11,616 21,382 activities Cash flow used in financing - 1,617 1,617 activities Cash flow used in investing (7,402) (7,284) (14,686) activities
Revenue for the nine months ended September 30, 2002 includes $15.5 million of crude oil sales made by Turgai and $5.8 million of crude oil sales made by Kazgermunai to Downstream. These amounts were eliminated on consolidation.
4. CASH AND CASH EQUIVALENTS
As at September 30, 2003 cash and cash equivalents included $3.1 million of cash dedicated to a margin account for the hedging program. As at December 31, 2002 the balance on this margin account was $5.7 million.
There were no cash equivalents as at September 30, 2003 and December 31, 2002.
5. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
September 30, December 31,
2003 2002
Trade 90,667 61,085
Value added tax recoverable 9,908 1,718
Due from Turgai 30,040 17,357
Other 15,936 12,271
146,551 92,431
6. RESTRICTED CASH
Restricted cash is $15.6 million of cash dedicated to a debt service reserve account for the Corporation's Term Facility (nil as at December 31, 2002). This cash is not available for general corporate purposes until the Term Facility is repaid in full (please refer to Note 8).
7. SHORT-TERM DEBT
September 30, December 31,
2003 2002
Working capital facilities 1,468 14,947
Current portion of term facility 53,471 -
Current portion of term loans 2,041 -
Joint venture loan payable 11,000 11,000
PKOP Bonds (Note 8) 24,494 -
92,474 25,947
The working capital facilities are revolving, for terms of one to eight years, are secured and have interest rates ranging from Libor plus 3.5% per annum to 14% per annum.
8. LONG-TERM DEBT
Long-term debt is represented by:
September 30, December 31,
2003 2002
Term facility 120,309 -
9.625% Notes 125,000 -
Kazgermunai debt 40,626 45,231
Term loans 13,704 -
12% Notes - 208,210
PKOP bonds - 13,162
299,639 266,603
Term facility
On January 2, 2003, PetroKazakhstan Kumkol Resources ("PKKR") entered into a secured $225.0 million term facility secured by crude oil export contracts. This facility is repayable in 42 equal monthly installments commencing July 2003. The facility bears interest at a rate of LIBOR plus 3.25% per annum. PKKR has drawn $190.0 million under this facility and has chosen not to utilize the remainder. PKKR has the right to repay the facility prior to its maturity, under certain terms and conditions. Please refer to Note 16 - Subsequent Events.
As a guarantor of the facility, the Corporation must comply with certain covenants including a limitation as to total debt and certain other financial covenants. The Corporation must also maintain a minimum cash balance of $40.0 million, of which an amount equal to 3 months principal and interest payments must be maintained in a security deposit account (see Note 6).
PKKR is also required to hedge 450,000 barrels of crude oil production per month for 2004 with a minimum price of $17.0 per bbl. As PKKR has not drawn the full amount of the facility, the hedged volumes have been reduced to 372,500 barrels of crude oil per month for 2004.
Included in deferred charges as at September 30, 2003 are $3 million of issue costs related to the Term facility, which will be amortized over the term of the facility.
9.625% Notes
On February 12, 2003, PetroKazakhstan Finance B.V., a wholly owned subsidiary of PKKR issued U.S. $125.0 million 9.625% Notes due February 12, 2010. The Notes are unsecured, unconditionally guaranteed by the Corporation, PKKR and PKOP, and were issued at a price of 98.389% of par value. Each of the guarantors has agreed to certain covenants, including limitations on indebtedness, restrictions on payments of dividends and on pledging of assets as security.
Issue costs of $1.8 million and the discount on the sale of the Notes of $2.0 million are recorded as deferred charges and will be amortized over the term of the Notes.
Kazgermunai debt
The Kazgermunai debt is non-recourse to the Corporation. During the nine months ended September 30, 2003, Kazgermunai repaid $11.6 million (50% - $5.8 million) of principal and interest.
Term loans
PKKR has obtained loans guaranteed by Export Credit Agencies for certain equipment related to the Kyzylkiya, Aryskum and Maibulak ("KAM") pipeline and the Gas Utilization Facility. The loans are secured by the equipment purchased, bear interest at LIBOR plus 4% per annum, are repayable in equal semi-annual installments and have final maturity dates ranging from five to seven years.
