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- Translation - 1000/144/2006 May 19, 2006 Subject: Management's Discussion and Analysis for Business Operations for 1st Quarter 2006 Attention: President of The Stock Exchange of Thailand Attachment: Management's Discussion and Analysis for Business Operations for 1st Quarter 2006 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 1st Quarter ending March 31, 2006 as attachment enclosed. Please be informed accordingly. Yours sincerely -Signed- (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 For 1st Quarter Ending March 31, 2006 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 Petroleum 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 the 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 1st Quarter 2006 For the first quarter of 2006, the Company operated under oil price fluctuation resulting from incident occurred to some major crude oil producing countries e.g. Iran and Nigeria, the rank 4th and 8th of the world top oil producing country respectively. In addition, the crude oil demand is expected to be continuously increased from last year which shall make gasoline and diesel prices to increase accordingly 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, the price moved less severely than the same period of last year in accordance with the Singapore market, by this situation, the retail price in the country could be adjusted in consistent with the costs resulted to an appreciate marketing margin in this quarter. However, the overall oil demand in the country has reduced from last year due to high level of oil prices had made the consumer decrease their consumption especially gasoline consumer. 1.Explanation and Analysis of the Operating Results for 1st Quarter 2006 compared with that of the year 2005 1.1 Net Profit/(Loss) Analysis 1) Regarding the business operations for the first quarter 2006, net profit of the Company and its subsidiary were Baht 653 million, which composed of Baht 657 million of the Company's net profit and Baht 13 million of its subsidiary's (Bangchak Green Net Co,ltd.-BGN) net loss. The connected transactions of Baht 9 million were adjusted. 2) The Company's EBITDA was Baht 1,319 million, increased from Baht 750 million of the same period of last year by Baht 569 million. Such profit resulted from the following factors: * EBITDA of the Refinery Business was Baht 1,141 million, increased from Baht 876 Million of the same period of last year. The Company Gross Refining Margin (ex. inventory gain/ loss) was 3.31 $/BBL, higher than that of the same period of last year which was at 1.89 $/BBL. This result was based on the optimization program of the refinery operation. The Company also recognized gain from hedging in order to protect the risk from oil price volatility which resulted from incident occurred to major oil producing country e.g. the political problem in Nigeria and the conflict between Iran and Western countries. In addition, the Company also recorded inventory gains of Baht 462 million which was lower than that of the same period of last year at Baht 678 million due to the oil prices in 1st Quarter, 2005, increasing at higher rate than that of this year;however, the oil prices trend in this year still be on an upward trend. In summary, the total Gross Refining Margin was 5.12 $/BBL, and the crude run was 66 KBD nearly to that of the same period of last year which was at the level 69 KBD. * EBITDA of Marketing Business was Baht 178 million, increased from Baht -126 million of the same period of last year, since the marketing Margin (ex.lube margin) was 44.4 satang per liter higher than that of the same period of last year which was at the level 22.7 satang per liter this is because the retail oil prices in the first quarter of 2005 were adjusted slower than its cost which was increased sharply and continuously following the oil prices in the world market. However, in the first quarter of 2006, oil prices in Singapore market were less fluctuated so that retail prices could be adjusted in consistent with the costs resulting to the higher marketing margin 1.2 Income Analysis Total revenues of the Company and its subsidiary for the first quarter of 2006 were Baht 26,705 million, composed of the Company's revenues of Baht 26,510 million and its subsidiary's of Baht 3,033 million, adjusted by connected transaction of Baht 2,838 million. The major changes of revenues were as follows: 1) Revenue from sales were Baht 25,860 million, higher than those of the same period of last year by Baht 8,049 million, since the average selling price increased by 51% (the average oil price was Baht 18.88 per liter of 2006 comparing to Baht 12.51 per liter of 2005), but total sale volumes decreased by 3%. 