KMG EP 9M2017 financial results show improvement due to crude oil appreciation.

Altynay IbraimovaNovember 13, 2017

Today, KMG EP reported 9M2017 financial results, according to which revenues exceeded last year's figure by 29%, and the Company more than doubled its net profit. The main support for KMG EP's results was the rise in oil prices, the prevalence of export supplies, the positive exchange rate difference and profit from Kazgermunai, CCEL and PKI. Containment factors were higher oil tax costs for and employee benefit costs.

For 9M2017 KMG EP increased revenues by 29% yoy to T666bn, largely due to a rise in the average price of Brent crude oil (+ 24% yoy), accompanied by a higher share of export sales (69%, + 9pp yoy).

For 9M2017 an increase in production costs (excluding depreciation) by 39% yoy (up to T431bn) is observed, which is largely due to higher production costs (+ 18% to T230bn) compared to the previous period.

In addition, due to the rise in oil prices in the reporting period, there has been an increase in expenses on rental tax (4 times yoy to T51bn), an increase in mineral extraction tax by 65% ​​(to T65bn) and an increase in export customs duties by 30% (to T72bn).

General and administrative expenses, on the contrary, decreased by 2%.

The EBITDA margin for 9M2017 did not show any changes, amounting to 21%.

The company received T18.2 bn of profit from participation in Kazgermunaygas, CCEL and PKI, compared to a loss of T7.6bn in 9M2016. Also, a profit from the exchange difference of T29bn was made against the loss a year earlier (T7bn) as a result of an increase in the exchange rate of the tenge to the US dollar from T333.29/$ to T341.19/$.

As a result, the net profit for 9M2017 amounted to T168 bn, 2.2 times higher than the same indicator for 9M2016 (T76blard).

Cash from KMG EP has increased by 16% since the beginning of the year to T1 360 bn, 98% of which are denominated in foreign currency.

Capital expenditures for the reporting period amounted to T76bn (+ 6% yoy) and for the whole of 2017 are planned at the level of T136 bn.

Fig. 1. Selected financials

KZT bn

9М2016

9М2017

yoy

Revenue

   514.7  

  665.5  

29%

Production Expenses

-  195.4  

-  230.3  

18%

Selling, General and Administrative 

-    94.5  

-    92.8  

-2%

Taxes other than on Income

-  115.8  

-  201.6  

74%

Depreciation and amortization

-    22.5  

-    25.8  

14%

EBITDA

   109.0  

  140.2  

29%

Net profit

     75.7  

  168.4  

122%

Source: Company data

Our view

The Company's results exceeded our expectations, in particular, the company's revenue exceeded our forecasts by 3%. At the same time, we underestimated the potential for increasing the Company's production costs, which exceeded our forecast by 2%. As a result, the EBITDA margin coincided with our expectations of 17% in 3Q2017.

At the same time, a relatively high price for oil, profit from participation in joint ventures and a positive exchange rate difference contributed to the receipt of 9M2017 net profit, commensurate with what we expect on the basis of 2017 results.

Due to the more favorable conditions for KMG EP on the oil market, we assess the improvement of the Company's financial results as reasonable and do not note any additional factors exceeding our expectations. We continue to hold our opinion on the possible risks of the relationship between KMG EP and its parent company and maintain our "Hold" recommendation.