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| KAZ > SEC Filings for KAZ > Form 10-K/A on 12-Nov-2009 | All Recent SEC Filings |
12-Nov-2009
Annual Report
This discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the fiscal years ended March 31, 2009, 2008 and 2007. This discussion should be read in conjunction with the consolidated financial statements and footnotes to the consolidated financial statements included in this annual report.
This section includes a discussion of our results of operations for the fiscal years ended March 31, 2009, 2008 and 2007. The following table sets forth selected operating data for the fiscal years indicated:
For the year ended For the year For the year ended
March 31, 2009 ended March 31, 2007
March 31, 2008
Revenues:
Oil and gas sales $ 69,616,875 $ 60,196,626 $ 15,785,784
Expenses:
Export duty 6,783,278 - -
Oil and gas operating(1) 7,998,012 5,515,403 2,272,251
Depletion 10,403,328 9,419,655 2,006,834
Interest expense 1,138,874 - -
Depreciation and 324,028 239,155 170,610
amortization
Accretion 449,025 254,572 173,519
General and 22,262,248 14,747,754 10,757,727
administrative
Net Production Data:
Oil (Bbls) 1,080,895 907,823 321,993
Natural gas (Mcf) - - -
Barrels of Oil 1,080,895 907,823 321,993
equivalent (BOE)
Net Sales Data(3):
Oil (per Bbl) 1,073,754 896,256 315,540
Natural gas (Mcf) - - -
Barrels of Oil 1,073,754 896,256 315,540
equivalent
Average Sales Price:
Oil (per Bbl) 64.84 67.16 50.03
Natural gas (per Mcf) - - -
Equivalent price (per 64.84 67.16 50.03
BOE)
Expenses ($ per BOE)
(3):
Oil and gas operating(1) 7.45 6.15 7.20
Depreciation, depletion
and
amortization(2) 9.69 10.51 6.36
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(1) Includes transportation cost, production cost and ad valorem taxes.
(2) Represents depletion of oil and gas properties only.
(3) We use sales volume rather than production volume for calculation of per unit cost because not all volume produced is sold during the period. The related production costs are expensed only for the units sold, not produced, based on a matching principle of accounting. Oil and gas operating expense per BOE is calculated by dividing oil and gas operating expenses for the year by the volume of oil sold during the year.
Year ended March 31, 2009 compared to the year ended March 31, 2008.
Revenue and Production
The following table summarizes production volumes, average sales prices and
operating revenue for our oil and natural gas operations for the year ended
March 31, 2009 and the year ended March 31, 2008.
Year ended
March 31, 2009
to the year ended
March 31, 2008
For the year For the year $ %
ended ended Increase Increase
March 31, March 31, (Decrease) (Decrease)
2009 2008
Production volumes:
Natural gas (Mcf) - - - -
Natural gas liquids (Bbls) - - - -
Oil and condensate (Bbls) 1,080,895 907,823 173,072 19%
Barrels of Oil equivalent (BOE) 1,080,895 907,823 173,072 19%
Sales volumes:
Natural gas (Mcf) - - - -
Natural gas liquids (Bbls) - - - -
Oil and condensate (Bbls) 1,073,754 896,256 177,498 20%
Barrels of Oil equivalent (BOE) 1,073,754 896,256 177,498 20%
Average Sales Price (1)
Natural gas ($ per Mcf) - - - -
Natural gas liquids ($ per Bbl) - - - -
Oil and condensate ($ per Bbl) $ 64.84 $ 67.16 $ (2.32) (3%)
Barrels of Oil equivalent
($ per BOE) $ 64.84 $ 67.16 $ (2.32) (3%)
Operating Revenue:
Natural gas - - - -
Natural gas liquids - - - -
Oil and condensate $ 69,616,875 $ 60,196,626 $ 9,420,249 16%
Gain on hedging and
derivatives(2) - - - -
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(1) At times, we may produce more barrels than we sell in a given period. The average sales price is calculated based on the average sales price per barrel sold, not per barrel produced.
(2) We did not engage in hedging transactions, including derivatives, during the year ended March 31, 2009 or the year ended March 31, 2008.
Revenue. We generate revenue under our exploration contract from the sale of oil recovered during test production. During the year ended March 31, 2009 our oil production increased 19% compared to the year ended March 31, 2008. This increase in production is primarily attributable to the fact that we had twenty four wells in testing or test production during all or some portion of the year ended March 31, 2009 compared to sixteen wells during all or some portion of the year ended March 31, 2008.
