Despite some reduction in realization volumes in 1H2017, the Company significantly increased its revenue, mainly due to the oil price growth. Transition to independent oil processing and increasing share of exports to 60% also provided a positive effect on revenue growth.
Company’s revenue for 1H2017 amounted to T437bn, 39% increase in comparison to 1H2016. EBITDA increased 2.3 times to T131bn against T56bn a year earlier. Net income has reached T88bn for 1H2017, significantly exceeding net profit of T17.2bn in 1H2016. KMG EP improved its liquidity position – cash for 30 June 2017 amounted to T1 286bn against T1 172bn at the beginning of the year. As a result of appreciating of tenge to dollar in 1H2017, Company recorded a foreign exchange loss amounted to T33bn.
Production expenses for 1H2017 have reached T149.5bn, increasing 21% yoy. The increase in expenses was caused by increasing costs on oil refining from T15.9bn in 1H2016 to T28.1bn in 1H2017 (+76% yoy), which is partially explained by the transition to independent processing in April 2016. Increased remuneration for employees from T70.3bn to T80.6bn (+14.7% yoy) in the same period also took part in increasing production costs.
Total taxes for 1H2017 amounted to T126.9bn against T79.3bn in 1H2016, which corresponds to the higher oil price and Company’s revenue growth. In May, Company received a refund of tax overpayment of T27.1bn.
Capital expenditures for 1H2017 amounted to T42bn (-19% yoy). Total capital expenditures planned for 2017 is T136bn. Therefore, the main part of Company’s capital expenditures will be in 2H2017.
Due to the increase in oil prices, KMG EP significantly increased its main financial indicators. Despite the moderate increase in production costs relative to the growth of total revenue, the Company’s tax expenses increased substantially. In particular, the taxes correlating with the price of Brent crude oil increase correspondingly. The rental tax for 1H2017 increased 3.1 times yoy to T30bn, export custom duty increased by 46% yoy to T48.9bn, the MET rose by 28% yoy to T41.1bn.
We note the positive effect of the Company’s transition to independent oil processing, and assess the increase of share of export as a factor of potential growth in profitability, given favorable pricing environment on international markets. However, considering current results we do not observe a material growth in operating metrics and see the changes in financial indicators predominantly due to impact of external factors. Taking into account the risks of the Company, we maintain our “Hold” recommendation.