LukOil(OAO) (LKOB) - 3rd Quarter Results (MDA) RNS Number : 0805S LukOil (OAO) 27 November 2012 Management's discussion and analysis of financial condition and results of operations The following report contains a discussion and analysis of the financial condition of OAOLUKOIL as of September 30, 2012 and the results of it's operations for the three and nine month periods ended September 30, 2012 and 2011, and significant factors that may affect its future performance. It should be read in conjunction with our interim US GAAP consolidated financial statements and notes thereto. References to "LUKOIL," "the Company," "the Group," "we" or "us" are references to OAO LUKOIL and its subsidiaries and equity affiliates. All dollar amounts are in millions of US dollars, unless otherwise indicated. Tonnes of crude oil and natural gas liquids produced are translated into barrels using conversion rates characterizing the density of crude oil from each of our oilfields and actual density of liquids produced at our gas processing plants. Tonnes of crude oil purchased as well as other operational indicators expressed in barrels were translated into barrels using an average conversion rate of 7.33 barrels per tonne. Translations of cubic meters to cubic feet were made at the rate of 35.31cubic feet per cubic meter. Translations of barrels of crude oil into barrels of oil equivalent ("BOE") were made at the rate of 1barrel per BOE and of cubic feet -at the rate of 6 thousand cubic feet per BOE. This report includes forward-looking statements - words such as "believes," "anticipates," "expects," "estimates," "intends," "plans," etc. - that reflect management's current estimates and beliefs, but are not guarantees of future results. Key financial and operational results 3^rd quarter of Change, % 9 months of Change, % 2012 2011 2012 2011 Sales (millions of US dollars) 35,494 34,563 2.7 103,152 99,101 4.1 Net income attributable to OAOLUKOIL (millions of US dollars) 3,509 2,244 56.4 8,316 9,012 (7.7) EBITDA (millions of US dollars) 5,441 4,628 17.6 14,249 15,316 (7.0) Taxes other than income taxes, excise and export tariffs (millions of US dollars) (8,900) (9,570) (7.0) (27,506) (26,330) 4.5 Earning per share of common stock attributable to OAO LUKOIL (US dollars): Basic 4.65 2.88 61.4 10.91 11.55 (5.6) Diluted 4.55 2.83 60.6 10.68 11.31 (5.6) Hydrocarbon production by the Group including our share in equity affiliates (thousands of BOE) 198,889 196,247 1.3 593,941 592,042 0.3 Daily hydrocarbon production by the Group including our share in equity affiliates (thousands of BOE per day) 2,162 2,133 1.4 2,168 2,169 0.0 Crude oil and natural gas liquids produced by the Group including our share in equity affiliates (thousands of barrels) 170,566 171,086 (0.3) 507,016 513,675 (1.3) Gas available for sale produced by the Group including our share in equity affiliates (millions of cubic meters) 4,813 4,276 12.6 14,771 13,317 10.9 Refined products produced by the Group including our share in equity affiliates (thousands of tonnes) 16,204 16,115 0.6 46,899 46,960 (0.1) During the nine months of 2012, our net income was $8,316million, which is $696 million, or 7.7%, less than in the same period of 2011. At the same time, our net income for the third quarter of 2012 amounted to $3,509million, which is $1,265million, or 56.4%, more than in the third quarter of 2011. Our net income was influenced mainly by export tariffs and mineral extraction tax rates and by hydrocarbon prices. Business overview The primary activities of OAO LUKOIL and its subsidiaries are oil exploration, production, refining, marketing and distribution. The Company is the ultimate parent entity of a vertically integrated group of companies. OAO LUKOIL was established in accordance with Presidential Decree 1403, issued on November 17, 1992. Under this decree, on April 5, 1993, the Government of the Russian Federation transferred to the Company 51% of the voting shares of fifteen enterprises. Under Government Resolution 861 issued on September 1, 1995, a further nine enterprises were transferred to the Group during 1995. Since 1995, the Group has carried out a share exchange program to increase its shareholding in each of 24 founding subsidiaries to 100%. From formation, the Group has expanded substantially through consolidation of interests, acquisition of new companies and establishment of new businesses. Now LUKOIL is a global energy company operating through its subsidiaries in 38 countries on four continents. LUKOIL is one of the world's largest energy companies in terms of hydrocarbon reserves that amounted to 17.3 billion BOE as of January 1, 2012 and comprised of 13.4 billion barrels of crude oil and 23.2 trillion cubic feet of gas. Our operations are divided into four main business segments: § Exploration and Production - which includes our exploration, development and production operations relating to crude oil and gas. These activities are primarily located within Russia, with additional activities in Azerbaijan, Kazakhstan, Uzbekistan, the Middle East, South America, Northern and Western Africa and South-East Asia. § Refining, Marketing and Distribution - which includes refining and transport operations, marketing and trading of crude oil, natural gas and refined products. § Chemicals - which includes processing and trading of petrochemical products. § Power generation - which includes generation, transportation and sales of electricity, heat and related services. Each of our four main segments is dependent on the other, with a portion of the revenues of one segment being a part of the costs of the other. In particular, our Refining, Marketing and Distribution segment purchases crude oil from our Exploration and Production segment. As a result of certain factors considered in the "Domestic crude oil and refined products prices" section on page 7, benchmarking crude oil market prices in Russia cannot be determined with certainty. Therefore, the prices set for inter-segment purchases of crude oil reflect a combination of market factors, primarily international crude oil market prices, transportation costs, regional market conditions, the cost of crude oil refining and other factors. Accordingly, an analysis of either of these segments on a stand-alone basis could give a misleading impression of those segments' underlying financial position and results of