12% Notes
On February 3, 2003 the Corporation redeemed all $208.2 million of its outstanding 12% Notes due in 2006. The Notes were redeemed for an aggregate redemption price of $212.4 million, representing 102% of the principal amount of the Notes, plus accrued and unpaid interest of $12.5 million, for a total of $224.9 million. Deferred charges of $1.4 million recorded as at December 31, 2002 were expensed upon redemption.
PKOP bonds
On February 16, 2001 PetroKazakhstan Oil Products ("PKOP") registered 250,000 unsecured bonds (par value $100) in the amount of $25 million with the National Securities Commission of the Republic of Kazakhstan (the "PKOP bonds"). The PKOP bonds have a three-year maturity, are due on February 26, 2004 and bear a coupon rate of 10% per annum. The PKOP bonds are listed on the Kazakh Stock Exchange.
As at December 31, 2002 134,800 bonds had been issued for consideration of $13.2 million. On February 13, 2003, PKOP issued the remaining 115,200 Bonds for consideration of $11.4 million.
The PKOP bonds contain certain covenants including a limitation on indebtedness.
Repayment
Principal repayments due for each of the next five years and in total are as follows:
2003 2004 2005 2006 2007 2008
Working
capital 1,468 - - - - -
facilities
Joint
venture 11,000 - - - - -
loan
payable
PKOP - 24,494 - - - -
bonds
9.625% - - - - - -
Notes
Term 13,367 53,471 53,471 53,471 - -
Facility
Kazgermunai - - - - - -
Term 1,022 2,196 2,665 2,665 2,271 1,878
loans
26,857 80,161 56,136 56,136 2,271 1,878
Thereafter Less Total
amounts long-term
included debt
in
short-term
debt
Working
capital - (1,468) -
facilities
Joint
venture - (11,000) -
loan
payable
PKOP - (24,494) -
bonds
9.625% 125,000 - 125,000
Notes
Term - (53,471) 120,309
Facility
Kazgermunai 40,626 - 40,626
Term 3,048 (2,041) 13,704
loans
168,674 (92,474) 299,639
The Kazgermunai debt does not have fixed repayment terms.
9. SHARE CAPITAL
Authorized share capital consists of an unlimited number of Class A common shares, and an unlimited number of Class A redeemable preferred shares, issuable in series.
Issued Class A common shares:
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
Number Amount Number Amount
Balance, 77,653,139 190,577 81,371,497 199,121
beginning of
period
Shares - - (366,461) (902)
repurchased and
cancelled
pursuant to
Normal Course
Issuer Bid (a)
Stock options 103,350 325 26,250 91
exercised for
cash
Corresponding
convertible 15,299 (3) 10,199 36
securities,
converted
Balance, end of 77,771,788 190,899 81,041,485 198,346
period
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
Number Amount Number Amount
Balance, 78,956,875 193,723 80,103,784 198,506
beginning of
period
Shares
repurchased and (1,477,400) (3,616) (366,461) (902)
cancelled
pursuant to
Normal Course
Issuer Bid (a)
Stock options 273,750 792 1,194,375 620
exercised for
cash
Corresponding
convertible 18,563 - 118,107 133
securities,
converted
Cancelled shares - - (8,320) (11)
Balance, end of 77,771,788 190,899 81,041,485 198,346
period
(a) During the third quarter of 2002, the Corporation adopted a normal course issuer bid to repurchase, for cancellation, up to 5,253,238 common shares during the period from August 7, 2002 to August 6, 2003. This repurchase program was renewed on August 5, 2003, which allows the Corporation to repurchase for cancellation, up to 5,775,028 common shares during the period from August 7, 2003 to August 6, 2004. As at December 31, 2002, the Corporation had purchased and cancelled 2,531,870 shares at an average price of C$14.57 per share. The Corporation purchased and cancelled an additional 1,477,400 at an average price of C$14.69 per share during the nine months ended September 30, 2003. The excess of cost over the book value for the shares purchased was applied to retained earnings. There were no purchases under the new NCIB program.
(b) The Corporation has elected to use intrinsic values when accounting for stock options and to disclose the pro forma results of using the fair value method.
