SET Announcements

- Translation - 1000 / 061 / 2006 March 8, 2006 Subject : Management's Discussion and Analysis for Business Operations ending December 31, 2005 Attention : President of The Stock Exchange of Thailand Attachment : Managements Discussion and Analysis for Business Operations ending December 31, 2005 As the Office of the Securities and Exchange Commission has fostered listed companies in the Stock Exchange of Thailand to conduct a Management's Discussion and Analysis for Business Operations every quarter so as to enable investors to better understand in the Company's financial status and business operations- apart from the sole financial data in financial statements, as well as to enable investors to adequately access information for decision in a security investment, which is in compliance with the adequate information disclosure in the good corporate governance program ; The Bangchak Petroleum Public Company Limited (BCP), a listed company in the Stock Exchange of Thailand, has concentrated on transparent business operation harmonious with the good corporate governance program. Therefore, the Company would like to conduct and submit Management's Discussion and Analysis for Business Operations results for 2005 as attachment enclosed. Please be informed accordingly. Yours sincerely -Sign- (Patiparn Sukorndhaman) Senior Executive Vice President Finance and Accounting Corporate Planning and Investor Relation Office Tel:0-2335-4583 Management's Discussion and Analysis for Business Operations Ending December 31, 2005 General Information The Bangchak Petroleum Public Company Limited (the Company) was founded in 1985 by the government of General Prem Tinsulanonda, aimed to be managed in the same manner as a private company as well as to be a Thai owned oil company, which conducts its businesses for the benefits of the Thai people and society. At present, its businesses include retail and wholesale sales of finished oil products and operate an oil refinery with a capacity of 120,000 barrels per day. The new refinery was rebuilt to replace the previous one and he latest crude distillation unit was completed in 1994. The refinery was designed to produce clean fuel with efficient energy consumption and high production yield. For sales activity, the Company has expanded its market base through approximately 1,100 of its service stations around the country, which comprise approximately 600 standard type service stations and 500 community type service stations. Business Overview for the year 2005 For the year 2005, the company operated under the uptrend of oil prices in the world market resulting from substantial increasing of oil demand. In addition, the temporary shut down of refineries caused by hurricane situation in the USA had made the supply deficit situation even more seriously.These resulted to the increases in gasoline and diesel oil prices in the world as well as Singapore market. However, the lower than others price increase of fuel oil had limited the capacity utilization of the simple refineries whose production yield a large portion of fuel oil. For domestic oil prices situation, after the Government decided to lift retail price of diesel to reflect the market movement since the second quarter, retail price was adjusted at the slower rate than the cost, which resulted to low marketing margin for marketing business. The demand was in the same vicinity as last year due to continuously increase of the oil prices for the whole year. The service station operators, then, enhanced their competitiveness by focusing on improvement of their service offer i.e., introduction of Gasohol 95, introduction of non-oil business etc. Explanation and Analysis of the Operating Results for the year 2005 compared with that of the year 2004 1.1 Net Profit/(Loss) Analysis 1) Regarding the business operations for the year 2005, net profit of the Company and its subsidiary were Baht 2,927 million, which composed of Baht 2,927 million of the Company's net profit and Baht 12 million of its subsidiary's net profit, The Bangchak Greennet. The connected transactions of Baht 12 million were adjusted. 2) The Company's EBITDA was Baht 4,573 million, increased from Baht 4,089 million of the same period last year by Baht 484 million.Such profit resulted from the following factors: -EBITDA of the Refinery Business was Baht 4,881 million, increased from Baht 3,456 Million of the same period of last year by Baht 1,425 million. The Company had gross refining margin (excluding inventory gain / (loss)) of 3.59 $/BBL, higher than that of last year which was at 1.84 $/BBL, due to the substantial increases in oil demand comparing to the small addition of the refining capacity in the region. Then, these diminished the surplus of oil supply, which resulted to the continuous improving of the gross refining margin. Moreover, refineries in the US also had to shut down during the hurricane situation, which made a temporary sharp increase of gasoline and diesel price in the world market as well as Singapore, and consequently increased the gross refining