SHNOS OJSC (Kazakhstan): brief characteristics

/IRBIS, March 6, 01/ - Following is brief characteristics of Shymkentnefteorgsintez OJSC (SHNOS OJSC, company), prepared on the basis of the materials of the Listing commission of the Kazakhstan Stock Exchange (KASE). The characteristics is published due to the entering the first issue bonds (KZ2CUY03A339; SYRGb1; $100; $25 mln; Feb 26, 01 - Feb 26, 04; semiannual coupon at 10% APR) of SHNOS OJSC into official list of the KASE securities under category "A". The agency IRBIS is not responsible for the reliability of the information presented herein, which is taken from conclusion of the KASE Listing commission (except for editorial corrections) and the materials presented to the Exchange by the issuer. GENERAL INFORMATION The date of initial state registration - Dec 31, 93, date of last re-registration - Apr 2, 99. Legal status - open joint stock company. Ownership - private. Legal and actual address of the head office - 5th km of Lenger highway, Shymkent, South Kazakhstan region, 486050, Kazakhstan. Number of employees as of Jan 1, 01 - 2,352 (personnel engaged in production - 1,714, administrative personnel - 536, others - 102). Primary activities of SHNOS OJSC are the processing of oil and selling of oil products. Most products are presented by gasoline, diesel fuel, fuel oil, kerosene and liquefied gas. ESTABLISHMENT HISTORY AND LIABILITIES SHNOS OJSC was founded in 1993 on the basis of Shymkent oil refinery. The main capacities of Shymkent refinery were put into service in mid 80's and early 90's. Projected capacity of the plant is 7 mln tons. In July 1996 the government of Kazakhstan privatized SHNOS OJSC by selling all common shares to Kazvit Holdings Ltd. (Kazvit), the company registered in Gibraltar and affiliated with KAZKOMMERTSBANK OJSC. Based on the agreement, Kazvit assumed all investment obligations amounting to $150 mln (including investments made out of the plant's own funds), that has to be made till December 31, 2001. Based on agreement terms, if the investment obligations are not met fully, Kazvit will have to pay the government of Kazakhstan a fine equal to 15% of lacking amount of the investments. In January 1998 Kazvit sold common shares of SHNOS OJSC to Central Asian Industrial Investments N.V., (Caracua, Anthills, Netherlands), transferring all contractual obligations on share purchases and investment obligations. On December 31, 2000 Hurricane Hydrocarbons Ltd. (head office in Calgary, Alberta, Canada, according to the law of this country is was founded in 1986) has finished buying common shares of SHNOS OJSC from Central Asian Industrial Investments N.V. Now Hurricane Hydrocarbons leads vertically integrated group of companies (Group), which includes: SHNOS OJSC, Hurricane Kumkol Munai OJSC (HKM, Kyzyl-Orda, Kazakhstan), Hurricane Overseas Services Inc. (Calgary, Canada), Hurricane Investments CJSC (Almaty), Hurricane - Dostyk (Almaty) and Hurricane - Sairan LLP (Almaty). Hurricane Hydrocarbons started in Kazakhstan with a stake in Turan Petroleum JV in 1991, by participating in the development of three major oil fields (Kyzylkiya, Aryskum and Maibulak) in South Kazakhstan. Other participants of the joint venture were state HKM and Yuzhkazgeologiya. Later Turan Petroleum JV has obtained the license to develop Yuzhnyi Kumkol field. In 1996 on of Hurricane Hydrocarbons subsidiaries, Hurricane Kumkol Limited (Cyprus), bought all common shares of HKM for $120 mln, which previously belonged to the state. One of the conditions of buying the shares is to meet investment obligations that obliges the Group to invest an equivalent of $280 mln into the fixed assets of HKM till December 31, 2002. Both direct investments of Hurricane Hydrocarbons and profit of HKM can be used as the source of investments. If Hurricane Hydrocarbons does not meet its investment obligations, it has to pay a fine to the government of Kazakhstan equal to 15% of lacking investment amount. As Hurricane Hydrocarbons estimates, as of late March 2000 the Group has met its investment obligations by 50%. Based on purchase conditions of SHNOS OJSC shares (as it was mentioned above, the shares have been purchased by Central Asian Industrial Investments N.V. on March 31, 00), Hurricane Hydrocarbons assumed all $150 mln investment obligations. These obligations should be met till December 31, 2001 by attracting investments, or reinvesting SHNOS OJSC profits. The management estimates that as of late 2000 about $87.1 mln has been invested. If Hurricane Hydrocarbons does not meet these requirements, it has to pay a fine equal to 15% of lacking investment amount. Hurricane Hydrocarbons intends to conduct talks with the government of Kazakhstan regarding the reduction of investment obligations relative to SHNOS OJSC, also by transferring part of the investments to HKM on the basis of economic soundness. In 1999 - early 2000 Hurricane Hydrocarbons