The pro forma net income per share had we applied the fair-value based method of accounting for stock options follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Net income
As reported 90,733 60,513 227,168 117,430
Pro forma 90,584 60,131 225,492 115,286
Basic net
income per
share
As reported 1.17 0.74 2.90 1.45
Pro forma 1.17 0.74 2.88 1.42
Diluted net
income per
share
As reported 1.12 0.71 2.79 1.39
Pro forma 1.11 0.71 2.77 1.36
A summary of the status of the Corporation's stock option plan as of September 30, 2003 and the changes during the nine months ended September 30, 2003 and year ended December 31, 2002 is presented below (expressed in Canadian dollars):
Options Weighted Average
Exercise Price
Outstanding at December 5,736,880 3.07
31, 2001
Granted 605,000 14.65
Exercised (1,393,281) 1.09
Forfeited (98,463) 6.73
Outstanding at December 4,850,136 5.01
31, 2002
Granted 17,000 16.20
Exercised (292,313) 3.98
Forfeited (62,275) 8.55
Outstanding at September 4,512,548 5.07
30, 2003
Options exercisable as at:
December 31, 2002 (as 1,908,798 3.87
amended)
September 30, 2003 2,422,842 2.93
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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Statutory 30% 30% 30% 30%
Kazakhstan income
tax rate
Expected tax 39,628 29,840 99,628 57,036
expense
Non-deductible 1,181 8,724 3,475 13,982
amounts, net
Income tax expense 40,809 38,564 103,103 71,018
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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Weighted
average 77,707,623 81,301,955 78,258,611 81,042,900
number of
common
shares
outstanding
Dilution 3,559,095 3,440,217 3,030,279 3,440,217
from
exercisable
options
(including
convertible
securities)
Diluted 81,266,718 84,742,172 81,288,890 84,483,117
number of
shares
outstanding
No options were excluded from the calculation of diluted number of shares outstanding for the three months and nine months ended September 30, 2003 and 2002, as the market price was in excess of exercise price.
12. FINANCIAL INSTRUMENTS
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 has entered into the following contracts with a major financial institution.
Contract Contract Contract Price Price
Amount Period Type Ceiling Floor
(bbls per ($/bbl) ($/bbl)
month)
187,500 January 2003 Zero cost 29.00 17.00
to December collar
2003
75,000 January 2003 Zero cost 30.00 17.00
to December collar
2003
112,500 January 2003 Zero cost 29.00 18.00
to December collar
2003
75,000 January 2003 Zero cost 29.50 19.00
to December collar
2003
450,000
75,000 January 2004 Zero cost 28.00 17.00
to December collar
2004
75,000 January 2004 Zero cost 29.00 17.00
to December collar
2004
75,000 January 2004 Zero cost 29.25 17.00
to December collar
2004
37,500 January 2004 Zero cost 29.60 17.00
to December collar
2004
75,000 January 2004 Zero cost 30.20 18.00
to December collar
2004
35,000 January 2004 Zero cost 30.20 18.00
to December collar
2004
372,500
During the nine months ended September 30, 2003, the Corporation has foregone revenue of $3.3 million through these contracts.
13. CASH FLOW INFORMATION
Interest and income taxes paid:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Interest paid 8,478 13,375 30,983 30,207
Income taxes 43,185 22,278 104,654 48,570
paid
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
As at September 30, 2003 the fair value, the related method of determining fair value and the carrying value of the Corporation's financial instruments were as follows.
The fair value of current assets and current liabilities approximates their carrying amounts due to the short-term maturity of these instruments.
The fair value of long term debt is based on publicly quoted market values and current market conditions for instruments of a similar nature.
Carrying Value Fair Value
Long-term debt 299,639 309,639
15. COMMITMENTS AND CONTINGENCIES
Kazakhstani environment
Kazakhstan, as an emerging market, has a legal and regulatory infrastructure that is not as mature and stable as those usually existing in more developed free market economies. As a result, operations carried out in Kazakhstan can involve risks and uncertainties that are not typically associated with those in developed markets.
The instability associated with the ongoing transformation process to a market economy can lead to changes in the business conditions in which the Corporation currently operates. Changes in the political, legal, tax or regulatory environment could adversely impact the Corporation's operations.
Tax matters
The local and national tax environment in the Republic of Kazakhstan is subject to change and inconsistent application, interpretation and enforcement. Non-compliance with Kazakhstan laws and regulations, as interpreted by the Kazakh authorities, can lead to the imposition of fines, penalties and interest. The Corporation's subsidiaries have been engaged in two court cases in Kazakhstan pertaining to disputed tax assessments received for 1998 and 1999.