margin. However, fuel oil price increased at a lower rate than other refined oil products and crude had limited the capacity utilization of the Company's refinery so as to reduce the fuel oil production to maintain operation at the optimum level. Due to such low capacity utilization, the Company had focused on high profit markets and had maximized the fuel oil volumes sending to Thaioil refinery for upgrading. The Company also had the inventory gains of Baht 2,313 million, higher than those of last year which was at Baht 2,176 million, since oil prices were continuously increased from last year. The average Dubai crude price was increased from 33.6 $/BBL in 2004 to 49.5 $/BBL in the year 2005. Thus, in 2005 the Company had total gross refining margin of 5.85 $/BBL, even though it had only 62 KBD of crude run compare to 90 KBD of last year. -EBITDA of Marketing Business was Baht -308 million, decreased from Baht 633 million of last year by Baht 941 million, since the marketing margin of the year 2005 was only at Satang 15.4 per liter, lower than those of last year at Satang 43.0 per liter. This resulted from the increase in the retail oil price slower than the sharply increase in its costs (Ex-refinery price) in accordance with the world oil prices. However, the Marketing business had recorded gain from selling Jet fuel by Baht 118 million or Satang 33.8 per liter. The Company's sale volumes in the retail market decreased to 53 KBD, comparing to last year at 56 KBD, since the Company needed to focus only on the high profit market during the low utilization of production capacity 1.2 Income Analysis Total revenues of the Company and its subsidiary for the year 2005 were Baht 86,528 million, which composed of the Company's revenues of Baht 85,663 million and its subsidiary's revenues of Baht 10,488 million, adjusted by connected transaction of Baht 9,623 million. The major changes of revenues were as follows: 1) Revenue from sales was Baht 85,035 million, higher than that of last year by Baht 6,133 million, since the average selling price increased by 38.1% (the average oil price was Baht 16.06 per liter comparing to Baht 11.62 per liter), but total sale volumes decreased by 22.0%. 2) Gain from crude and product price hedging contract was Baht 537 million, higher than that of last year by Baht 2 million, since the Company established policy to mitigate risk from price fluctuation by entering into such hedging contract as appropriate. 3) For the year 2005, the Company had recorded gain from its subsidiary by using the equity method of Baht 14 million. 1.3 Expense Analysis Total expenses of the Company and its subsidiary of the year 2005 were Baht 83,317 million, which composed of the Compan's expenses of Baht 82,458 million and its subsidiary's expenses of Baht 10,470 million, adjusted by connected transaction of Baht 9,611 million. The major changes of expenses were as follows: 1) Cost of good sold amounted Baht 79,865 million, increased by Baht 5,718 million from that of last year, since crude costs continuously increased (Dubai price increased by 16 $/BBL on average comparing to last year), but the total sale volumes decreased by 22.0% 2) Selling and administrative expenses were Baht 1,622 million, increased from those of last year by Baht 255 million. The significantly increase expenses were the following: 1) Service station's maintenance expenses which had increased due to the expansion of Gasohol services and service stations image improvement project. 2)In-land freight expense which had increased due to the increase in oil prices, and 3)Advertising and promotion expenses which also increased due to the Gasohol sales promotion. 3) Net interest expense was Baht 639 million, decreased from that of last year by 147 million. Major reduction was the gradually conversion of CDDR to company's ordinary share amounting Baht 1,774 million since the second quarter of last year and repayment of high interest rate bonds with the lower interest rate loan from the Krungthai Bank. 4) The Company posted Baht 278 million of corporate income taxes, since the Company could generate the accumulated profit exceeding the loss carry forward; therefore, the Company had to start to pay income taxes for the performance of this year. 2. Explanation and Analysis of the Financial Position as of December 31, 2005 compared with December 31, 2004 2.1 Assets 1) At the end the year 2005, total assets of the Company and its subsidiary were Baht 34,263 million, which composed of Baht 34,164 million of the Company's total assets and Baht 513 million of its subsidiary's total assets, adjusted by Baht 414 million of connected transactions which the Company offered 15 days credit term to its subsidiary. 