operations. For this reason, we do not analyze either of our main segments separately in the discussion that follows. However, we present the financial data for each in Note 20"Segment information" to the interim consolidated financial statements. Changes in the Group structure In January 2012, the Group was offered to acquire a 20% stake in the joint venture operating the ISAB refining complex ("ISAB"). The transaction was approved by European regulatory authorities and was completed in September 2012 in amount of €485 million (approximately $609 million). The Group's ownership in ISAB increased from 60% to 80% and the Group obtained control over this joint venture. This transaction was a partial exercise of ERG S.p.A. option to sell in full its stake in the joint venture established in 2008. In April 2011, within this option, the Group acquired an 11% stake in the joint venture for €241 million (approximately $342 million). In August 2012, the Group acquired ConocoPhillips' investment in OOO "Narianmarneftegas" ("NMNG") and certain related assets for $604 million. ConocoPhillips group owned 30% interest in NMNG. The acquisition increased the Group's total ownership interest in NMNG to 100%. Operational highlights Hydrocarbon production We undertake exploration for, and production of, crude oil and natural gas in Russia and internationally. In Russia our major oil producing subsidiaries are OOO LUKOIL-Western Siberia, OOO LUKOIL-Komi and OOO LUKOIL-Perm. Exploration and production outside of Russia is performed by our 100% subsidiary LUKOIL-Overseas, that has stakes in PSA's and other projects in Kazakhstan, Azerbaijan, Uzbekistan, Iraq, Saudi Arabia, Egypt, Ghana, Cote d'Ivoire and Vietnam. The table below summarizes the results of our exploration and production activities. 3^rd quarter of 9 months of 2012 2011 2012 2011 (thousand BOE per day) Daily production of hydrocarbons, including the Company's share in equity affiliates, including: 2,162 2,133 2,168 2,169 - crude oil and natural gas liquids^(1) 1,854 1,860 1,851 1,882 - natural gas^(2) 308 273 317 287 (US dollar per BOE) Hydrocarbon extraction expenses 5.05 5.05 4.92 4.99 - in Russia 5.05 5.04 4.94 5.01 - outside Russia 5.09 5.24 4.74 4.67 (millions of US dollars) Hydrocarbon extraction expenses 971 955 2,821 2,842 - in Russia 900 894 2,611 2,671 - outside Russia 71 61 210 171 Exploration expenses 52 196 199 309 - in Russia 17 18 109 73 - outside Russia 35 178 90 236 Mineral extraction tax 2,992 3,122 9,264 8,779 - in Russia 2,967 3,094 9,193 8,706 - outside Russia 25 28 71 73 ^(1)Natural gas liquids produced at the Group gas processing plants. ^(2)^Gas available for sale (excluding gas produced for our own consumption and including petroleum gas sold to third parties). Crude oil production.In the nine months of2012, we produced 67.2 million tonnes (496.6million barrels) of crude oil compared to 68.3 million tonnes(504.2 million barrels) in the same period of 2011 (including the Company's share in equity affiliates). The following table represents our crude oil production in the nine months of 2012 and 2011 by major regions. Change to 2011 9 months Change in Organic 9 months (thousands of tonnes) of 2012 Total, % structure change of 2011 Western Siberia 36,893 0.4 - 137 36,756 Timan-Pechora 11,745 (12.8) - (1,722) 13,467 Ural region 10,036 5.4 - 516 9,520 Volga region 2,640 11.8 - 278 2,362 Other in Russia 1,418 (3.3) - (49) 1,467 Crude oil produced in Russia 62,732 (1.3) - (840) 63,572 Crude oil produced internationally 2,517 (1.4) (37) - 2,554 Total crude oil produced by consolidated subsidiaries 65,249 (1.3) (37) (840) 66,126 Our share in crude oil produced by equity affiliates: in Russia 288 8.7 - 23 265 outside Russia 1,710 (10.0) - (189) 1,899 Total crude oil produced 67,247 (1.5) (37) (1,006) 68,290 The main oil producing region for the Company is Western Siberia where we produced 56.5% of our crude oil in the nine months of 2012 (55.6% in the nine months of 2011). Since the second half of 2011, the Company managed to stabilize crude oil production in the region that had been declining for several preceding years. The continuing trend of increasing water cut at our Yuzhnoye Khylchuyu oilfield was the main reason for the production decrease in Russia. The structural decrease of our international production was a result of sale of 10% of our share in Karachaganak Petroleum Operating consortium ("KPO"), an upstream project in Kazakhstan, to a state-owned KazMunayGaz in the end of the second quarter of 2012. In addition to our production, we purchase crude oil in Russia and on international markets. In Russia we primarily purchase crude oil from affiliated producing companies and other producers. Then we either refine or export purchased crude oil. Crude oil purchased on international markets is normally used for trading activities, for supplying our international refineries or for processing at third party refineries. 3^rd quarter of 2012 2011 (thousand (thousand (thousand (thousand of barrels) of tonnes) of barrels) of tonnes) Crude oil purchases in Russia 462 63 1,122 153 Crude oil purchases 31,409 4,285 47,095 6,425 internationally Total crude oil purchased 31,871 4,348 48,217 6,578 9 months of 2012 2011 (thousand (thousand (thousand (thousand of barrels) of tonnes) of barrels) of tonnes) Crude oil purchases in Russia 1,767 241 2,016 275 Crude oil purchases internationally 87,997 12,005 110,668 15,098 Total crude oil purchased 89,764 12,246 112,684 15,373 Significant part of our crude oil purchases is for processing. In the nine months of 2012, we purchased 8,995 thousand tonnes of crude oil to process at our and at third party refineries, compared to 9,823 thousand tonnes in the nine months of 2011. The decrease was due to higher volumes of own supply. Our purchases for trading also decreased compared to the nine months of 2011. Production of gas and natural gas liquids. In the nine months of 2012, we produced 14,771 million cubic meters (86.9 million BOE) of gas available for sale (including our share in equity affiliates), that is 10.9% more than in the nine months of 2011. Our major gas production field is the Nakhodkinskoe field, where we produced 5,942 million cubic meters of natural gas in the nine months of 2012 (6,192 million cubic meters in the nine months of 2011). Our international gas production increased by 36.1%, mostly due to growth