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 $2.43 - Production for the first
quarter averaged 149,732 bopd an increase of 4.8% over the same
period in 2004 - Continued share buy-backs under the Company's
Normal Course Issuer Bid - Successful completion of first
horizontal production wells - Drilled 20 development wells and 3
exploration wells in the first quarter - Dry gas pipeline to the
City of Kyzylorda constructed and commissioned FINANCIAL
HIGHLIGHTS:
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Three Months ended (in millions of US$ except per share amounts)
March 31
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2005 2004 ---- ----
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Gross Revenue $ 502.5 $ 325.3
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Net income 165.6 87.5
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Per share (basic) 2.18 1.11
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Per share (diluted) 2.16 1.08
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Cash flow 186.4 110.8
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Per share (basic) 2.46 1.41
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Per share (diluted) 2.43 1.37
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Weighted Average Shares Outstanding
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Basic 75,918,721 78,742,750
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Diluted 76,612,892 80,658,736
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Shares Outstanding at End of Period 75,728,337 79,865,009
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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
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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
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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
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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
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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)
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