Dedication across the board
Annual Report 2012

Business Review

Message from the Chairman

Frank Monstrey

Frank Monstrey2012 was the best year in Zhaikmunai’s history. It saw record production levels as well as outstanding financial results. 2012 also marked the first steps towards expanding a high-quality portfolio of assets in the hydrocarbon-rich pre-Caspian basin in North-western Kazakhstan. Zhaikmunai, thanks to its impressive infrastructure, which includes a state-of-the-art Gas Treatment Facility (GTF), now holds a unique position in North-western Kazakhstan. Moreover, Zhaikmunai’s sizeable production level and reserve base enable it to fund future production growth from existing internally generated cash flow. This is all possible whilst continuing a steady return of cash to shareholders through dividends and a GDR buy-back programme. Thanks to its strong cash flows, low leverage and operational control of all licenses and infrastructure projects, Zhaikmunai is ideally positioned to deliver further growth in 2013 and beyond.

Our vision:

Zhaikmunai’s ambition is to further consolidate its position as one of the leading independent oil and gas companies in the Commonwealth of Independent States (CIS). It now has the foundation to create a high-quality and complementary portfolio of assets in Kazakhstan and the broader CIS. Its strategy hinges on extracting as much value as possible from its initial front-loaded infrastructure investments. To achieve this, Zhaikmunai’s management team is able to draw on its in-depth knowledge of the geology and operating environment in Kazakhstan and neighbouring areas.

Zhaikmunai intends to realize its vision through a clearly defined strategy, balancing organic development with opportunistic expansion through acquisitions. Its main priority remains, as always, to continue to deliver growth and shareholder value in a responsible and efficient way.

Record production levels:

2012 saw an average total daily production of 36,940 boepd, a 181% increase compared to 2011. This growth was driven by the production ramp-up of the Gas Treatment Facility (GTF). The 1.7 bcm raw feed gas plant went into 2013 running at full capacity, as a result of the successful tie-in of planned wells and continuous operational improvements carried out throughout 2012. Zhaikmunai now enjoys a period of sustained production at levels above 45,000 boepd, while plans to build an additional train alongside the existing two trains are being developed. This steady production and associated cashflow will allow Zhaikmunai to continue to fund and deliver organic production growth. They will also sustain the renewed Chinarevskoye field appraisal programme. This first targeted appraisal programme since 2009 aims to convert more Probable and Possible Reserves into the Proved Reserves (1P) category over the next 3 years. With over 800 million boe in Probable and Possible Reserves, the prospect of significantly increasing the Proved Reserves base over the coming years is both very real and very exciting.

Strong Financial Position:

The dramatic increase in production levels in 2012, combined with a stable and high oil price environment were very beneficial for Zhaikmunai. This led to record revenue (US$ 737.1 million), EBITDA (US$ 460.3 million) and net income (US$ 162.0 million) for a truly outstanding overall result.

A significant portion of Zhaikmunai’s 2015 senior bond was refinanced in the course of the year, thereby extending the maturity profile to 2019 and reducing the interest rate by some 3,375% per annum. The cash position on the Balance Sheet was also increased (US$ 251.4 million), in line with the increasing cash flow generated from operations. Zhaikmunai’s priority going forward remains a balanced approach to investment in growth and prudent cash management.

Low cost reserve growth:

Message from the ChairmanIn 2012, the drilling programme focussed primarily on production wells in order to secure the feed to the Gas Treatment Facility (GTF). In spite of the lack of any appraisal programme since 2009 and the relatively low number of wells drilled, the Proved Reserves (1P) replacement ratio remained as high as 174.8%. This means that the 2012 increase in Proved Reserves (1P) (25.7 mmboe) more than replaced the 2012 total actual Chinarevskoye field production, which amounted to 14.7 mmboe.

This positive result bodes well for the planned effort to convert the Probable and Possible reserves into the Proven Reserves category in the coming years. In addition, Zhaikmunai has entered the first stages of growing its reserves through acquisitions, with the purchase of three licenses within close proximity to the Chinarevskoye field (Rostoshinskoye, Darjinskoye and Yuzhno-Gremyachenskoye fields). The potential finding and development costs of these neighbouring fields can, thanks to the GTF, be dramatically reduced below industry standards. The front-loaded nature and size of the investment in this impressive facility are now opening up additional opportunities for the company. Zhaikmunai plans to add further reserves through acquisitions throughout 2013 and beyond.

