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- Translation - 1000 / 206 / 2006 August 21, 2006 Subject : Management's Discussion and Analysis for Business Operations for 2nd Quarter 2006 Attention : President of The Stock Exchange of Thailand Attachment : Management's Discussion and Analysis for Business Operations for 2nd 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 2nd Quarter ending June 30, 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 2nd Quarter Ending June 30, 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 its 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 2nd Quarter 2006 For the second quarter of 2006, the Company operated under oil price fluctuation resulting from incident occurred in major oil producing countries especially the conflict between Iran and Western countries coincidently with the demand increased during this driving season and speculative effect from hedge funds. These encourage the oil price to be on an upward trend.In addition, crude oil demand is expected to be continuously increased from last year which shall make gasoline and diesel prices to increase accordingly. However, the lower than others price increase of fuel oil had limited the capacity utilization of the simple refineries whose production yields a large portion of fuel oil. For domestic oil prices situation, the retail selling prices should be adjusted in accordance with the price movement in Singapore reference market; however, the retail prices actually were adjusted slower than its cost which were increased continuously and sharply following oil prices in Singapore market especially during April. This situation depressed retail marketing margin to negative level during this second quarter. Even though oil prices was on its uptrend, demand for oil (Gasoline and Diesel) was increase at 2% compare Q on Q. 1. Explanation and Analysis of the Operating Results for 2nd Quarter 2006 compared with that of the year 2005 1.1 Net Profit/(Loss) Analysis 1) Regarding the business operations for the second quarter 2006, net profit of the Company and its subsidiary were Baht 300 million, which composed of Baht 296 million Company's net profit and Baht 4 million of its subsidiary's (Bangchak Green Net Co,ltd.-BGN) net profit. 2) The Company's EBITDA was Baht 827 million, decreased from Baht 1,647 million of the same period of last year by Baht 820 million which resulted from the following factors: * EBITDA of the Refinery Business was Baht 1,059 million, decreased from Baht 1,561 million of the same period of last year since the Company recorded inventory gains of Baht 227 million or 0.95 USD/BBL which was lower than that of the same period of last year at Baht 967 million or 3.70 USD/BBL due to the oil prices in this quarter moved at much lower rate from those of last year. The Company's gross refining margin (exclude gains from inventory) was 4.53$/BBL higher than that of the same period of last year which was at 3.28 USD/BBL. This better result came from improvement of operation GRM by 0.24 $/BBL and improvement of gains from GRM hedging by 1.01 $/BBL. In summary, total GRM was 5.48 USD/BBL while crude run was 54 KBD lower than that of the same period of last year which was at the level 65 KBD. * EBITDA of Marketing Business was Baht -232 million, decreased from Baht 86 million of the same period of last year, since the marketing margin (ex. lube margin) was -12 satang per liter lower than that of the same period of last year which was at 47 satang per liter. Major factor was the continuously and sharply increased of oil price in Singapore market while the retail domestic prices were adjusted slower than its cost. This situation depressed retail marketing margin to be only -37 satang per liter. However, the industrial marketing margin was maintained at a satisfactory level of 50 satang per liter. Total sale volume in this period was recorded 52.5 KBD, decreased than level 53.7 KBD of the same period of last year. Table: Details of breakdown EBITDA (unit : Million Baht) 2nd Quarter, 06 2nd Quarter, 05 Changing +/- (A) (B) (A) - (B) (Reviewed) (Reviewed) * EBITDA +827 +1,647 -820 - Refinery +1,059 +1,561 -502 - Marketing -232 +86 -318 * Less Inventory Gain +227 +967 -740 * Adjusted EBITDA +600 +680 -80 - Refinery +832 +594 +238 - Marketing -232 +86 -318 1.2 Income Analysis Total revenues of the Company and its subsidiary for the second quarter of 2006 were Baht 25,166 million, composed of the Company's revenues of Baht 24,948 million and its subsidiary's of Baht 3,171 million, adjusted by connected transaction of Baht 2,953 million. The major changes of revenues were as follows: 1) Revenue from sales were Baht 24,676 million, higher than those of the same period of last year by Baht 2,608 million, since the average selling price increased by 38% (the average oil price was Baht 20.8 per liter in 2006 comparing to Baht 15.0 per liter in 2005), but total sale volumes decreased by 19%. 2) Gain from foreign exchange was Baht 18 million, higher than that of last year by Baht 109 million, which composed of Baht 37 million of foreign exchange gain from accounts payable and Baht 19 million of foreign exchange loss from other transactions. These foreign exchange gain and loss were the results of the appreciation of Thai Baht from 38.9 Baht/USD at the end of first quarter 2006 to an average of 38.2 Baht/USD in this second quarter 3) Gain from oil hedging contract was Baht 197 million while same period last year recorded loss at Baht 91 million. The Company has established policy to mitigate risk from price fluctuation by entering into hedging contracts as appropriate. This period, the hedge level was 48% of average crude run. 1.3 Expense Analysis Total expenses of the Company and its subsidiary for this second quarter were Baht 24,866 million, which composed of the Company's expenses of Baht 24,652 million and its subsidiary's of Baht 3,168 million, adjusted by connected transaction of Baht 2,955 million. The major changes of expenses were as follows: 1) Cost of good sold amounted Baht 23,850 million, increased by Baht 3,819 million from those of last year, since crude costs continuously increased (Dubai price increased by 17 USD/BBL on average comparing to the same period of last year), but the total sale volumes decreased from 100.7 KBD to 81.1 KBD. 2) Interest expense was Baht 186 million, increased from that of the same period of last year by Baht 25 million, since the loan interest rate increased by approximately 1.0%. 