Joint Stock Company "National Company "KazMunayGas" (KMGZ) Earnings Call Transcript

Ladies and gentlemen, welcome to the KazMunayGas First Half 2025 Operational and Financial Results Conference Call. The call is being recorded. Please note that company's presentation on your zoom screen. Our call today will last for approximately 1 hour. It will be held in Russian with simultaneous translation into English, Kazakh and [indiscernible]. So you can ask questions in any language and sequence in writing. [Operator Instructions] Over to the company now.

Good day, dear participants. My name is [indiscernible]. I'm Head of Department of IR at KazMunayGas. Welcome to the presentation of our results for first half 2025. Thank you for joining us today. Let me introduce our speaker, Diana Aryssova, Vice Chairperson of the Management Board for Economy and Finance. We have top managers of the company on the line ready to detail expanded and detailed answers to your questions. Before we start the presentation, we would like to draw your attention to the disclaimer regarding forward-looking statements. During today's conference call, the company may make forward-looking statements that are associated with uncertainty, and so they can't be treated as guarantees of future results. The company cannot guarantee that its estimates will be achieved. Draw your attention that the call is solely on discussion of KMG results for first half 2025. Over to Diana Aryssova.

Dear ladies and gentlemen, here is our review of operations for first half 2025. KazMunayGas is still a leading position across the entire production cycle that is downstream, midstream, upstream and oil services. On a side note, I should say that the company is a leader in exploration, and we are doing very successful work as a result of geological exploration of subsoil in the western part of Kazakhstan. In the first half of 2025, we signed 2 new contracts for exploration and production in Severny Ozen and Bolashak. Soon, we are expected to sign contracts for the Berezovskiy block. So KazMunayGas has diversified portfolio of oil and gas assets with high potential of growth and -- it is part of mega projects, Tengiz, Karachaganak and Kashagan. The company owns the key pipeline network in the company via its subsidiary, KazTransOil, and it also has 27% stake in CPC, Kazakhstan-China pipeline 50%, MunaiTas 50% and it owns sea transportation operator, Kazmortransflot, which gives us access to key export destinations, CPC, Atyrau–Samara, Atasu–Alashankou and also offshore supplies via Aktau port. KazMunayGas has a leading position in Kazakhstan's refining industry. We managed strategically integrated portfolio of 3 oil refining plants and bitumen plant and KazMunayGas also owns 2 plants in Romania, which enables the company to solidify its presence in the European market and expand its export opportunities. As part of the strategic objective to diversify our business and expand our product portfolio, KMG actively develops its petrochemical work stream. It includes the company that is being consolidated Petrochem, plant for polypropylene production, KPI with a stake of 49.5% and also a joint venture, Silleno, which is engaged in construction of polyethylene production plant. Our stake in this is 40%. The shareholding structure of KMG is the same, Samruk-Kazyna, the Ministry of Finance and National Bank, as they jointly own 97% in KMG and 3% of our shares are in free float at 2 local stock exchanges. In the first half of 2025, KazMunayGas has been consistent, focused on its strategic priorities. We had stable production operations and promoted key projects in exploration, production, downstream overall midstream, upstream petrochemicals transportation and green projects. In the first half of 2025, we saw some changes in the macroeconomic environment. As for KazMunayGas, we should note high volatility in the commodity markets. The average Brent price decreased 15% year-on-year to reach $72 per barrel. But since the beginning of the year, the U.S. to Tenge rate has appreciated, which made a favorable impact on the company's dollar revenue. We have KEBCO export oil, and it was traded with a premium of USD 0.96 per barrel to Brent, which shows sufficient demand for Kazakhstani oil in international markets. For the company, an important event in 2025 was upgrade of its credit rating by Standard & Poor's global rating to BBB- with a stable outlook, which confirms solid financial position of the company. Today, KMG rating is equal to the sovereign rating of the Republic of Kazakhstan, and it is an investment-grade rating. Upon the whole, in the first half of 2025, KMG confirmed by a number of examples, the resilience and high performance of its business model. We showed growth in operational metrics, an increase in production of oil and gas condensate. The transportation via pipeline and sea are flat year-on-year, and there were stable operations of the plants in Kazakhstan and Romania after planned upgrades and launch of new production units. As for financial results, the macroeconomic fluctuations regarding the oil price and U.S. dollar rate compensated one another in their impact on the company's financial. So the total effect from the growth of production metrics and FX rate, the company's EBITDA grew by 1.8% despite a significant decrease in the oil price. At the same time, in the first half of 2025, KazMunayGas solidified its financial position. We had a stable free cash flow, and we reduced our net debt by 30%. Next, we will discuss the dynamics of our operational results and key factors behind our financial results in more detail. In May, following the Annual General Meeting of Shareholders, in line with our dividend policy and recommendations of the Board of Directors, we approved profit distribution for 2024 with a dividend in the amount of KZT 491.71 per ordinary share. In June, the company completed its dividend payout. And in total, we paid KZT 300 billion to shareholders. Since the IPO, the company has been maintaining a stable level of dividend for its shareholders. And for 3 years in a row, we have been paying record high dividends. That's how we fulfill on our IPO promises. The total dividend payout since the IPO amounted to about USD 2 billion. From the beginning of the year till 30th of June 2025, the company's shares gained 13.4% and their price to KZT 16,616. On the 8th of August, they hit a historic maximum of KZT 20,595 per share. The first half showed positive dynamics of key operational metrics of KazMunayGas. Crude oil and gas condensate production grew by 8.8% to reach 13 million tonnes or 549,000 barrels per day. In the first half of 2025 at Tengiz, oil production grew by 35.5% to 3.9 million tonnes or 173,000 barrels per day as for gas, a growth by 39.7% to 2.2 billion cubic meters, thanks to the launch of the third generation plant as part of future expansion project. At Karachaganak, the production of crude oil and condensate grew by 4.6% to 573,000 tonnes or 25,000 barrels per day due to higher reinjection of raw gas at production units. The gas production before reinjection grew by 12.5% to amount to 1.3 billion cubic meters. Oil production and production of condensate at operational assets increased by 0.4%. It should be noted that gas production at Embamunaigas and Mangistaumunaigas went up by 7.7% and 2.4%, respectively, on the back of the launch of new wells with higher gas-to-oil ratio. There is a slight decrease in the overall transportation of oil by 0.3% to 41.6 million tonnes, which is due to lower offshore transportation to 5.6 million tonnes as a result of planned refurbishment of our tankers, Taraz and Liva and limited supplies by third parties. At the same time, long-distance pipeline oil transportation grew by 2.6% to 36 million tonnes, thanks to higher oil delivery from Tengiz field to the CPC system and higher supplies to Kazakhstani refineries. The processing of hydrocarbons at Kazakhstani refineries grew by 5% to 7.4 million tonnes, thanks to higher production at Pavlodar refinery and continuous work of Shymkent refinery in the first half of 2025, while in the same period of 2024, Shymkent refinery was undergoing overhaul. KazMunayGas International Romania plant increased its processing by 60.7% to 3 million tonnes, thanks to stable work in the first half of 2025, while in the first quarter of 2024, the processing was limited because of the delayed launch of the soft hydrocracking unit after the incident with the fire and also after the overhaul at the refinery. KMG is taking an active part in the developing of petrochemical industry. We have increased production of polypropylene at KPI plant by 62.9% to reach 107,000 tonnes, thanks to an extended assortment from 14 grades in first half 2024 to 18 grades in the first half of 2025 and gradually reaching the design capacity. The sales of polypropylene grew by 63.2% to 100,000 tonnes, including higher sales in the domestic market by 108% to 9,500 tonnes and exports higher 59.6%, reaching 91,000 tonnes. Mainly, we export it to Turkey and European countries. Over to the detailed analysis of our financial metrics. EBITDA in the first half of 2025 was at USD 2.2 billion, which is an increase of 1.8% on the back of higher EBITDA in the segment of upstream and midstream and at the level of corporate center. Adjusted EBITDA, which reflects the dividends from joint companies and associated companies instead of share of income of JVs and associated companies amounted to USD 2.5 billion. It's important to say that the dividends from joint ventures and associated companies showed significant growth by 34.4% to reach USD 926 million in the first half 2025. The key growth driver was increased dividend from Tengizchevroil and from CPC after the launch of the third-generation plant at Tengiz. During the first half, our other joint ventures, Petrokazakhstan, Kazgermunai, Kazakhstan-China pipeline increased their dividend payout. Our free cash flow for the first half amounted to USD 1.3 billion. CapEx by the accrual method reduced by 19.3%. They were at USD 506 million. They were due to overhaul of KMG. This change is due to the overhaul of KMG International in the first half of 2024, and we also completed certain stages of investment projects at Dunga, Kashagan and KMG Barlau. Cash and cash equivalents, including long-term and short-term bank deposits as of the end of the first half amounted to USD 5.9 billion, which is an increase of 11.3%. In the first half of 2025, KMG confirmed the stability and resilience of its business model. We had stable free cash flows, which gave the company an opportunity to maintain its financial resilience, increase operational efficiency and planned investments in large strategic projects. As for our debt portfolio, in the first half 2025, the net debt of the company reduced by 30.2%. And at the end of the reporting period, it was at USD 1.5 billion. The company is committed to its conservative approach to managing its debt burden and maintaining financial stability. It is reflected in the well-balanced debt maturity schedule, as you can see on this page. In the short term, there are no significant payouts and the next large repayment Eurobonds is expected in 2030, which gives the company stability and predictability in managing its cash flows. In conclusion, I would like to say that we are confident that our current financial position and high operational results will enable the company to be ever successful in strategic and investment projects, increasing shareholder value and creating long-term advantages for all stakeholders. Thank you.