of our production in Uzbekistan. We produced 754 million cubic meters of gas from the Gissar field (commercial production commenced in December 2011), and increased production from the Khauzak field by 570 million cubic meters, or by 30.2%. In the nine months of 2012, the output of natural gas liquids at the Group gas processing plants in Western Siberia, Ural and Volgograd regions of Russia was 10.4 million BOE, compared to 9.5 million BOE in the nine months of 2011. Refining, marketing and trading Refining. We own and operate four refineries located in European Russia and three refineries located outside of Russia - in Bulgaria, Ukraine and Romania. Moreover, we have a 45% interest in the Zeeland Refinery in the Netherlands. In September 2012, we increased our interest up to 80% and obtained control over ISAB, in which we previously held 60% (49% before April 2011). Therefore, starting from September 2012, ISAB became our consolidated subsidiary rather than an equity affiliate. Compared to the nine months of 2011, the total volume of refined products produced by the Group (including our share in equity affiliates production) remained on roughly the same level. Due to scheduled overhauls, production volumes of our Russian refineries decreased by 3.2%. Production of our international refineries increased by 16.3% as a result of the increase of our share in ISAB. We invested, and continue to invest, significant resources in our refineries aiming at taking the leading position in Russia in producing ecological fuel of high quality standards. Starting from July 1, 2012, all the gasoline and most of diesel fuel produced by the Group in Russia comply with Euro-5 standards. Along with our own production of refined products we can refine crude oil at third party refineries depending on market conditions and other factors. In 2011, we began processing our crude oil at a third party refinery in Kazakhstan. In 2012, we restarted processing operations in Belarus. The following table summarizes key figures for our refining activities. 3^rd quarter of 9 months of 2012 2011 2012 2011 (millions of US dollars) Refining expenses at the Group refineries 430 375 1,108 1,048 - in Russia 310 307 838 821 - outside Russia ^(^1) 120 68 270 227 Refining expenses at ISAB and Zeeland Refinery ^(2) 166 226 645 648 Refining expenses at third party refineries 28 2 75 7 Capital expenditures 345 225 905 524 - in Russia 279 193 581 407 - outside Russia 66 32 324 117 (thousands of barrels per day) Refinery throughput at the Group refineries 1,153 1,084 1,069 1,078 - in Russia 889 912 879 912 - outside Russia ^(^1) 264 172 190 166 Refinery throughput at ISAB and Zeeland Refinery ^(2) ^(3) 192 247 233 230 Refinery throughput at third party refineries 55 6 55 7 Total refinery throughput 1,404 1,337 1,357 1,315 (thousands of tonnes) Refined products produced at the Group refineries 13,808 12,962 38,169 38,247 - in Russia 10,674 10,934 31,370 32,401 - outside Russia ^(^1) 3,134 2,028 6,799 5,846 Production of ISAB and Zeeland Refinery ^(2) 2,396 3,153 8,730 8,713 Refined products produced at third party refineries 684 72 1,919 241 Total refined products produced 16,888 16,187 48,818 47,201 ^(1) Including 80% share of ISAB for September 2012. ^(2) Including 60% share of ISAB from April 2011 to August 2012 (49% share of ISAB before April 2011) and 49% share of Zeeland Refinery. ^(3) Including refined product processed. Marketing and trading.Our marketing and trading activities mainly include wholesale and bunkering operations in Western Europe, South-East Asia, Central America and retail operations in the USA, Central and Eastern Europe, the Baltic States and other regions. In Russia we purchase refined products on occasion, primarily to manage supply chain bottlenecks. The Group retails its refined products in 26 countries through nearly 5.6 thousand petrol stations. Most of the stations operate under the LUKOIL brand. The table below summarizes figures for our trading activities. 3^rd quarter of 9 months of 2012 2011 2012 2011 (thousands of tonnes) Retail sales 4,103 4,204 11,371 11,152 Wholesale sales 24,874 21,932 71,809 65,257 Total refined products sales 28,977 26,136 83,180 76,409 Refined products purchased in Russia 385 643 1,136 1,539 Refined products purchased internationally 13,530 10,295 38,956 32,755 Total refined products purchased 13,915 10,938 40,092 34,294 Exports of crude oil and refined products from Russia. The volumes of crude oil exported from Russia by our subsidiaries are summarized as follows: 3^rd quarter of 2012 2011 (thousands of (thousands of (thousands of (thousands of barrels) tonnes) barrels) tonnes) Exports of crude oil using Transneft export routes 57,196 7,803 54,059 7,375 Exports of crude oil bypassing Transneft 8,569 1,169 9,917 1,353 Total crude oil exports 65,765 8,972 63,976 8,728 9 months of 2012 2011 (thousands of (thousands of (thousands of (thousands of barrels) tonnes) barrels) tonnes) Exports of crude oil using Transneft export routes 178,501 24,352 158,556 21,631 Exports of crude oil bypassing Transneft 19,945 2,721 31,145 4,249 Total crude oil exports 198,446 27,073 189,701 25,880 In the nine months of 2012, our export of crude oil from Russia increased by 4.6%, compared to the same period of 2011, and we exported 43.2% of our total domestic crude oil production (40.7% in the nine months of 2011). Almost all the volume of crude oil exported bypassing Transneft was routed through our own export infrastructure. The reduction of export through our own export infrastructure was mainly caused by a decrease in production from Yuzhnoye Khylchuyu oilfield (1,010 thousand tonnes in the nine months of 2012 compared to 2,794 thousand tonnes in the nine months of 2011). In the nine months of 2012, we exported from Russia 16.9 million tonnes of refined products, a decrease of 9.4%, compared to the respective period of 2011. Primarily, we export from Russia diesel fuel, fuel oil and gasoil. These products account for approximately 88% of our refined products export volumes. The decrease in refined products export and increase in the export of crude oil were both a result of a decrease in throughput at our refineries in Nizhny Novgorod and Ukhta due to scheduled overhauls in the second and third quarters of 2012, respectively. In the nine months of 2012, our revenue from export of crude oil and refined products from Russia both to Group companies and third parties amounted to $19,696 million and $12,695 million, respectively ($18,607 million for crude oil and $13,887 million for refined products in the nine months of 2011). Main macroeconomic factors affecting our results of operations Changes in the price of crude oil and refined products The price at which we sell crude oil and refined products is the primary driver of the Group's revenues. During the nine months of 2012, the Brent crude oil price fluctuated between $88 and $128 per barrel and reached its peak of $128.18 in the beginning of March. During the third quarter of 2012, average crude oil prices increased by 1.1% compared to the second quarter of 2012, quarter-end Brent price amounted to $111.00per barrel. Substantially all the crude oil the Group exports is Urals blend. The following table shows the average crude oil and refined product prices in the respective periods of 2012 and 2011. 