was under the protection of the Canadian law due to the default on debt liabilities. (Based on SHNOS OJSC prospectus, Canadian law provides for the opportunity of temporary protection of the companies from the lenders and restructuring of the debt in case of the company's default on its obligations. Code of law acts and amendments to these acts that regulate such cases are called Companies' Creditors Arrangement Act). After restructuring the debts on March 31, 2000 Hurricane Hydrocarbons was released from the protection. As of late 2000 Hurricane Hydrocarbons has paid a total of $174.67 mln out of debt liabilities of $198.57 mln. The management of Hurricane Hydrocarbons considers that can pay off remaining liabilities of $23.9 mln ahead of schedule. Under Debt restructuring plan SHNOS OJSC issued guarantees in favor of the lenders of Hurricane Hydrocarbons for the amount of unpaid debt. CAPITAL, SHARES AND SHAREHOLDERS As of Feb 1, 01 announced authorized capital of the SHNOS OJSC equaled KZT100 mln, and issued and paid authorized capital - KZT62.3 mln. Total of 62,322,701 shares at KZT1.0 face value were issued, including 61,928,201 common inscribed and 394,500 preferred inscribed shares. SHNOS OJSC has registered three issues of shares. The last issue was registered on Jan 18, 01 with simultaneous cancellation of the second issue (second issue cancelled the first issue) for KZT62,322,701 due to a decrease in issued capital and contained 61,928,201 common and 394,500 preferred shares at KZT1.0 each. The issue is non-documentary. The shareholders register is maintained by Reestr-Service LLP (Almaty). Dividends to one common share of SHNOS OJSC are determined by the General shareholders meeting upon the suggestion of the Board (based on the prospectus of the third issue dated Oct 1, 00 - upon the suggestion of the Board of directors). For preferred shares the charter and the issue prospectus set a fixed dividend at 100% of face value. In 1995 total of KZT23,368 th was paid out as dividends, of which KZT15,468 th to common shares and KZT7,882 th to preferred shares. In 1996 dividend payments equaled correspondingly: KZT15,385 th, KZT7,.75 th and KZT8,310 th. In 1997, 1998 and 1999 dividends were accrued and paid only to preferred shares for amounts of KZT7,905 th, KZT394.5 th and KZT327.5 th, respectively. Common and preferred shares of SHNOS OJSC were entered into the official list of the KASE securities under category "A" on Sept 16, 98. From Sept 16, 97 through Sept 16, 98 they were traded within the official list of the category "B". In 2000 seven deals were made in the company's shares amounting to 13,293,307 shares totaling 15,776.8 th U.S. dollars. Based on the total volumes of the deals, the company's common shares were the most traded securities at the KASE in 2000. Their prices varied at the Exchange during the year from $1.0000 to $1.6300 per share. The last deal was made at the maximum price. In 2001 no deals were made in common shares of SHNOS OJSC. No deals were made in preferred shares of the company a the KASE during the trading period. Kazkommerts Securities OJSC (Almaty) acts as a market-maker of SHNOS OJSC shares at the KASE. As of Feb 2, 01, Hurricane Hydrocarbons owns 91.44% of SHNOS OJSC authorized capital (based on the results of the third issue). By the shareholders register, the remaining 8.56% is owned by the individuals. DESCRIPTION OF ACTIVITY AND RAW MATERIAL BASE As it was mentioned above, the primary activity of SHNOS OJSC is refining of oil and commercial operations with oil products. Commercial operations with crude oil is also an important source for revenues, large share of such operations was registered in the last year. General activity of the SHNOS is purchase of oil, processing and selling of oil products to other parties. The refinery also uses another scheme when it refines oil of customers charging fixed processing rates. By results of 9 month 2000 sales of oil products yielded 50% of the total sales income. The share of revenues from crude oil exporting took 43%. SHNOS mainly exports oil purchased from Hurricane Kumkol Munai (HKM). The oil is shipped from oil loading racks of the SHNOS. Organizational structure. Industrial capacities of the company located in Shymkent. It has seven branches (Astana, Almaty, Shymkent, Taraz, Kzyl- Orda, Karaganda and Ust-Kamenogorsk) and two representative offices in Almaty and Bishkek (Kyrgyzstan). The branch offices are the part of marketing network. Their activity is storage and selling of oil products. Main part of management is located in Shymkent. The part consisting of marketing and sales, strategic planning and analysis, financial and internal audit departments located in Almaty. Crude oil supply. Main supplier of crude oil is Hurricane Kumkol Munai (HKM). In 1999, its share equaled 83% in total oil shipments, in 2000 - 64%. The raw material base of HKM is corresponded to licenses