As discussed above, our revenue is sensitive to changes in prices received for our oil. Most of our production is currently being sold at the prevailing world market price, which fluctuates in response to many factors that are outside our control. Imbalances in the supply and demand for oil can have a dramatic effect on the price we receive for our production. Similarly, if we were denied an export quota, our export quota were reduced or we were otherwise forced to sell all, or a significant portion, of our production to the domestic market in Kazakhstan. Historically the price per barrel of oil we receive for oil sold in Kazakhstan has been significantly lower than the price we realize for oil we export. For a period during the year, as a result of the material decline in world oil prices and the export duty enacted by the government, we realized greater returns by selling to the local market. As a result of the material drop in world oil prices our revenue decreased significantly during the year. Political instability, the economy, changes in legislation and taxation, weather and other factors outside our control may also have an impact on both supply and demand.
Historically, sales to the domestic market in Kazakhstan would have resulted in a significant reduction in revenue and income from operations because the domestic market price has been markedly lower than world oil prices. As the gap between world oil prices and domestic prices shrank and as a result of the export duty, we found it more financially attractive to sell our oil to the domestic market for the period from November 2008 through January 2009.
Costs and Operating Expenses
The following table presents details of our expenses for the years ended March
31, 2009 and 2008:
For the year ended For the year ended
March 31, 2009 March 31, 2008
Expenses:
Export duty $ 6,783,278 $ -
Oil and gas operating(1) 7,998,012 5,515,403
General and administrative 22,262,248 14,747,754
Depletion 10,403,328 9,419,655
Interest expense 1,138,874 -
Accretion expenses 449,025 254,572
Amortization and depreciation 324,028 239,155
Consulting expenses 8,662,500 -
Total $ 58,021,293 $ 30,176,539
Expenses ($ per BOE):
Oil and gas operating(1) 7.45 6.15
Depletion (2) 9.69 10.51
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(1) Includes transportation cost, production cost and ad valorem taxes.
(2) Represents depletion of oil and gas properties only.
Export Duty. On April 18, 2008 the government of the Republic of Kazakhstan introduced an export duty on several products (including crude oil). We became subject to the duty in June 2008. The export duty for year ended March 31, 2009 amounted to $6,783,278. The formula for determining the amount of the crude oil export duty was based on a sliding scale that was tied to the world market price for oil. The amount of the export duty changed with fluctuations in world oil prices. Fluctuations in the export duty, however, lagged behind fluctuations in world oil prices by about 90 days. In December 2008 the government of the Republic of Kazakhstan repealed the export duty effective January 26, 2009. We are now subject to the new tax code that went into effect on January 1, 2009, as discussed in more detail below.
Oil and Gas Operating Expenses. During the year ended March 31, 2009 we incurred $7,998,012 in oil and gas operating expenses compared to $5,515,403 during the year ended March 31, 2008. This increase is primarily the result of several factors, including increased production volumes, royalty payments, salary and transportation expenses and increased repair costs.
During the year ended March 31, 2009 royalty paid to the government increased by $186,688 or 12% compared to the year ended March 31, 2008. While royalty expenses increased, as a percentage of total revenue, royalty expense remained nearly unchanged. Royalties were replaced by a mineral extraction tax when we became subject to the new tax code effective January 1, 2009.
Mineral Extraction Tax. This tax replaced the royalty we were paying previously. The rate of this tax depends upon annual production output. At current production rates, we are subject to a 5% mineral extraction tax rate on production sold to the export market and a 2.5% tax rate on production sold to domestic market. The mineral extraction tax expense is reported as part of oil and gas operating expense. During the year ended March 31, 2009 mineral extraction tax paid to the government amounted to $467,359. As noted above, we were not subject to the mineral extraction tax during the year ended March 31, 2008 or during the first three fiscal quarters of year ended March 31, 2009.
Rent Export Tax. This tax is calculated based on the export sales price and ranges from as low as 0% if the export sales price is less than $40 per barrel to as high as 32% if the price per barrel exceeds $190. Rent export tax is reported as part of oil and gas operating expense. During the year ended March 31, 2009 rent export tax paid to the government amounted to $515,032. We were not subject to the rent export tax during the year ended March 31, 2008 or during the first three fiscal quarters of the year ended March 31, 2009.
During the year ended March 31, 2009 payroll and related payments to production personnel increased $158,816 or 24% compared to the year ended March 31, 2008. As production volume increased we retained additional production personnel during the year ended March 31, 2009.
Transportation expenses increased $1,154,715 or 35% as a result of the increased volume of oil we produced and transported. We anticipate transportation expenses will continue to fluctuate in proportion to production volume.