2) At the end of the year 2005, the Company's total assets decreased by Baht 105 million, comparing to that at the end of 2004.The major changes of assets were as follow: -Cash and cash equivalent amounted Baht 1,561 million decreased by Baht 333 million, comparing to that at the end of last year (details of cash and cash equivalent listed in explanation and Analysis of the Statement of Cash Flows). -Trade accounts receivable amounted Baht 3,998 million increased by Baht 377 million comparing to that at the end of last year, since the oil prices continuously increased, even though the Company decreased its sales volumes during the situation of low marketing margin. -Total inventories of Baht 10,671 million, increased by Baht 725 million, comparing to that at the end of last year,since the average price of inventories increased by Baht 4.42 per liter, but the inventories level decreased by 208 million liters resulted from reduction of operation level and more efficient inventory management. -The receivable from oil fund subsidy amounted Baht 433 million decreased from last year ending 2005 by Baht 909 million comparing to that at the end of last year as a result of cancellation of retail diesel price capped by the Government since the second quarter of this year. 2.2 Liabilities 1) At the end of the year 2005, total liabilities of the Company and its subsidiary were Baht 21,393 million, which composed of Baht 21,294 million of the Company's total liabilities and Baht 498 million of its subsidiary's total liabilities, adjusted by Baht 399 million of connected transactions. 2) At the end of the year 2005, the Company's total liabilities decreased by Baht 3,195 million comparing to those of the end of the year 2004. The major changes of liabilities were as follow: -Total interest bearing debt of Baht 13,480 million decreased by Baht 1,441 million comparing to that of at the end of last year, since the Company had repaid its scheduled long-term loan in year 2005 amounted Baht 1,756 million. The repaid amount came from company's internal operating cash flow and drawdown of Baht 700 million long-term loans from Krungthai Bank. In addition,Baht 385 million of CDDR was converted into the ordinary share in 2005. -Trade accounts payable amounted Baht 5,478 million, decreased by Baht 2,105 million comparing to that at the end of last year, due to the decrease in crude purchase. In addition, the Company also made advance payment of some portion invoice of crude for reduction of financial expenses. -In the year 2005, the Company had to start to pay corporate income tax, since the accumulated profit exceeded the loss carry forward, however, the Company already paid approximately Baht 29 million of withholding tax. Therefore, the Company had to accrue Baht 249 million of the corporate income tax at the end of the year 2005. 2.3 Shareholders' Equity 1) At the end of the year 2005, total shareholders' equity of the Company and its subsidiary were Baht 12,870 million, which composed of Baht 12,870 million of the Company's total shareholders' equity and Baht 0.5 million of minority shareholders. 2) The Company's total shareholders' equity increased by Baht 3,090 million comparing to that at the end of 2004, since the Company could generate net profit of Baht 2,927 in 2005, and the Depository Receipt of Convertible debenture (CDDR) had been converted to ordinary share amounted Baht 385 million (recorded in the paid-up capital by Baht 27 million and premium on share by Baht 358 million). Therefore, total shareholders' equity at the end of the year 2005 was Baht 12,870 million. 3. Explanation and Analysis of the Statement of Cash Flows for the year 2005 compared with that of the year 2004 3.1 In 2005, the Company and its subsidiary had cash profit from operation of Baht 3,750 million, which composed of Baht 3,732 million of the Company's and Baht 18 million of its subsidiary's. In addition, the Company and its subsidiary had cash and cash equivalent at the beginning of period of Baht 2,213 million, which composed of Baht 1,894 million of the Company's cash items and Baht 319 million of its subsidiary's cash items. The Company and its subsidiary used those cash in the company's activities by Baht 4,209 million, which main activities were Baht 2,177 million used for acquiring the operating assets and liabilities and Baht 976 million of the investment in non-current and other non-current assets; however, Baht 1,056 million were used for financing activities. Therefore, cash and cash equivalent at the end of this year were Baht 1,753 million, which composed of Baht 1,561 million of the Company cash and cash equivalent and Baht 192 million of its subsidiary's. 3.2 The Company had the net profit of Baht 2,927 million, added back the non-cash items of Baht 805 million. Thus, the Company had cash profit from operation of Baht 3,732 million together with cash at the beginning of period of Baht 1,894 million, which were used in the Company's activities as follows : 1) Net cash used in acquiring operating assets and liabilities was Baht 2,031 million, since the oil prices had continuously increased. Not only the Company had to use more cash to purchase crude for inventories,but the account payable was also increased. The Company had also made payment in advance for crude purchase for some period for lowing the financial cost. 2) Net cash used in investing activities was Baht 978 million, due to the increase in investments in fixed assets and equipments of the service stations and refinery as well as the investment in the first phase of Product Quality Improvement project (PQI). 