2) Gain from foreign exchange was Baht 77 million, higher than that of last year by Baht 71 million, which composed of Baht 126 million of foreign exchange gain from accounts payable and Baht 49 million of foreign exchange loss from other transactions. These foreign exchange gain and loss were the results of the appreciation of Thai Baht from 41.2 Baht/USD at end of 2005 to an average of 39.4 Baht/USD in the first quarter of 2006 3) Gain from crude and product price hedging contract increased by Baht 534 million, from Baht 7 Million of the same period of last year, since the Company established policy to mitigate risk from price fluctuation by entering into hedging contracts as appropriate. 1.3 Expense Analysis Total expenses of the Company and its subsidiary for the first quarter of year 2006 were Baht 26,052 million, which composed of the Company's expenses of Baht 25,852 million and its subsidiary's of Baht 3,046 million, adjusted by connected transaction of Baht 2,846 million.The major changes of expenses were as follows: 1) Cost of good sold amounted Baht 24,984 million, increased by Baht 8,160 million from those of last year, since crude costs continuously increased (Dubai price increased by 17 $/BBL on average comparing to the same period of last year), but the total sale volumes decreased from 98.5 KBD to 95.4 KBD. 2) For the first quarter of 2006, the Company had recorded loss from BGN by using the full equity method of Baht 14 million. Even though, after combined the loss and adjusted unrealized gain from stock inventories from such subsidiary, the total amount to be recognized was Baht 18 million, the Company could be able to realize loss in income statements of the Company not to exceed the remaining investment amount which is Baht 14 million. Thus income statements of the Company only were shown difference from the consolidated one at the amount of Baht 4 million. 3) The Company posted Baht 241 million of corporate income taxes, increased by Baht 245 million from that of last year, since the first quarter of 2005 the Company had tax loss carried forward which was fully utilized in the year ending 2005; therefore, the Company had to start to pay income taxes for the performance of this year on rates 25% and 30% as stipulated under the Revenue Code. 2. Explanation and Analysis of the Financial Position as of March 31, 2006 compared with December 31, 2005 2.1 Assets 1) At the end of the first quarter 2006, total assets of the Company and its subsidiary were Baht 33,396 million, which comprised of Baht 33,303 million of the Company's total assets and Baht 522 million of its subsidiary's total assets, adjusted by connected transactions which mainly came from account receivables - BGN of Baht 422 million where the Company offered 15 days credit term. 2) At the end of the first quarter of 2006, the Company's total assets decreased by Baht 861 million, comparing to the end of 2005. The major changes of assets were as follow: * Cash and cash equivalent amounted Baht 3,097 million increased by Baht 1,536 million, comparing to the end of 2005 (details of cash and cash equivalent listed in Explanation and Analysis of the Statement of Cash Flows). * Trade accounts receivable amounted Baht 3,626 million decreased by Baht 373 million comparing to that at the end of last year, since the sales volume of fuel oil upgrading was decreased. * Total inventories of Baht 9,485 million, decreased by Baht 1,186 million, comparing to those at the end of last year, since the inventories level decreased by 99 million liters (0.6 million barrels equivalent) but the average price of inventories increased by Baht 0.6 per liter. * The receivable from oil fund subsidy of Baht 154 million decreased from Baht 433 million at the end of last year as a result of the Company had received oil subsidy from the Customs Department for import diesel which was imported in early 2005. (at that time the retail price of diesel was capped by the Government and the different between cost and price was subsidized by oil fund). 2.2 Liabilities 1) At the end of the first quarter of 2006, total liabilities of the Company and its subsidiary were Baht 19,927 million, which comprised of Baht 19,830 million of the Company's total liabilities and Baht 520 million of BGN's total liabilities, adjusted by Baht 423 million of connected transactions. 2) At the end of the first quarter of 2006, the Company's total liabilities decreased by Baht 1,464 million comparing to those of the end of the year 2005. The major changes of liabilities were as follow: * Total interest bearing debt decreased by Baht 564 million since the Company had repaid short-term loan and scheduled long-term loan to Krungthai Bank at the amount of Baht 500 million and Baht 64 million respectively. * Trade accounts payable amounted Baht 4,671 million, decreased by Baht 807 million comparing to that at the end of 2005, due to reduction of crude purchasing in March as per production plan. . 2.3 Shareholders' Equity 1) At the end of the first quarter of 2006, the consolidated total shareholders' equity of the Company were Baht 13,469 million, which comprised of Baht 13,469 million of the total equity of parent Company's shareholders and Baht 0.5 million of minority shareholders. 