While oil and gas operating expenses increased 45% during the year ended March 31, 2009 compared to the year ended March 31, 2008, expense per BOE increased only 21% from $6.15 per BOE during the year ended March 31, 2008 to $7.45 during the year ended March 31, 2009. During the year ended March 31, 2008 we sold 896,256 barrels of oil, during the year ended March 31, 2009 we sold 1,073,754 barrels of oil. As expense per BOE is a function of total expense divided by the number of barrels of oil sold, the 20% increase in sales volume more than offset the 45% increase in expenses resulting in the 21% increase in oil and gas operating expense per BOE.
General and Administrative Expenses. General and administrative expenses during the year ended March 31, 2009 were $22,262,248 compared to $14,747,754 during the year ended March 31, 2008. This represents a 51% increase in general and administrative expenses. This increase in general and administrative expenses was the result of several factors such as increases in non-cash compensation expense, payroll and related costs, rent expense and professional services. This increase was partially offset by a $332,216, or 34%, reduction in environmental payments for flaring of unused natural gas.
During the year ended March 31, 2009 we recognized non-cash compensation expense of $7,450,211 resulting from restricted stock grants made previously to employees. By comparison, during the year ended March 31, 2008 we recognized non-cash compensation expense in the amount of $2,303,078 for restricted stock grants issued to employees and outside consultants.
The increase in general and administrative expense during the 2009 year was also attributable to:
• a 35% increase in rent expense from renting special equipment,
apartments and additional vehicles;
• a 32% increase in payroll and related costs as we hired additional
administrative personnel to fulfill business needs, increased employee
pay rates for existing employees;
• a 30% increase in professional services resulting from legal fees
incurred in our ongoing litigation.
Depletion. Depletion expense for the year ended March 31, 2009 increased by $983,673 compared to the year ended March 31, 2008. The major reason for this increase in depletion expense was a 20% increase in sales volume in fiscal 2009 compared to fiscal 2008. The increase in depletion expense was also attributable to the fact that we drilled additional wells, continued workover on existing wells and developed additional infrastructure during fiscal year 2009.
Depreciation and Amortization. Depreciation and amortization expense for the year ended March 31, 2009 increased 35% compared to the year ended March 31, 2008. The increase resulted from purchases of fixed assets during the year.
Consulting Expense. In November 2007 we retained a consultant to assist us in negotiating an extension of the exploration period of our contract and with potential acquisitions. On June 24, 2008, we were granted an extension of our existing exploration contract from July 2009 to January 2013. Compensation expense for consulting services was recorded in the amount of $11,727,500, which included $1,000,000 paid upon the execution of consulting agreement and non-cash share-based compensation in the amount of $10,727,500 as the success fee for the extension of time period for exploration. The share-based compensation represents 1,750,000 (500,000 shares for each additional year of the extension of exploration status) valued at $6.13 per share which was the closing market price of our common shares on June 24, 2008.
On September 16, 2008 this consulting agreement was revised and the parties agreed to decrease the number of shares issued for services provided by 500,000 shares. The non-cash compensation expenses for consulting services were reversed in the amount of $3,065,000 (500,000 shares valued at $6.13 per share which was the closing market price of our common shares on June 24, 2008) for the year ended March 31, 2009.
Income from Operations. During the year ended March 31, 2009 we realized income from operations of $11,595,582 compared to income from operations of $30,020,087 during the year ended March 31, 2008. This decrease in income from operations during fiscal 2009 is the result of the 92% increase in total expenses during fiscal 2009, which increase was only partially offset by a 16% increase in revenue.
Other Income. During the fiscal year ended March 31, 2009 we realized total other income of $4,533,704 compared to $1,186,895 during the fiscal year ended March 31, 2008. This 282% increase is largely attributable to a $2,592,341 foreign exchange gain resulting mainly from the revaluation of accounts payable denominated in Kazakhstani tenge and $1,650,293 we received from a shareholder of the Company as disgorgement of profits earned in violation of the short-swing profit rules of Section 16(b) of the Securities Exchange Act of 1934.
Net Income. For all of the foregoing reasons, during the year ended March 31, 2009 we realized net income of $17,157,558 or $0.38 basic and $0.37 diluted income per share compared to a net income of $31,310,564 or $0.70 basic and $0.70 diluted income per share for the year ended March 31, 2008.
Year ended March 31, 2008, compared to the year ended March 31, 2007.
Revenue and Production
The following table summarizes production volumes, average sales prices and operating revenue for our oil and natural gas operations for the year ended March 31, 2008 and the year ended March 31, 2007.