Governance and the Board:

Zhaikmunai is committed to achieving exemplary standards of corporate governance, the system by which the Group is directed, managed and controlled in the interests of all its stakeholders. To this end, the Board of Directors of Zhaikmunai Group Limited, the General Partner of Zhaikmunai L.P., has set up the following over the years:

  • it voluntarily adopted a Corporate Governance Code. In adopting its Code, the General Partner has given consideration to the best practice provisions on corporate governance set out in the UK Corporate Governance Code;
  • it has adopted a Dealing Code for the members of the Board, any persons discharging managerial responsibilities and any relevant employees which is based upon the Model Code set out in the UK Listing Rules;
  • it has adopted a Code of Conduct for the Group that requires Group personnel to act ethically and with integrity, to comply with all applicable laws and regulations and to act appropriately in the areas of personal conduct and equal opportunities.

Zhaikmunai’s dedicated and long-serving Board of Directors has seen the Partnership develop through recent successes, but has equally navigated difficult times during the global financial crisis. Protecting shareholders’ interests remains the Board’s steadfast focus through good and bad times. This happens through an on-going detailed analysis of the business risks inherent to the sector and a balanced approach to ensuring growth consisting of a prudent financial policy and a focus on achieving the highest ethical standards.

As Chairman, it is my role and duty to ensure that we pursue strong Corporate Governance practice, which has brought us to where we are today into 2013 and beyond.

Corporate Social Responsibility (CSR):

Having operated in Kazakhstan for more than 20 years, many members of Zhaikmunai’s Board and Management Team have developed not only a thorough understanding but indeed a strong commitment and connection with the country. Zhaikmunai’s North-western Kazakhstan presence has, over the years, also given rise to a tight-knit community. It is thus very naturally that Zhaikmunai has developed its commitment to behave ethically and to contribute to the economic development of the area. Improving the quality of life of the workforce, their families, the local community and society at large in Kazakhstan as well managing the environment in a respectful and careful way art at the core of our ambitious and pragmatic CSR roadmap.

This CSR roadmap comprises employee security and welfare, investment in community building and environmental protection and reporting. Each of these priorities is now taken up in the overall yearly management plan and monitored against specific voluntary as well as compliance objectives. In addition, the QHSE Department has recently undergone major changes including a new and more flexible organisational structure in anticipation of its increasing strategic role.

I am proud to report that Zhaikmunai recently received the first prize in Kazakhstan’s “Investment in Ecology Contest” organized by the Ministry of Environmental Protection on World Environment Day in 2013. This prize underscores Zhaikmunai strong environmental protection record, its ambitious social development programme as well as its dedication to community building.

Zhaikmunai will continue to make Corporate and Social Responsibility a priority in 2013 and onwards, through further development and implementation of strategic and ambitious programmes.

Management Team and Employees:

Zhaikmunai’s exceptional results in 2012 would not have been possible without the steadfast resolve and consistent quality work of its Management Team. The stability of this team led by Chief Executive Officer Kai-Uwe Kessel over the years is, without a doubt, a key factor in the success we are enjoying. I would thus like to take this opportunity to congratulate each and everyone on this team on an excellent performance during 2012.

Finally, I would also like to take this opportunity to thank all Zhaikmunai employees for their steadfast contribution in making Zhaikmunai what it is today.

Closing Remarks:

Zhaikmunai is well positioned going into 2013. It boasts an excellent financial platform from which to deliver its growth strategy. Thanks to its significant, front-loaded investments in infrastructure Zhaikmunai can now contemplate building a portfolio of complementary assets in the area. Finally, the Management Team’s unabated drive to succeed gives me great confidence that Zhaikmunai can continue to deliver the planned growth in the years ahead. I am very optimistic for the future of Zhaikmunai and believe it has never been in a better position to deliver further value for all shareholders.

Frank Monstrey
Chairman

Frank Monstrey