3) The Company posted Baht 150 million of corporate income taxes while this tax exposure was zero last year due to benefit of tax loss carried forward. This loss carried forward was fully utilized in 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 June 30, 2006 compared with December 31, 2005 2.1 Assets 1) At the end of the second quarter 2006, total assets of the Company and its subsidiary were Baht 41,918 million, which comprised of Baht 41,841 million of the Company's total assets and Baht 402 million of its subsidiary's total assets, adjusted by connected transactions which mainly came from account receivables - BGN of Baht 325 million where the Company offered 15 days credit term. 2) At the end of the second quarter of 2006, the Company's total assets decreased by Baht 7,677 million, comparing to the end of 2005. The major changes of assets were as follows: * Cash and cash equivalent amounted Baht 3,017 million increased by Baht 1,456 million, comparing to the end of 2005 (details of cash and cash equivalent listed in Explanation and Analysis of the Statement of Cash Flows). * The Company invested cash from PQI fund raising proceed (idle to be used as per project progress schedule) into 3 to 14 months fixed deposit accounts. The investment period shorter than 12 months was classified as Short Term Investment and period over 12 months was classified as Long Term Investment (Bath 3,100 and Baht 600 million respectively). * Total inventories were Baht 13,288 million, increased by Baht 2,617 million, comparing to those at the end of last year, since the inventories level increased by 90 million liters (0.6 million barrels equivalent) as well as the average price of inventories increased by Baht 1.57 per liter. 2.2 Liabilities 1) At the end of the second quarter of 2006, total liabilities of the Company and its subsidiary were Baht 22,425 million, which comprised of Baht 22,349 million of the Company's total liabilities and Baht 397 million of BGN's total liabilities, adjusted by Baht 321 million of connected transactions. 2) At the end of the second quarter of 2006, the Company's total liabilities increased by Baht 1,055 million comparing to those of the end of the year 2005. The major changes of liabilities were as follow: * Total interest bearing debt increased by Baht 624 million, major change was from an issuance of convertible debentures to PTT as part of PQI fund raising program amounting Baht 585 million. * Trade accounts payable amounted Baht 6,197 million, increased by Baht 719 million comparing to that at the end of 2005, since the average oil price increased by 11.4 USD/BBL (the average oil price of Jun, 2006 comparing to Dec, 2005. 2.3 Shareholders' Equity 1) At the end of the second quarter of 2006, the consolidated total shareholders' equity of the Company were Baht 19,493 million, which comprised of Baht 19,492 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 6,622 million comparing to that at the end of 2005, since; * The Company increased share capital by issuing and offering of 428 million shares as part of fund for PQI project, amounting Baht 5,935 million netted from issuing fee and expenses. At this period the CDDR holder had exercised their conversion right which was equivalent to 3.5 million shares or Baht 50 million. And the Company generated net profit of Baht 953 for half year of 2006, * In May 2006, the Company paid dividend to common share holders by Baht 206 million and amortized by Baht 110 million of surplus on fixed assets revaluation. 3) Explanation and Analysis of the Statement of Cash Flows for the 2nd quarter 2006 compared with that of the year 2005 3.1 For the half year 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 1,309 million of which Baht 6,403 million from financing activities, Baht 4,771 million were used in investing activities and Baht 323 million were used in operating activities. Therefore, cash and cash equivalent at the end of this period were Baht 3,062 million, which composed of Baht 3,017 million of the Company and Baht 45 million of BGN. 3.2 The Company had net profit of Baht 953 million, added back the non-cash items of Baht 425 million, thus, the Company had cash profit from operation of Baht 1,378 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 used in working capital was Baht 1,599 million; * Inventories were increased of Baht 2,617 million, since inventories level was increase by 90 million liters equivalent 0.6 million barrels as well as the average price of inventories increased by Baht 1.57 per liter. * The Company had cash flows from trade accounts payable increased by Baht 722 million, since the average oil price increased by 11.4 USD/BBL (the average oil price of Jun, 2006 comparing to Dec, 2005. * Cash flows from reduction in other operating assets and liabilities were Baht 296 million. 2) Net cash used in investing activities was Baht 4,726 million; * The Company deposited Baht 3,924 million into 3-14 months fixed deposit accounts. * Investment of fixed assets of Baht 717 million, of which Baht 686 million was PQI's. * Other investments were Baht 85 million. 3) Net cash from financing activities was Baht 6,403 million; * Proceeds from share capital increased as part of fund raising for PQI project of Baht 5,935 million and proceed from convertible debentures issued to PTT of Baht 585 million. * Additional drawdown of short-term loan of Baht 414 million from Krungthai Bank and initial drawdown of Baht 30 million of PQI's facilities from TMB Bank. This period, the Company also paid Baht 355 million for long-term loan repayment. * In May 2006, the Company paid dividend to common share holders by Baht 206 million At the end of the second quarter of 2006, the Company had cash and cash equivalents of Baht 3,017 million, increased by Baht 1,456 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) totaling Baht 15,369 million or equivalent 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 so sharply 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.