--------------------------------------------------------------------------------
Year ended
March 31, 2008
to the year ended
March 31, 2007
For the year For the year $ %
Ended ended Increase Increase
March 31, March 31, (Decrease) (Decrease)
2008 2007
Production volumes:
Natural gas (Mcf) - - - -
Natural gas liquids - - - -
(Bbls)
Oil and condensate 907,823 321,993 585,830 182%
(Bbls)
Barrels of Oil 907,823 321,993 585,830 182%
equivalent (BOE)
Sales volumes:
Natural gas (Mcf) - - - -
Natural gas liquids - - - -
(Bbls)
Oil and condensate 896,256 315,540 580,716 184%
(Bbls)
Barrels of Oil 896,256 315,540 580,716 184%
equivalent (BOE)
Average Sales Price (1)
Natural gas ($ per Mcf) - - - -
Natural gas liquids ($ - - - -
per Bbl)
Oil and condensate ($ $ 67.16 $ 50.03 $ 17.13 34%
per Bbl)
Barrels of Oil
equivalent
($ per BOE) $ 67.16 $ 50.03 $ 17.13 34%
Operating Revenue:
Natural gas - - - -
Natural gas liquids - - - -
Oil and condensate $ 60,196,626 $ 15,785,784 $ 44,410,842 281%
Gain on hedging and
derivatives(2) - - - -
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(1) At times, we may produce more barrels than we sell in a given period. The average sales price is calculated based on the average sales price per barrel sold, not per barrel produced.
(2) We did not engage in hedging transactions, including derivatives during the year ended March 31, 2008, or the year ended March 31, 2007.
Revenue. During the year ended March 31, 2008 our oil production increased 182% compared to the year ended March 31, 2007. This significant increase in production is primarily attributable to the fact that we had sixteen wells in testing or test production during all or some portion of the year ended March 31, 2008 compared to eight wells during all or some portion of the year ended March 31, 2007.
During the year ended March 31, 2008 we realized revenue from oil sales of $60,196,626 compared to $15,785,784 during the year ended March 31, 2007. The largest contributing factor to the 281% increase in revenue was a 184% increase in sales volume. Another factor contributing to the increase in revenues was a 34% increase in the price per barrel we received for oil sales during the year ended March 31, 2008 compared to the year ended March 31, 2007. During the fiscal years ended March 31, 2008 and 2007 we exported 91% and 100% of our oil, respectively to the world markets and realized the world market price for those sales. Revenue from oil sold to the world markets made up 96% and 100% of total revenue, respectively, during the years ended March 31, 2008 and 2007.
Costs and Operating Expenses
The following table presents details of our expenses for the years ended March
31, 2008 and 2007:
For the year ended For the year ended
March 31, 2008 March 31, 2007
Expenses:
Oil and gas operating(1) $ 5,515,403 $ 2,272,251
General and administrative 14,747,754 10,757,727
Depletion 9,419,655 2,006,834
Accretion expenses 254,572 173,519
Amortization and depreciation 239,155 170,610
Total $ 30,176,539 $ 15,380,941
Expenses ($ per BOE):
Oil and gas operating(1) 6.15 7.20
Depletion (2) 10.51 6.36
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(1) Includes transportation cost, production cost and ad valorem taxes.
(2) Represents depletion of oil and gas properties only.
Oil and Gas Operating Expenses. During the year ended March 31, 2008 we incurred $5,515,403 in oil and gas operating expenses compared to $2,272,251 during the year ended March 31, 2007. This significant increase is primarily the result of several factors, including increased royalty, salary and transportation expenses and increased repair costs.
During the year ended March 31, 2008 royalty paid to the government increased by $1,214,029 or 354% compared to the year ended March 31, 2007. The primary reason for the increase in royalty is two-fold. During the 2007 fiscal year, oil production increased 182% and our average sales price per barrel increased 34% as a result of exporting nearly all of our oil to the world markets during fiscal 2008. While royalty expenses increased significantly, as a percentage of total revenue royalty expense remained nearly unchanged.
During the year ended March 31, 2008 payroll and related payments to production personnel increased $142,418 or 28% compared to the year ended March 31, 2007. As production volume increased we retained additional production personnel during the year ended March 31, 2008.
Transportation expenses increased $1,886,705 or 133% as a result of the increased volume of oil we produced and transported.
We calculate oil and gas operating expense per BOE based on the volume of oil actually sold rather than production volume because not all volume produced during the period is sold during the period. The related production costs are expensed only for the units sold, not produced.
General and Administrative Expenses. General and administrative expenses during the year ended March 31, 2008 were $14,747,754 compared to $10,757,727 during the year ended March 31, 2007. This represents a 37% increase in general and administrative expenses. This increase in general and administrative expenses was the result of several factors such as increased payroll and related costs, rent expense, taxes and professional services.
We recognized compensation expense of $2,303,078 during the year ended March 31, 2008 resulting from restricted stock grants made to employees and outside consultants. By comparison, during the year ended March 31, 2007 we recognized . . .
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