3^rd quarter of Change, 9 months of Change, 2012 2011 % 2012 2011 % (in US dollars per barrel, except for figures in percent) Brent crude 109.50 113.41 (3.4) 112.21 111.89 0.3 Urals crude (CIF Mediterranean) ^ (1) 109.13 111.43 (2.1) 111.09 109.24 1.7 Urals crude (CIF Rotterdam) ^ (1) 108.69 111.52 (2.5) 110.71 109.22 1.4 (in US dollars per metric tonne, except for figures in percent) Fuel oil 3.5% (FOB Rotterdam) 621.25 630.62 (1.5) 644.98 604.56 6.7 Diesel fuel 10 ppm (FOB Rotterdam) 977.17 967.33 1.0 977.74 953.94 2.5 High-octane gasoline (FOB Rotterdam) 1,062.57 1,026.87 3.5 1,051.97 1,001.82 5.0 Source: Platts. ^(1)The Company sells crude oil on foreign markets on various delivery terms. Thus, our average realized sale price of oil on international markets differs from the average prices of Urals blend on Mediterranean and Northern Europe markets. Domestic crude oil and refined products prices Substantially all crude oil produced in Russia is produced by vertically integrated oil companies such as ours. As a result, most transactions are between affiliated entities within vertically integrated groups. Thus, there is no concept of a benchmark domestic market price for crude oil. The price of crude oil that is produced but not refined or exported by one of the vertically integrated oil companies is generally determined on a transaction-by-transaction basis against a background of world market prices, but with no direct reference or correlation. At any time there may exist significant price differences between regions for similar quality crude oil as a result of the competition and economic conditions in those regions. Domestic prices for refined products are determined to some extent by world market prices, but they are also directly affected by local demand and competition. The table below represents average domestic wholesale prices of refined products in the respective periods of 2012 and 2011. 3^rd quarter of Change, % 9 months of Change, % 2012 2011 2012 2011 (in US dollars per metric tonne, except for figures in percent) Fuel oil 295.22 333.73 (11.5) 293.89 321.90 (8.7) Diesel fuel 753.05 700.23 7.5 777.91 740.35 5.1 High-octane gasoline (Regular) 807.77 929.99 (13.1) 801.01 870.58 (8.0) High-octane gasoline (Premium) 879.26 977.89 (10.1) 858.84 911.30 (5.8) Source: InfoTEK (excluding VAT). Changes in the US dollar-ruble exchange rate and inflation A substantial part of our revenue is either denominated in US dollars or is correlated to some extent with US dollar crude oil prices, while most of our costs in the Russian Federation are settled in Russian rubles. Therefore, ruble inflation and movements of exchange rates can significantly affect the results of our operations. In particular, the appreciation of the ruble against the US dollar generally causes our costs to increase in US dollar terms, and vice versa. The appreciation of the purchasing power of the US dollar in the Russian Federation calculated on the basis of the ruble-dollar exchange rates and the level of inflation in Russia was 3.3% in the nine months of 2012, compared to the nine months of 2011. The following table gives data on inflation in Russia and the change in the ruble-dollar exchange rate. 3^rd quarter of 9 months of 2012 2011 2012 2011 Ruble inflation (CPI), % 1.9 (0.3) 5.2 4.7 Change of the ruble-dollar exchange rate, % 5.8 (13.5) 4.0 (4.6) Average exchange rate for the period (ruble to US dollar) 32.01 29.05 31.10 28.77 Exchange rate at the end of the period (ruble to US dollar) 30.92 31.88 30.92 31.88 Tax burden The following table represents average enacted rates for taxes specific to the oil industry in Russia for the respective periods. 3^rd quarter of Change, 2012^(1) 2011^(1) % Export tariffs on crude oil $/tonne 366.27 442.45 (17.2) Export tariffs on refined products Middle distillates (jet fuel), diesel fuel and gasoils $/tonne 241.70 296.42 (18.5) Light distillates gasoline $/tonne 329.63 398.18 (17.2) straight-run gasoline $/tonne 329.63 398.18 (17.2) Liquid fuels (fuel oil) $/tonne 241.70 206.59 17.0 Mineral extraction tax Crude oil RUR/tonne 5,146.30 4,544.85 13.2 Natural gas RUR/1,000 m^3 251.00 237.00 5.9 ^(1) Average values. 9 months of Change, 2012^(1) 2011^(1) % Export tariffs on crude oil $/tonne 403.30 411.01 (1.9) Export tariffs on refined products Middle distillates (jet fuel), diesel fuel and gasoils $/tonne 266.14 276.91 (3.9) Light distillates gasoline $/tonne 362.95 334.72 8.4 straight-run gasoline $/tonne 362.95 322.87 12.4 Liquid fuels (fuel oil) $/tonne 266.14 188.92 40.9 Mineral extraction tax Crude oil RUR/tonne 5,085.65 4,368.40 16.4 Natural gas RUR/1,000 m^3 251.00 237.00 5.9 ^^(1)Average values. Tax rates set in rubles and translated at the average exchange rates are as follows: Change, 3^rd quarter of 2012^(1) 2011^(1) % Mineral extraction tax Crude oil $/tonne 160.79 156.47 2.8 Natural gas $/1,000 m^3 7.84 8.16 (3.9) ^(1) Average values. Change, 9 months of 2012^(1) 2011^(1) % Mineral extraction tax Crude oil $/tonne 163.53 151.86 7.7 Natural gas $/1,000 m^3 8.07 8.24 (2.1) ^^(1)Average values. The rates of taxes specific to the oil industry in Russia are linked to international crude oil prices and are changed in line with them. The methods to determine the rates for such taxes are presented below. Crude oil extraction tax rate. The base rate is 446 rubles per metric tonne extracted (419 rubles in 2011) and it is adjusted depending on the international