possessed by Hurricane Hydrocarbons group. Nowadays, the latter possess licenses over development of Kumkol, Uzhnii, kzylkiya, Aryskum and Maibulak oil deposits (these licenses had been previously recalled from Turgai Petroleum CJSC). It holds 50% participation in Turgai Petroleum CJSC (Kumkol-Lukoil) that develops Northern Kumkol deposit (northern part of Kumkol deposit) and 50% participation in Kazgermunai that possess licenses over development of Akshabulak, Nuraly and Aksai fields. Among other large oil suppliers are NOTC KazTransOil (oil in exchange for transportation services), NOC KAZAKHOIL CJSC and Turgai Petroleum. Oil delivery from Turgai basin is made through Kumkol-Shymkent pipe-line operated by KazTransOil. At present, the transportation tariff equals $10.9. All payments are made in tenge. The exchange rate of conversion depends on purpose of oil transportation. The export transportation is rated at the official exchange rate of the National Bank. Transportation for further processing is paid off at exchange rate set as of Apr.1, 1999 (KZT87.5). At the beginning of 2001 the difference between to schemes totaled 65%. The transportation tariffs are paid by supplier. Most of oil purchase are based on prepayment terms. All four oil fields of Hurricane Hydrocarbons group are linked with SHNOS by pipe-line with daily capacity of 21 th tons (7.5 mln per year). This pipe-line allows to increase production of oil products without additional investments into infrastructure. Provision of oil reserves. As a result of revaluation made by McDaniel & Associates Consultants Ltd in 1999, proven recoverable oil reserves of Hurricane Hydrocarbons amounted to 244.6 mln barrels or 31.57 mln tons. Considering oil production in 2000 (3.334 mln tons) reserves equaled 28.2 mln tons. The present rate of production would drain reserves within 8.5 years. The regional oil fields are also being developed by Turgai Petroleum JV and Kazgermunai JV. The former company develops northern part of Kumkol. In 2000 it produced 1.3 mln tons of oil. In late 2000 the company's reserves amounted 10.1 mln tons. Kazgermunai JV develops three small oil fields: Akshabulak (recoverable reserves - 1 mln tons), Nurali and Aksai (fields are still being explored). Total production of the company amounted 0.56 mln tons in 2000. Oil refining. Shymkent refinery started operation in 1985 with launch of LK- 6U refining facility with annual capacity of 7.0 mln tons. The refinery was designed on processing of Western Siberian oil. The shift to Kumkol oil has required reconstruction of some facilities that was completed in 90th. At present refining level equals to 52% varying from 50 to 58% depending on type of processing. The LK-6U facility consists of: equipment for atmospheric distillation (annual capacity - 7 mln tons); equipment for catalytic reforming with pre- hydrorefining (1 mln tons); equipment for hydro deparaffination of diesel fuel (1 mln tons); installation for hydrorefining of kerosene (600 th tons); gas fractionation plant (450 th tons). Equipment for vacuum distillation of mazut (3.8 mln tons) and retarded carbonization installation were set up in 1992. However, they have not been operated yet. According to SHNOS OJSC, investments into fixed assets amounted KZT782 mln in 1997, KZT1.8 bln in 1998 ($23 mln), 1999 - KZT906 mln. All investments were financed from internal sources (net income of the company). The main objectives of the investments were reconstruction of existing facilities to improve quality of production. Between 1993 and 1998, the company introduced computer-based production management system and modernized reforming and hydro deparaffination installations. Currently, retarded carbonization installation is being modified into mazut light thermocracking facility (1 mln tons). After launching of this equipment the company plans to set up mazut vacuum distillation facility. Mazut catalytic cracking facility is under construction (2 mln tons). There are several auxiliary departments at the refinery that provide operation of main facilities: storing facility, central laboratory, steam and air supplying department, electric power shop, control equipment shop, etc. The company received 4.56 mln tons of oil, of which 3.05 mln were refined and 1.51 mln were exported. From the processed oil 2.26 mln tons were acquired by SHNOS and 0.79 mln (17% of total supplied and 26% of processed oil) were received under tolling agreements. Tolling schemes are being regulated by Agency for regulation of natural monopolies (the Agency). In year 2000 the Agency set tariff of KZT2,845 including VAT per ton of processed oil ($19.6 as of Feb.1, 2001). This relatively low rate make tolling unprofitable. That is why such income from operations amounted only for 2% of the total income. Production and commercial activity. Final products of the company are gasoline of A-80, A-85, AI-92 and AI-96 grades, diesel