2) The Company's total shareholders' equity increased by Baht 602 million comparing to that at the end of 2005, since the Company generated net profit of Baht 657 in the first quarter of 2006, but amortized by Baht 55 million of surplus on fixed assets revaluation . 3) Explanation and Analysis of the Statement of Cash Flows for the 1st quarter 2006 compared with that of the year 2005 3.1 For the first quarter of 2006, the Company and its subsidiary had beginning cash and cash equivalent of Baht 1,753 million. During the quarter, the Company received net cash from various activities of Baht 1,531 million of which Baht 2,065 million from operating activities, Baht 29 million from investing activities and Baht 564 million were used for financing activities. Therefore, cash and cash equivalent at the end of this period were Baht 3,284 million, which composed of Baht 3,097 million of the Company and Baht 187 million of BGN. 3.2 The Company had net profit of Baht 657 million, added back the non-cash items of Baht 205 million, thus, the Company had cash profit from operation of Baht 862 million together with cash at the beginning of period of Baht 1,561 million. The Company also had additional cash flow activities as follows: 1) Net cash from change in working capital was Baht 1,206 million where major contribution came from reduction in inventories of Baht 1,186 million and reduction in other operating assets and liabilities of Baht 20 million. 2) Net cash from investing activities was Baht 32 million which came from deposit return of Baht 78 million from hedging contracts and decreased in non-current assets of Baht 1 million, however the Company had increased in investments in fixed assets and equipments of Baht 47 million. 3) Net cash used in financing activities was Baht 564 million resulting from loan repayment to Krungthai Bank which was short-term loan of Baht 500 million and its scheduled long-term loans of Baht 64 million. At the end of the first quarter of 2006, the Company had cash and cash equivalents of Baht 3,097 million, increased by Baht 1,536 million comparing to those the end of the year 2005. 4.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, the retail price could increase at a slower rate than the cost increased which depressed the marketing margin to be at a low level and this incident would slow down the demand for oil consumption; in other hand, if the oil prices were decreased, the marketing margin and oil consumption would increase as well. For the refining margin, as a simple refinery having a high proportion of fuel oil production and the fact that fuel oil price is always lower than crude price, the Company's gross refining margin was capped to a certain level depending on the fuel oil price for each period. Sending the Company's fuel oil to be upgraded at other refineries could partly reduce effect of this situation. However, the Company has had necessity to attain the long-term resolution for reducing fuel oil production to enhance gross refining margin to be at the same level of the industry's. Therefore, the Company has adopted the Product Quality Improvement project (PQI) by installing the hydro-cracking unit and other associated units, which will reduce production of fuel oil to the near level of other local and foreign refineries and hence become a complex refinery. 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 reach its completion subject to oil price at the period. Currently PQI project has started its construction, which total project cost (included contingency reserve) of USD 378 million. The Company has appointed CTCI Overseas Corporation Limited and CTCI (Thailand) Co., Ltd. to be contractors of the PQI under fixed price, date certain arrangement. The construction requires 32 months which include commissioning and test run period. The Company has achieved its financial closure for sources of funds for the project since May 16, 2006. The oil prices will still be major parameters effecting operating result of the Company. It is possible that the oil prices, which have been increased since the end of 2003, may be declined in the future because of the natural price based adjustment.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 while the capacities addition is still limited. In order to deal with such situation, the Company appoints a specific department and form a special committee called Price Risk Management Committee (PRMC) to keeps a close look on the situation and is ready to perform risk management on the matter. Furthermore, factor which may have effect on the Company's performance is the foreign exchange fluctuation (mostly Baht and USD). The Company purchases oil on US dollar term and sell its product on US dollar related basis and records transactions as trade payable and trade receivable respectively. Since the Company has assets greater than liabilities, the appreciation of Thai Baht will cause the decrease in net assets and vise versa. However, the Company has had the policy to leveling differences of US dollar assets and liabilities whenever it becomes appropriate. In the mean time, the Company has partly mitigated this risk by utilizing some financial instruments.