market price of Urals blend and the ruble exchange rate. The tax rate is zero when the average Urals blend international market price for a tax period is less than or equal to $15.00 per barrel. Each $1.00 per barrel increase in the international Urals blend price over the threshold ($15.00 per barrel) results in an increase of the tax rate by $1.61 per tonne extracted (or $0.22 per barrel extracted using a conversion factor of 7.33). The base rate for 2013 is currently set at 470 rubles per metric tonne extracted. However, the rate may be amended by the authorities later on. The crude oil extraction tax rate varies depending on the development and depletion of a particular oilfield. The tax rate is zero for extra-heavy crude oil and for crude oil produced in certain regions of Eastern Siberia, the Caspian Sea and the Nenetsky Autonomous District, depending on the period and volume of production. The Group produces crude oil in the Caspian Sea. In the nine months of 2012, the amount of incentive was relatively insignificant, but we expect it to increase as the production volumes grow. Natural gas extraction tax rate.The mineral extraction tax on natural gas production is calculated using a flat rate. In 2011, the rate was 237 rubles per thousand cubic meters. On January 1, 2012, the rate was raised to 251 rubles per thousand cubic meters. Crude oil export duty rateis calculated on a progressive scale. The rate is zero when the average Urals blend international market price is less than or equal to approximately $15.00 per barrel ($109.50 per metric tonne). If the Urals blend price is between $15.00 and $20.00 per barrel ($146.00 per metric tonne), each $1.00 per barrel increase in the Urals blend price over $15.00 results in an increase of the crude oil export duty rate by $0.35 per barrel exported. If the Urals blend price is between $20.00 and $25.00 per barrel ($182.50 per metric tonne), each $1.00 per barrel increase in the Urals blend price over $20.00 results in an increase of the crude oil export duty rate by $0.45 per barrel exported. Each $1.00 per barrel increase in the Urals blend price over $25.00 per barrel results in an increase of the crude oil export duty rate no more than by $0.65 per barrel exported. Starting from October 1, 2011, the maximum increase of export duty rate is $0.60 per barrel for each $1.00 per barrel increase in the Urals blend price. The crude oil export duty rate is revised monthly on the basis of the immediately preceding one-month period of crude oil price monitoring. A special export duty regime is in place for certain greenfields. Effective from December 2010, the list of the oilfields where the reduced rate applies also includes our Yu. Korchagin and V. Filanovsky oilfields located in the Caspian Sea. Export duty rates on refined products prior to 2011 were set by the Russian government. The rate of export duty depended on internal demand for refined products and international crude oil market conditions. Starting from 2011, export duty rates on refined products are calculated by multiplying the current crude oil export duty rate by a coefficient according to the table below. Before October 1, After October 1, 2011 2011 Multiplier for: Light distillates (except for gasolines), middle distillates (jet fuel), diesel fuel and gasoils 0.670 0.660 Gasolines^(1) 0.467 0.900 Liquid fuels (fuel oil) 0.467 0.660 Motor and other oils 0.467 0.660 Other products 0.467 0.660 ^(1) Starting from May 2011, a coefficient for gasoline export duty rate is set at 0.9. Crude oil and refined products exported to the member countries of the Custom Union - Belarus and Kazakhstan, are not subject to export duties. Excise on refined products. The responsibility to pay excises on refined products in Russia is imposed on refined product producers (except for straight-run gasoline). Only domestic sales volumes are subject to excises. In other countries where the Group operates, excises are paid either by producers or retailers depending on the local legislation. Starting from 2011, excise rates on refined products in Russia were increased and tied to the ecological class of fuel. Excise tax rates for the respective periods of 2012 and 2011 are listed below: 3^rd quarter of Change, % 2012 2011 Gasoline Below Euro-3 RUR/tonne 8,225.00 5,995.00 37.2 Euro-3 RUR/tonne 7,882.00 5,672.00 39.0 Euro-4 RUR/tonne 6,822.00 5,143.00 32.6 Euro-5 RUR/tonne 5,143.00 5,143.00 - Diesel fuel Below Euro-3 RUR/tonne 4,300.00 2,753.00 56.2 Euro-3 RUR/tonne 4,300.00 2,485.00 73.0 Euro-4 RUR/tonne 3,562.00 2,247.00 58.5 Euro-5 RUR/tonne 2,962.00 2,247.00 31.8 Motor oils RUR/tonne 6,072.00 4,681.00 29.7 Straight-run gasoline RUR/tonne 7,824.00 6,089.00 28.5 3^rd quarter of Change, % 2012 2011 Gasoline Below Euro-3 $/tonne 256.97 206.40 24.5 Euro-3 $/tonne 246.26 195.28 26.1 Euro-4 $/tonne 213.14 177.06 20.4 Euro-5 $/tonne 160.68 177.06 (9.3) Diesel fuel Below Euro-3 $/tonne 134.34 94.78 41.7 Euro-3 $/tonne 134.34 85.55 57.0 Euro-4 $/tonne 111.29 77.36 43.9 Euro-5 $/tonne 92.54 77.36 19.6 Motor oils $/tonne 189.71 161.16 17.7 Straight-run gasoline $/tonne 244.45 209.63 16.6 9 months of Change, % 2012 2011 Gasoline Below Euro-3 RUR/tonne 7,892.88 5,995.00 31.7 Euro-3 RUR/tonne 7,549.88 5,672.00 33.1 Euro-4 RUR/tonne 6,822.00 5,143.00 32.6 Euro-5 RUR/tonne 6,258.25 5,143.00 21.7 Diesel fuel Below Euro-3 RUR/tonne 4,165.82 2,753.00 51.3 Euro-3 RUR/tonne 3,977.18 2,485.00 60.0 Euro-4 RUR/tonne 3,562.00 2,247.00 58.5 Euro-5 RUR/tonne 3,360.54 2,247.00 49.6 Motor oils RUR/tonne 6,072.00 4,681.00 29.7 Straight-run gasoline RUR/tonne 7,824.00 6,089.00 28.5 9 months of Change, % 2012 2011 Gasoline Below Euro-3 $/tonne 253.80 208.40 21.8 Euro-3 $/tonne 242.77 197.17 23.1 Euro-4 $/tonne 219.37 178.79 22.7 Euro-5 $/tonne 201.24 178.79 12.6 Diesel fuel Below Euro-3 $/tonne 133.96 95.70 40.0 Euro-3 $/tonne 127.89 86.39 48.0 Euro-4 $/tonne 114.54 78.11 46.6 Euro-5 $/tonne 108.06 78.11 38.3 Motor oils $/tonne 195.25 162.72 20.0 Straight-run gasoline $/tonne 251.59 211.67 18.9 Income tax. Starting from January 1, 2009, the Federal income tax rate is 2.0% and the regional income tax rate varies between 13.5% and 18.0%. The Group's foreign operations are subject to taxes at the tax rates applicable to the jurisdictions in which they operate. Until January 1, 2012, there were no provisions in the taxation legislation of the Russian Federation