3) Net cash used in financing activities was Baht 1,056 million resulting from loan repayment at its maturity of Baht 1,756 million and drawdown of additional long-term loan from Krungthai Bank of Baht 700 million. Thus, at the end of the year 2005, the Company had cash and cash equivalents of Baht 1,561 million, decreased by Baht 333 million comparing to those the end of the year 2004. 4. Financial ratios analysis and the explanation for the year 2005 compared with that of the year 2004 2005 2004 Liquidity Ratios -Current Ratio 1.9 Time 1.4 Time -Quick Ratio 0.7 Time 0.6 Time -Receivable Turnover 24.6 Time 27.1 Time -Average Collection Period 14.6 Day 13.3 Day -Inventory Turnover 7.6 Time 9.5 Time -Inventory Turnover Period 47.2 Day 37.7 Day -Account Payable Turnover 12.1 Time 12.3 Time -Average Payment Period 29.7 Day 29.2 Day -Cash Cycle 32.1 Day 21.8 Day Profitability Ratios -Gross Profit Margin 6.4 % 6.3 % -Net Profit Margin 3.4 % 3.3 % -Return on Equity 25.8 % 41.1 % Efficiency Ratios -Return on Total Assets 8.5 % 8.4 % -Assets Turnover 2.5 Time 2.5 Time Financial Policy Ratios -Debt to Equity 1.0 Time 1.5 Time Remark: Calculation from consolidated financial statements -Calculation from Interest Bearing Debt According to the financial restructuring in the beginning of year 2004, not only could the Company decrease the liabilities, but the performance was gradually improved from a continuously improvement refinery margin which resulting in better performance of the Company's liquidity. However,from the increasing price, the oil inventories' value and account receivable were increased so that the ratios of inventory turnover and account receivable were decreased. Factors and major influences that may affect the Company's performance or financial status in the future Major factors affected the performance were the marketing margin and gross refining margin. For the marketing margin, since the oil prices were rapidly increased especially after the floating of gasoline and diesel price. As a result, the retail price increased could adjust slower than the cost increased which depressed the marketing margin at a low level and slow down the demand for oil consumption; however, in reverse, if the oil prices were decreased, the marketing margin and oil consumption would increase as well. For the refinery margin, as a simple refinery having a high proportion of fuel oil production, having the price lower than crude price, comparing with a complex refinery, the Company's gross refining margin was depressed at a certain level. Thus, sending its fuel oil to upgrade at other refineries could reduce a part of effect of such situation so that the Company has had necessary to attain the long-term resolution for reducing the fuel oil production in order to enhance the gross refining margin to the same level as the industries. Therefore, the Company has had Product Quality Improvement project by constructing the cracking unit and other units, which will upgrade the refinery to the complex refinery, and also will reduce the production of fuel oil to the nearly level of other local and foreign refineries. Moreover, The Company expects that the project will be started up in year 2008 and will increase EBITDA from approximately Baht 4,000 million in year 2005 to approximately Baht 6,000 - 8,000 million after the project is completed and fully producing subject to oil price at the period. In addition, the oil prices will still produce major impact on the operations of the Company. It is probable that the oil prices, which have been increased since the end of 2003, may decline in the future because of the oil-price base adjusted. However, the Company foresees that crude prices and refined product prices still remain at a high level due to the fact that the demand for oil consumption still grows continuously; on the other hand, the production expansion is still limited. Therefore, such declines of oil prices will effect to low value of oil inventories. In order to deal with such situation, the responsible team of the Company keeps a close watch on the situation and is ready to perform risk management on the matter. Furthermore, a factor, which may have an effect on the Company's performance, is the fluctuation of Thai Baht against US dollar because the purchasing and selling oil prices are based on US dollar as well as assets and liabilities, which are oil inventories and account payable respectively. Since the Company has assets greater than liabilities, the appreciation of Thai Baht will cause the decrease in net assets; on the other hand, the depreciation of Thai Baht will also cause the increase in net assets. However, the Company has had the policy to adjust the proportion both of assets and liabilities in US dollar to the nearly level and, also, currently does the hedging contracts in order to transfer some parts of such foreign exchange risk as well.