fuel, aviation and burning kerosene, mazut, heating oil and liquefied gas. Total output of products as a result of processing is 93% including gasoline - 18% and liquefied gas - 1%. Output of diesel fuel and mazut is defined by used mode of processing: summer mode - 33 and 41%, winter - 26 and 48%. Production of oil products (thousand tons) --------------------------------------- Name of product 1997 1998 1999 2000 --------------- ----- ----- ----- ----- Gasoline 872 793 797 620 Diesel fuel 988 1,011 961 857 Mazut 1,195 1,398 1,334 1,286 Kerosene* 148 140 14 20 liquefied gas * 27 50 82 94 Heating oil 0 0 2 0 --------------- ----- ----- ----- ----- Total 3,230 3,391 3,190 2,876 --------------------------------------- Produced goods are shipped to customers through loading rack into railroad or automobile tanks. Major part of goods are transported using railroads. Four special racks are used for this purpose (gasoline, diesel, oil and mazut racks). SHNOS sells oil products directly from the refinery through branch offices, owned or rent filling stations (FS). All shipments of goods are made on prepayment basis. There are seven branches that fulfil demand of seven regions: Akmola, Almaty, South Kazakhstan, Zhambyl, Kzyl-Orda, Karaganda and Ust- Kamenogorsk regions. The branches sell products through owned (Almaty, Taraz) or rent oil depots. The retail network includes FS in South Kazakhstan, Zhambyl and Akmola regions. Major part of oil products is sold on the domestics market. Important consumers are industrial and agricultural enterprises, power stations, air companies and FS. The share of export is relatively small while still growing: in 1998, exports amounted to 159 th. tons or 2.7% of oil products, 2000 - 288 th. or 4.4%. Major share of export goes to Ukraine and Lithuania (33 and 30% correspondingly). Major domestic markets for oil products are Southern regions of Kazakhstan: Almaty, South Kazakhstan, Zhambyl, Kzyl-Orda and East Kazakhstan regions. These regions take 36% of area and 46% of total population of Kazakhstan. Oil exports. SHNOS OJSC has had export quotas set by Minister of Power Resources, Industry and Trade. In late 1999 (beginning of 2000) SHNOS exported oil shipped from HKM. It provided 43% of total revenues. Major part of exports were transported through seaports of Black sea. MARKETS AND COMPETITION SHNOS OJSC absorbs main part of the market in the southern regions. There are only two domestic competitors of the refinery: Atyrau oil refining plant (AORP) and Pavlodar oil-chemical plant (POCP). Foreign competitors are Russian facilities located near northern border of the republic (Samara, Orsk and Omks refineries). Trend for lowering of capacity utilization at Kazakhstan refineries has been observed in Kazakhstan during last decade. This trend is explained by fall in domestic demand, increase of competition, significant differences between domestic and world oil prices. The declining trend was pronounced in last two years. If in 1999 it was linked to sharp fall of world oil prices (companies were forced to export oil to lower losses), then in 2000 high world prices forced oil producers to export to maximize profit. Pavlodar refinery. Annual capacity - 7 mln tons. It is the biggest oil refinery in Kazakhstan. The refinery was launched in 1978, refining level reaches 70%. In November 2000 the control stake (51%) of the refinery was transferred to Mangistaumunaigas OJSC. The oil is delivered using Pavlodar-Omsk pipe-line in accordance with oil substitution agreements with Russian producers. Small volume of oil is delivered from Caspian and Turgai basins. During last few years oil was delivered using substitution schemes of Mangistaumunaigas OJSC and Aktobemunaigas OJSC that have shipped oil to Russia through Atyrau-Samara and Kenkiyak-Orsk directions while Russian companies ship equivalent at Omsk-Pavlodar direction. As Omsk- Pavlodar pipe-line is the only source of oil for Pavlodar refinery, the plant experience dependence from Russian producers. Closeness of Omsk refinery, one of the biggest processing capacities in Russia, explains strict competition with Russian products. Atyrau refinery. The oldest refinery in Kazakhstan. It was put into operation in 1947. It has been modernized several times during 60-80th. Atyrau refinery is located in the center of oil reach region. It mostly refines domestic oil. The oil is supplied using pipe-line from major oil companies of Western Kazakhstan. At present, the refining level of the facility is 59% (close to SHNOS). The refinery's equipment does not allow to produce high-grade gasoline or kerosene. NOC KAZAKHOIL holds 86% of shares of the refinery. KAZAKHOIL plans to conduct throughout modernization of refining facilities and increase quality of products. Management of SHNOS considers that this modernization can take 3 to 4 years. Comparable description of oil refineries in Kazakhstan ------------------------------------------------------------------------------- Atyrau refinery- Pavlodar refinery- SHNOS - Western region Northern region Southern region Kazakhstan Indicators ---------------- ------------------ --------------- for 2000 tons, mln % tons, mln % tons, mln % tons, mln ---------------- ----------- ---- ------------ ----- ----------- --- ---------- Capacity 5 26 7.5 38 7 36 19.5 Oil processing 2.2 32 1.1 11 3.1 57 6.4 Utilization 44 15 43 Demand 0.9 14 3.0 46 2.6 40 6.6* Production of oil and gas condensate 31.3 89 0 0 4.0 11 35.3 ------------------------------------------------------------------------------- * - demand is given considering volume of sales (information of SHNOS) and import of oil- products from Russia. Import of oil products. Major imports of oil products come from Russia. In 1999 Kazakhstan imported 479 th tons of oil products; 2000 - 900 th. including 483 th tons of gasoline, diesel fuel - 212 th tons, mazut - 124 th. tons and kerosene - 124 th tons. SHNOS noted following reasons for rapid growth of imports: three month delay of Atyrau refinery in spring 2000, low prices of Russian producers, abolition of excise duties on import in July 2000. Existing facilities are three higher than domestic demand, nevertheless low capacity utilization and excessive supply of products from Russia seriously affects market composition. Major supply comes from Orsk refinery and covers mostly northern regions of Kazakhstan. According to the SHNOS, Russian producers mostly supply items that are not produced (or produced in limited volumes) in Kazakhstan (lubricants, bitumen, high grade gasoline). SHNOS is protected from competition as it supplies products to southern regions where import is insignificant. Only sharp disturbances related to exchange rate differentials (KZT/RUR) could bring sever competition for SHNOS as it has taken place in 1998. Among other competitors are Uzbekistan refineries located in Ferghana and Bukhara. During last five years SHNOS has not met any competition from Uzbekistan producers. Neither it had any commercial links with them. This is mainly explained by foreign exchange restrictions in Uzbekistan and high utilized capacity of southern rail roads. According to SHNOS, advantage of additional sales market and raw material supplies that could appear as a result of liberalization of Uzbekistan economy might outbalance negative effects of competition. DEVELOPMENT STRATEGY AND INVESTMENT PROJECTS Integration with HKM. According to the Hurricane Hydrocarbons management integration of SHNOS operations with HKM would provide flexible reaction of the company on changes in domestic and external economic conditions. The companies could select their tactics and orientation on domestic or external markets. Besides, participation in the Group could mean stable oil supply for the refinery. Besides acceleration of sales on the domestic market, the group plans increase oil export (non-CIS countries). The group intends to cut transportation cost by concluding substitution agreements with companies in the western regions. The group also plans to introduce programs on lowering of oil production and processing expenses at Shymkent refinery. For instance, companies will optimize activity of SHNOS and HKM regarding integration of outlets and filling stations of both companies. Modernization. One of the foreground task of investment activity is modernization of reprocessing facilities. It would increase output of profitable light fractions (gasoline and diesel fuel). In this respect major prospective undertaking will be launching of catalytic cracking installment. Launching of this facility would also increase production of light-end products. This complex include hydrorefining of vacuum gasoil, methyl tributyl ether and hydrogen facilities. The project's cost is $80 mln. Previously , the company informed that construction was 60% underway in 1997, and that another $120 mln have been required to complete construction. This sum consisted of expenses for acceleration of sales of light-end products (their production might have increased 1.8 times). At present, the project is laid up because of low demand. The company intends to complete second stage of diesel fuel deparaffination project. Initial cost is $1.0 mln. This project will bring quality of fuel to European standards. Another important project is reconstruction of carbonization facility (thermal cracking of mazut, second stage). Modification would allow to transform process of retard carbonization into light thermal cracking of mazut. Further reconstruction would increase naphtha output up to 7-8% and diesel fuel up to 22%. The cost of modernization is $0.25 mln. SHNOS also plans to set up autonomous steam supply construing its own boiler-house. Project cost - $4.1 mln. Besides, company plans invest funds into automatic control system and hydrorefining of aviation fuel as well as other projects.