to permit the Group to reduce taxable profits of a Group company by offsetting tax losses of another Group company against such profits. Tax losses could be fully or partially used to offset taxable profits in the same company in any of the ten years following the year of loss. Starting from January 1, 2012, if certain conditions are met, taxpayers are able to pay income tax as a consolidated taxpayers' group ("CTG"). This allows taxpayers to offset taxable losses generated by certain participants of a CTG against taxable profits of other participants of the CTG. Certain Group companies met the legislative requirements and pay income tax as a CTG starting from the first quarter of 2012. Losses generated by a taxpayer before joining a CTG are not available for offset against taxable profits of other participants of the CTG. However, if a taxpayer leaves a CTG, such losses again become available for offset against future profits generated by the same taxpayer. The expiration period of the losses is extended to take account of any time spent within a CTG when the losses were unavailable for use. Transportation of crude oil and refined products in Russia The main Russian crude oil production regions are remote from the main crude oil and refined products markets. Therefore, access by crude oil production companies to the markets is dependent on the extent of diversification of the transport infrastructure and access to it. As a result, transportation cost is an important macroeconomic factor affecting our net income. Transportation of crude oil produced in Russia to refineries and export destinations is performed primarily through the trunk oil pipeline system of state-owned OAO AK Transneft or by railway transport. Transportation of refined products in Russia is performed by railway transport and the pipeline system of OAOAKTransnefteproduct. The Russian railway infrastructure is owned and operated by OAO Russian Railways. Both these companies are state-owned. We transport the major part of our refined products by railway transport. In Russia, the gas is mostly sold at the wellhead and then transported through the Unified Gas Supply System ("UGSS"). The UGSS is responsible for gathering, transporting, dispatching and delivering substantially all natural gas supplies in Russia and is owned and operated by OAO Gazprom ("Gazprom"). The Federal Service for Tariffs of the Russian Federation regulates natural gas transportation tariffs. We are not able to sell our gas other than through UGSS. Three and nine months ended September30,2012, compared to three and nine months ended September30,2011 The table below presents our consolidated statements of income for the periods indicated. 3^rd quarter of 9 months of 2012 2011 2012 2011 (millions of US dollars) Revenues Sales (including excise and export tariffs) 35,494 34,563 103,152 99,101 Costs and other deductions Operating expenses (2,349) (2,280) (6,891) (6,858) Cost of purchased crude oil, gas and products (16,343) (15,051) (47,127) (43,058) Transportation expenses (1,523) (1,604) (4,625) (4,677) Selling, general and administrative expenses (904) (1,043) (2,665) (2,845) Depreciation, depletion and amortization (1,309) (1,137) (3,581) (3,345) Taxes other than income taxes (3,309) (3,442) (10,248) (9,811) Excise and export tariffs (5,591) (6,128) (17,258) (16,519) Exploration expense (52) (196) (199) (309) (Loss) gain on disposals and impairments of assets (29) (11) 137 (171) Income from operating activities 4,085 3,671 10,695 11,508 Interest expense (109) (182) (430) (532) Interest and dividend income 62 53 194 144 Equity share in income of affiliates 64 168 408 510 Currency translation loss (97) (154) (493) (312) Other non-operating income (expense) 41 (48) (26) 287 Income before income taxes 4,046 3,508 10,348 11,605 Current income taxes (613) (1,091) (2,205) (2,071) Deferred income taxes 37 (27) 89 (500) Total income tax expense (576) (1,118) (2,116) (2,571) Net income 3,470 2,390 8,232 9,034 Net loss (income) attributable to noncontrolling interests 39 (146) 84 (22) Net income attributable to OAO LUKOIL 3,509 2,244 8,316 9,012 Earning per share of common stock attributable to OAO LUKOIL (in US dollars): Basic 4.65 2.88 10.91 11.55 Diluted 4.55 2.83 10.68 11.31 The analysis of the main financial indicators of the financial statements is provided below. Sales revenues Sales breakdown 3^rd quarter of 9 months of 2012 2011 2012 2011 (millions of US dollars) Crude oil Export and sales on international markets other than CIS 6,265 8,056 18,948 21,827 Export and sales to CIS 395 654 1,243 1,885 Domestic sales 446 366 1,093 1,209 7,106 9,076 21,284 24,921 Refined products Export and sales on international markets Wholesale 19,075 16,160 55,957 48,426 Retail 2,867 3,055 7,973 8,489 Domestic sales Wholesale 2,303 2,033 5,854 5,530 Retail 2,249 2,324 6,276 5,694 26,494 23,572 76,060 68,139 Petrochemicals Export and sales on international markets 232 277 776 849 Domestic sales 73 241 191 744 305 518 967 1,593 Gas and gas products Export and sales on international markets 565 475 1,781 1,356 Domestic sales 276 261 789 732 841 736 2,570 2,088 Sales of energy and related services 296 229 983 1,137 Other Sales on international markets 238 243 659 666 Domestic sales 214 189 629 557 452 432 1,288 1,223 Total sales 35,494 34,563 103,152 99,101 Sales volumes 3^rd quarter of 9 months of 2012 2011 2012 2011 Crude oil (thousands of barrels) Export and sales on international markets other than CIS 57,745 71,871 172,306 199,743 Export and sales to CIS 7,103 12,608 23,903 35,507 Domestic sales 8,356 7,858 21,763 25,047 73,204 92,337 217,972 260,297 Crude oil (thousands of tonnes) Export and sales on international markets other than CIS 7,878 9,805 23,507 27,250 Export and sales to CIS 969 1,720 3,261 4,844 Domestic sales 1,140 1,072 2,969 3,417 9,987 12,597 29,737 35,511 Refined products (thousands of tonnes) Export and sales on international markets Wholesale 21,541 18,859 63,304 56,926 Retail 1,765 1,840 4,908 5,181 Domestic sales Wholesale 3,333 3,073 8,505 8,331 Retail 2,338 2,364 6,463 5,971 28,977 26,136 83,180 76,409 Total sales volume of crude oil and refined products 38,964 38,733 112,917 111,920 Realized average sales prices 3^rd quarter of 9 months of 2012 2011 2012 2011 Average realized price international Oil (excluding CIS) ($/barrel) 108.52 112.09 109.97 109.28 Oil (CIS) ($/barrel) 55.49 51.96 51.99 53.10 Refined products Wholesale ($/tonne) 885.54 856.90 883.94 850.69 Retail ($/tonne) 1,624.55 1,660.38 1,624.60 1,638.55 Average realized price within Russia Oil ($/barrel) 53.32 46.67 50.21 48.28 Refined products Wholesale ($/tonne) 690.96 661.60 688.25 663.73 Retail ($/tonne) 962.37 982.81 971.17 953.57 During the third quarter of 2012, our revenues increased by $931 million, or by 2.7%, compared to the same period of 2011, crude oil sales decreased by $1,970 million, or by 21.7%, refined products sales increased by $2,922million, or by 12.4%. During the nine months of 2012, our revenues increased by $4,051 million, or by 4.1%, compared to the same period of 2011. Our revenues from crude oil sales decreased by $3,637 million, or by 14.6%. Our revenues from sales of refined products increased by $7,921million, or by 11.6%. Sales of crude oil Compared to the respective periods of 2011, our total crude oil sales revenues decreased by $1,970 million, or by 21.7%, in the third quarter of 2012 as a result of the decrease in sales volumes and prices and by $3,637 million, or by 14.6%, in the nine months of 2012 as a result of decreased sales volumes. Our sales volumes decreased by 20.7%, or by 2,610 thousand tonnes, in the third quarter of 2012 and by 16.3%, or by 5,774 thousand tonnes, in the nine months of 2012, because of lower scale of trading operations and decrease in production. During the third quarter and the nine months of 2012, our revenue from crude oil export from Russia both to the Group companies and third parties amounted to $6,504 million and $19,696 million, respectively. Sales of refined products Compared to the same periods of 2011, our revenue from the wholesale of refined products outside of Russia increased by $2,915 million, or by 18.0%, in the third quarter of 2012 as a result of an increase in sales volumes by 14.2% and prices by 3.3%, and increased by $7,531 million, or by 15.6%, in the nine months of 2012 due to an increase in sales volumes by 11.2% and prices by 3.9%. Our revenue from international retail sales decreased by $188 million, or by 6.2%, in the third quarter of 2012 and by $516 million, or by 6.1%, in the nine months of 2012 due to a decrease in average prices by 2.2% and sales volumes by 4.1% in the third quarter of 2012, and due to a decrease in sales volumes by 5.3% in the nine months of 2012. Retail sales volumes decreased by 75 thousand tonnes in the third quarter of 2012 and by 273 thousand tonnes in the nine months of 2012, mainly as a result of restructuring of our retail network in the USA. Our revenue from the wholesale of refined products on the domestic market increased by $270 million, or by 13.3%, in the third quarter of 2012 and increased by $324 million, or by 5.9%, in the nine months of 2012. Our average realized price increased by 4.4% and by 3.7%, respectively. Our sales volumes also increased by 8.5% in the third quarter of 2012 and by 2.1% in the nine months of 2012. Our revenue from retail sales in Russia decreased by $75 million, or by 3.2%, in the third quarter of 2012 and increased by $582 million, or by 10.2%, in the nine months of 2012. Domestic retail sales volumes decreased by 1.1% in the third quarter of 2012 and increased by 8.2% in the nine months of 2012 resulting from the increase in domestic demand for motor fuels. Average retail prices in Russia decreased by 2.1%, compared to the third quarter of 2011, and increased by 1.8%, compared to the nine months of 2011. In the third quarter and the nine months of 2012, our revenue from export of refined products from Russia both to Group companies and third parties amounted to $3,906 million and $12,695 million, respectively. Sales of petrochemical products In the third quarter of 2012, our revenue from sales of petrochemical products decreased by $213million, or by 41.1%, and in the nine months of 2012, our revenue decreased by $626 million, or by 39.3%, mainly as a consequence of a fire on our petrochemical plant in Stavropol, Russia in December 2011. Domestic sales volumes dropped by 71.1% in the third quarter of 2012 and by 73.9% in the nine months of 2012. International sales volumes decreased by 15.2% in the third quarter and by 3.1% the nine months of 2012. The decrease of international sales was due to maintenance works at our petrochemical plant Karpatnaftochim Ltd. in Ukraine. Our international realized prices decreased by 0.6% in the third quarter of 2012 and by 4.7% in the nine months of 2012. Sales of gas and gas products Sales of gas and gas refined products increased by $105 million, or by 14.3%, in the third quarter of 2012 and by $482 million, or by 23.1%, in the nine months of 2012. Gas products wholesales revenue decreased by $16 million, or by 5.0% in the third quarter of 2012 and increased by $101 million, or by 11.5%, in the nine months of 2012. Average realized wholesale prices for gas products decreased by 15.6% in the third quarter of 2012 and by 5.4% in the nine months of 2012, while sales volumes increased by 12.5% and 17.8%, respectively. Retail gas products revenue remained flat to the third quarter of 2011 and decreased by $11 million, or by 2.4%, compared to the nine months of 2011 because of price factor. Natural gas sales revenue increased by $101 million, or by 51.7%, in the third quarter of 2012 and by $348 million, or by 57.6%, in the nine months of 2012. This revenue increased both domestically and internationally. At the domestic market, this was mainly a result of the increase of sales price to Gazprom by 30.8%. The main reason for the rise of revenue outside of Russia was the increase of both sales volumes and prices in Uzbekistan. Domestic sales of energy and related services We sell substantially all our energy and related services domestically. International sales are relatively insignificant. Our revenue from sales of electricity, heat and related services increased by $67 million, or by 29.3%, in the third quarter of 2012 and decreased by $154 million, or by 13.5%, in the nine months of 2012. These changes in revenue were a result of changes in volume of resale operations as a result of alteration of scheme of electricity supplies to our subsidiaries. Sales of other products Other sales include non-petroleum sales through our retail network, transportation services, rental revenue, crude oil extraction and refining