KazMunaiGas: Despite growing production, revenue remains flat

analysis

KazMunaiGas: Despite growing production, revenue remains flat

By SRI ⋅ May 1, 2008 ⋅

While oil prices keep breaking new records seemingly everyday, KazMunaiGas, the Kazakh national oil company, has not registered a significant increase in revenues so far this year.

In the first quarter of 2008, KazMunaiGaz (KMG) increased its oil and gas condensate production by 9 percent compared to the same period last year. At the same time, however, consolidated revenues for the KMG Group have risen by only 0.9 percent despite the high price of crude and growing production. Analysts suggest that government actions may be the reason for the disappointing results.

According to Khalil Shehmametev, research director at Otkritie, a Russian investment bank, the KMG’s revenue from one ton of oil was $811 in the three months since the beginning of this year. This is roughly equal to that of LukOil in 2007 which was $820. “The structure of the company is very complex: besides production and processing, there is oil and gas transportation, distribution of petroleum products, etc. And since there is no information about where the revenues have come from, it is difficult to judge the contributions of each segment of the business,” Shehmametev told the Kazakh business weekly Biznis & Vlast. “Thus, to say that the results of KMG are disappointing would ne incorrect”. According to Shehmametev, the relatively low increase in revenue, which KMG registered in the most recent quarter, may be a result of governmental policies in Kazakhstan to fight inflation. These policies have severely limited the possibility of local energy companies to raise price for petroleum products and their transportation.

Galym Tumabaev, head of external relations at Trading House KMG, the retail arm of KMG, supported this view in conversation with Biznis & Vlast and said that Trading House KMG has no plans to raise prices for fuel at its gas stations. “The reason for this is that the government asked the companies not to increase the cost of petroleum products. A memorandum to this effect has been signed earlier this year for January through March 2008. However, it should be stressed that administrative regulation of prices for petroleum products cannot be maintained at such low level in the long run, because it could lead to significant interruptions in supply of fuel. The policy of artificially keeping the prices would cause such an increase in the number of KMG gasoline stations customers that the supply chains would simply be unable to cope. A prolonged period of artificially deflated prices of gasoline and other petrochemical products would certainly lead to serious damage to KMG’s bottom line,” Tumabaev added.

Denis Demin, head of research at EnergoKapital, a Russian investment company, drew attention to the existing structure of KMG’s assets and its expansion plans. “An active policy of acquisitions and rising investment costs may cause fluctuations in growth of income,” Demin told Biznis & Vlast. “Given the rising cost of acquisitions and fixed assets development, it is likely that the profitability of the company will keep lagging behind the growth in energy prices.” Therefore, investor interest will likely be focused primarily on the results of KMG Exploration Production, a KMG subsidiary focused on upstream activities, whose shares are actively traded in London and Almaty, he predicts. Perhaps its financial performance will be more illustrative.

A KMG official explained to Biznis & Vlast that the quarterly results do not reveal the actual revenues. Since the results calculated immediately after the end of the quarter, it is possible that it does not reflect all data. “KMG is a vertically integrated company which covers all activities in the oil and gas sector - starting with the exploration and production and ending with retail sale of petroleum products. Accordingly, revenues from sales of crude oil and gas constitute only one part of the consolidated income but not 100 percent. It would be a mistake to assume that income should fluctuate proportionally with production because there is no direct correlation.” Also, when comparing revenues with production and world prices, it is necessary to keep in mind that the capital expenditures on various projects and investments in production have increased by 50 percent compared to same period last year, added the KMG official.

The Kazakh state holding company Samruk which holds 100 percent of the oil company refused to comment on the results. “All questions regarding KMG’s activities should be directed to KMG itself. The state holding company does not interfere in its internal affairs,” said Murat Buldekbaev, the press service head of Samruk in an interview with Biznis & Vlast.

Brief:

The KMG group produced 4,422 million tons of oil and gas condensate in the first three months of 2008. The total production this year is projected at 17,393 tons, which would be 5.9 percent higher than in 2007. According to projections, KMG plans to transport 118,931 million cubic meters of gas this year.

From Biznis & Vlast — 4/22/2008