Aton daily 16-Aug-05
2Q05 US GAAP results show q-o-q rise in production, revenue; bottom line,
cash flow disappoint
Nelson Resources yesterday reported 2Q05 US GAAP results showing a significant q-o-q
increase in production and revenue and a slight decline in EBITDA and net income due to
several unexpected items, which the company explained in a subsequent conference call.
In 2Q05, Nelson's production rose by 14% q-o-q to 29.7mbpd (net), or slightly higher
than our forecast, while revenue came in at $124mn, up an impressive 26% q-o-q and 147% y-o-y and broadly in line with our estimates.
We note that production exceeded the volume of crude oil sold (by 213,000 bbl or 7.4% of 2Q05 output), suggesting an increase in crude oil stock which is likely to be sold down in coming quarters.
Total operating expenses doubled q-o-q to $49.5mn, or well above out expectations,
partly due again to non-cash additional compensation costs. The real negative surprise
came in a 43% q-o-q increase in production costs, though this was almost fully explained by
the introduction of gas flaring penalties, an issue that is becoming increasingly common to
Kazakhstan oil producers. Nelson said it accrued $5.4mn in penalties in 2Q05, and management noted that while it is seeking to find a temporary solution to reduce penalties in coming quarters, Nelson's gas flaring would be ended in 2H06 anyway.
The rise in G&A, which doubled from 1Q05's figure, was attributed to Nelson's efforts
to begin proper accounting, reporting and corporate governance procedures,
following a spate of acquisitions in 2004 that led to a substantial increase in consultancy
fees, which were incurred at the corporate level and thus did not reduce taxable income (and resulted in a higher effective income tax rate).
Transport expenses rose as a result of a higher transportation tariff imposed on the company.
Meanwhile, a lower than expected hedging loss resulted in pre-tax profit remaining in
the proximity of our forecasts, at $46.5mn, or down 9% q-o-q. However, a higher than
expected effective tax rate of 48% resulted in lower than expected net income at $22.4mn, some 24% below our estimates.
Operating cash flow was reported at $18mn, significantly below our forecast due to an
unexpected $30mn increase in working capital, which the company attributed to an increase in trade receivables due to a mismatch between crude oil deliveries and payments, meaning the bulk of this is due to be recovered in coming quarters. Excluding the unexpected increase in working capital, operating cash flow rose 20% q-o-q to $48mn, or exactly in line with our expectations.
Overall, the 2Q05 numbers paint a picture of healthy operating results, with the company's
financials slightly lower than our estimates but higher than the market's expectations.
Based on the reported 1H05 results, Nelson seems to be on track to meet our full
year 2005 projections of $529mn in revenue, $292mn in EBITDA and $144mn in net income.
We will incorporate the gas flaring penalties into our financial model, although we
expect the impact on the long-term forecast and fair value to be minimal. Nelson remains a
very promising growth story and our recommendation on the stock remains Buy.
2Q05 US GAAP results show q-o-q rise in production, revenue; bottom line,
cash flow disappoint
Nelson Resources yesterday reported 2Q05 US GAAP results showing a significant q-o-q
increase in production and revenue and a slight decline in EBITDA and net income due to
several unexpected items, which the company explained in a subsequent conference call.
In 2Q05, Nelson's production rose by 14% q-o-q to 29.7mbpd (net), or slightly higher
than our forecast, while revenue came in at $124mn, up an impressive 26% q-o-q and 147% y-o-y and broadly in line with our estimates.
We note that production exceeded the volume of crude oil sold (by 213,000 bbl or 7.4% of 2Q05 output), suggesting an increase in crude oil stock which is likely to be sold down in coming quarters.
Total operating expenses doubled q-o-q to $49.5mn, or well above out expectations,
partly due again to non-cash additional compensation costs. The real negative surprise
came in a 43% q-o-q increase in production costs, though this was almost fully explained by
the introduction of gas flaring penalties, an issue that is becoming increasingly common to
Kazakhstan oil producers. Nelson said it accrued $5.4mn in penalties in 2Q05, and management noted that while it is seeking to find a temporary solution to reduce penalties in coming quarters, Nelson's gas flaring would be ended in 2H06 anyway.
The rise in G&A, which doubled from 1Q05's figure, was attributed to Nelson's efforts
to begin proper accounting, reporting and corporate governance procedures,
following a spate of acquisitions in 2004 that led to a substantial increase in consultancy
fees, which were incurred at the corporate level and thus did not reduce taxable income (and resulted in a higher effective income tax rate).
Transport expenses rose as a result of a higher transportation tariff imposed on the company.
Meanwhile, a lower than expected hedging loss resulted in pre-tax profit remaining in
the proximity of our forecasts, at $46.5mn, or down 9% q-o-q. However, a higher than
expected effective tax rate of 48% resulted in lower than expected net income at $22.4mn, some 24% below our estimates.
Operating cash flow was reported at $18mn, significantly below our forecast due to an
unexpected $30mn increase in working capital, which the company attributed to an increase in trade receivables due to a mismatch between crude oil deliveries and payments, meaning the bulk of this is due to be recovered in coming quarters. Excluding the unexpected increase in working capital, operating cash flow rose 20% q-o-q to $48mn, or exactly in line with our expectations.
Overall, the 2Q05 numbers paint a picture of healthy operating results, with the company's
financials slightly lower than our estimates but higher than the market's expectations.
Based on the reported 1H05 results, Nelson seems to be on track to meet our full
year 2005 projections of $529mn in revenue, $292mn in EBITDA and $144mn in net income.
We will incorporate the gas flaring penalties into our financial model, although we
expect the impact on the long-term forecast and fair value to be minimal. Nelson remains a
very promising growth story and our recommendation on the stock remains Buy.