services, and other revenue of our production and marketing companies from sales of goods and services not related to our primary activities. In the third quarter of 2012, other sales increased by $20 million, or by 4.6%, and in the nine months of 2012, other sales increased by $65 million, or by 5.3%. Other sales include $22 million of ISAB refining services revenue for September 2012. Operating expenses Operating expenses include the following: 3^rd quarter of 9 months of 2012 2011 2012 2011 (millions of US dollars) Hydrocarbon extraction expenses 971 955 2,821 2,842 Own refining expenses 430 375 1,108 1,048 Refining expenses at third parties and affiliated refineries 194 228 720 655 Cost of processing operations at ISAB 16 - 16 - Expenses for crude oil transportation to refineries 325 267 914 807 Power generation and distribution expenses 146 108 463 477 Petrochemical expenses 72 89 230 250 Other operating expenses 195 258 619 779 Total operating expenses 2,349 2,280 6,891 6,858 The method of allocation of operating expenses above differs from the approach used in preparing the data for Note 20 "Segment information" to our interim consolidated financial statements. Expenditures in the segment reporting are grouped depending on the segment to which a particular company belongs. Operating expenses for the purposes of this analysis are grouped based on the nature of the costs incurred. Our operating expenses increased by $69 million, or by 3.0%, in the third quarter of 2012 and by $33 million, or by 0.5%, in the nine months of 2012. Hydrocarbon extraction expenses Our extraction expenses include expenditures related to repairs of extraction equipment, labor costs, expenses on artificial stimulation of reservoirs, fuel and electricity costs, cost of extraction of natural gas liquids, property insurance of extraction equipment and other similar costs. In the third quarter of 2012, our extraction expenses increased by $16 million, or by 1.7%, and in the nine months of 2012, our extraction expenses decreased by $21 million, or by 0.7%. Increase in labor costs, repairs and artificial stimulation of reservoirs was compensated for by devaluation of ruble against the US dollar. Our average hydrocarbon extraction expenses remained at the same level of $5.05 per BOE as in the third quarter of 2011, but decreased from $4.99per BOE in the nine months of 2011 to $4.92 per BOE the nine months of 2012, or by 1.4%. Own refining expense Our own refining expenses increased by $55 million, or by 14.7%, in the third quarter of 2012, and by $60 million, or by 5.7%, in the nine months of 2011. Refining expenses at our domestic refineries remained nearly flat to the third quarter of 2011, and in the nine months of 2012 increased by $17 million, or by 2.1%. The increase of expenses due to higher consumption and cost of additives was compensated for by the ruble devaluation and lower energy cost. Refining expenses at our international refineries increased by 76.5%, or by $52 million, in the third quarter of 2012 and by 18.9%, or by $43 million, in the nine months of 2012. The increase was mainly due to obtaining control over ISAB in September 2012 (see Refining, marketing and trading section for details). Refining expenses at third party and affiliated refineries Along with our own production of refined products we have the ability to refine crude oil at third party and affiliated refineries both in Russia and abroad. In the third quarter and the nine months of 2012, refining expenses at third party and affiliated refineries decreased by 14.9% and increased by 9.9%, respectively. The decrease to the third quarter of 2011 was due to obtaining control over ISAB in September 2012 (see Refining, marketing and trading section for details). The increase compared to the nine months of 2011 was due to crude oil processing at third party refineries in Belorussia since the beginning of 2012. Expenses for crude oil transportation to refineries Expenses for crude oil transportation to refineries include pipeline, railway, freight and other costs related to delivery of the Group's own crude oil to refineries for further processing. In the third quarter of 2012, expenses for crude oil transportation to refineries increased by $58 million, or by 21.7%, while in the nine months of 2012 they increased by $107 million, or by 13.3%. The increase was largely due to supplies of our crude oil to the refineries in Belorussia, where we commenced crude oil processing in the first quarter of 2012. Petrochemical expenses In the third quarter of 2012, operating expenses of our petrochemical plants decreased by $17 million, or by 19.1%, compared to the third quarter of 2011, and in the nine months of 2012, these expenses decreased by $20 million, or by 8.0%, compared to the nine months of 2011. Despite the sharp decrease in production as a result of the fire that destroyed the ethylene production unit at our plant in Stavropol, Russia, operating expenses of the plant didn't decrease significantly due to overhauls at other plant units. The effect of the increased production at Group's other petrochemical plants was partially compensated by the devaluation of local currencies against the US dollar. Power generation and distribution expenses Power generation and distribution expenses increased by $38million, or by 35.2%, in the third quarter of 2012 and decreased by $14 million, or by 2.9%, in the nine months of 2012. These changes in expenses were a result of changes in volume of resale operationsas a result of alteration of scheme of electricity supplies to our subsidiaries. Other operating expenses Other operating expenses include expenses of the Group's upstream and downstream entities that do not relate to their core activities, namely rendering of transportation and extraction services, costs of other services provided and goods sold by our production and marketing companies, and of non-core businesses of the Group. In the third quarter of 2012, other operating expenses decreased by $63 million, or by 24.4%, and in the nine months of 2012, other operating expenses decreased by $160 million, or by 20.5%. Cost of purchased crude oil, gas and products Cost of purchased crude oil, gas and products includes cost of crude oil and The story has been truncated, [TRUNCATED]
LukOil(OAO) LKOB 3rd Quarter Results (MDA)
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