Thank you, Diana, for your presentation. Dear audience, now we are ready to take your questions. Please, your questions, go ahead.

[Operator Instructions] The first question, are you planning to issue green bonds or any other sustainability bonds going forward?

Thank you for your question. Presently, KMG is not considering issues of green bonds or with the exception of potentially new investment projects given -- subject to the company's liquidity. Currently, KazMunayGas has sufficient liquidity as we noted in the report.

A question regarding the BTC pipeline. Could you shed some light on the operations of CPC and comment on the problems associated with the route to Ceyhan due to pollution. There is still a force majeure situation. What about the terminal in Baku? What are the expectations regarding the time line? Any further complications envisaged?

Bolat Zakirov speaking. As you may know, there was leak of organic chlorides of -- there was pollution of oil with organic chloride, so which is Baku-Ceyhan pipeline. There is a force majeure situation, and it is still on now. So we rerouted the oil to CPC. There is enough throughput capacity there. We are hoping to resolve the issue soon. And after that, we will resume the transportation along this route. So we can reroute these volumes if necessary.

Another question regarding transportation. Do you think your capacities of [indiscernible] capacities are sufficient via CPC?

Yes, currently, the capacities of CPC are sufficient to transport all the volumes produced in Kazakhstan.

Taking into account the forthcoming harvesting season, could you comment on the situation with diesel fuels? Do you expect any deficit?