The first involved PKOP and was for approximately $8.8 million. PKOP has successfully argued its case at the first level of the court system in Kazakhstan and at the Supreme Court level. There is no possibility of further appeal and accordingly, no provision has been made in the consolidated financial statements for this assessment. The second case involved PKKR and was for a total of approximately $10.5 million including taxes, fines, interest and penalties. PKKR was successful at the first level of the court system and was unsuccessful on the majority of the issues at the Supreme Court level. PKKR was unsuccessful in obtaining the Supervisory Commission's agreement to hear its appeal on the assessed taxes. The Corporation provided for $2.9 million of the $10.5 million in the December 31, 2002 consolidated financial statements. PKKR is currently disputing the remaining $7.6 million of the $10.5 million, which relates to fines and penalties assessed, as PKKR believes there was an incorrect application of the provisions of the tax act. PKKR has paid this amount to stop the further accumulation of fines and penalties and has recorded this payment as an account receivable pending resolution of this issue. No provision has been made for the disputed penalties. The Corporation, through its operating subsidiaries in Kazakhstan received tax assessments for 2000 and 2001 amounting to $56.0 million, which were reduced through negotiations to $44.8 million (including our 50% share of Turgai Petroleums assessments). The Corporation does not agree with these assessments and has filed court cases disputing these amounts.
PKOP has been successful at the first level of the court system and at the Supreme Court with respect to the entire $12.5 million of its assessment. This assessment was for withholding taxes on the acquisition of an interest in the Caspian Pipeline Consortium ("CPC") despite the fact that this transaction was not completed. Turgai Petroleum has been successful at the first two levels of the court system on almost its entire assessment of $12.0 million, of which $6.0 million is our 50% share. The Ministry of Finance may appeal these cases.
The PKKR assessment was split into two cases. The first case was for amounts totaling approximately $13.0 million and at the first level of the court system PKKR was successful on $6.8 million of the $13.0 million and was unsuccessful on the remainder. The major issue on which PKKR was unsuccessful was the assessment of royalties on flared associated gas (approximately $4.9 million). The Corporation believes the claim for royalties on flared associated gas, which has no commercial value, contravenes the provisions of its Hydrocarbons Contracts. PKKR appealed to the Supreme Court and was unsuccessful. PKKR intends to appeal this adverse decision to the Supervisory Panel of the Supreme Court. No provision has been made in the consolidated financial statements for this assessment.
The second case was for $13.5 million, with $6.9 million related to transfer pricing sent back by the court for re-negotiation. The transfer-pricing amount has been reduced through re-negotiation to $700,000. The second case was heard in September 2003 with PKKR being successful on almost all of the issues. The final assessment resulting from the court decision totaled $783,000 including the transfer pricing issue. The Ministry of Finance has the option to appeal approximately $4.2 million of the remaining assessment to the Supreme Court. No provision has been made in the consolidated financial statements for this case.
PKKR received an assessment for royalties on oil production during testing of the East Kumkol discovery for $300,000 and was assessed a fine of $1.3 million. The Corporation believes this assessment is without merit because the assessment is contrary to the Hydrocarbon Contract and relevant legislation. PKKR is disputing this assessment.
In response to PetroKazakhstan's submission, the Minister of Finance initiated the creation of a high level working group between its Officials and PetroKazakhstan representatives to address and seek resolution of all outstanding tax issues through dialogue and negotiations.
16. SUBSEQUENT EVENTS
Agency for Regulation of Natural Monopolies and Protection of Competition ("ARNM")
On October 2, the ARNM claimed that PKOP had received $6.3 million of unjustified revenue from charging prices for oil products that are allegedly in excess of ARNM authorized maximum prices. The Corporation has long taken the position that the ARNM has no right to regulate PKOP under the terms of the Privatization Agreement relating to the Shymkent refinery, which operates in a highly competitive environment. In addition, PKOP believes that the ARNM claim contains a number of factual errors. On October 9, PKOP filed a lawsuit against the ARNM challenging the ARNM claim.
The Corporation through a group company in Kazakhstan received news on October 8, that the ARNM has alleged violations of Kazakhstan's competition laws. The ARNM is claiming that approximately $31.0 million in unjustified revenue was obtained by the group company. The Corporation believes this claim has no legal merit and has taken legal action to defend itself.
Term facility
On October 24, the Corporation notified the facility agent under its term facility, that a $50 million prepayment will be made on October 31, 2003. Future repayments of the term facility will be reduced on a pro-rata basis. (Note 8)