SET Announcements

- Translation - 1000 / 257 / 2006 November 20, 2006 Subject : Management's Discussion and Analysis of Business Operations for 3rd Quarter 2006 Attention : President of The Stock Exchange of Thailand Attachment : Management's Discussion and Analysis of Business Operations for 3rd Quarter 2006 As the Office of the Securities and Exchange Commission has fostered isted 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 the Company's financial status and business operations-apart from the sole financial data in financial statements, as well as to adequately access information for decision in a security investment, which is in compliance with the sufficient information disclosure in the corporate governance best practice ; 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 practice. The Company would like to conduct and submit Managemen's Discussion and Analysis of Business Operations for 3rd Quarter ending September 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 3rd Quarter Ending September 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 a Thai owned, well efficient operation as a private Petroleum company , which conducts its businesses for the benefits of the Thai people and its society. At present, its businesses include retail and wholesale operation of refined oil products and oil refinery operation with a capacity of 120,000 barrels per day. The refinery was rebuilt to replace the previous one which 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 as compared with its class. For sales activity, the Company has expanded its marketing outlets through approximately 1,100 of its service stations around the country, of which approximately 600 stations are standard type and 500 stations are community type. Business Overview for 3rd Quarter 2006 For the third quarter of 2006, most of world oil prices had reached its new high level at the beginning of July and maintain at that level until middle of August. This situation was resulted from concerned over supply deficit situation in the market as evidenced by number of incidents occurred in the market i.e. leakage in Alaska oil pipeline, political unrest in Nigeria, conflict between countries in Middle East , conflict between UN and Iraq and maintenance of oil facilities in Venezuela. However, at the second half of August, oil price has started to adjust into opposite direction and it became sharply and continuously decreased since beginning of September. This reverse situation came from a significantly relief pressure concerning conflicts in Middle East, no serious damage to US and Mexico operation units during the passed Tornado season and , among other thing, an approach to the end of driving season. For domestic market, the oil price in domestic market has followed same situation as world market which moved as per the movement of Singapore oil market. However, it was expected that oil price may be rebounded in this coming forth quarter as it starts winter season where demand for heating fuel usually increase. In addition, there expect to be a serious attempt in the OPEC countries to cut oil production to the level that oil price will be maintained at the appropriate level. 1. Explanation and Analysis of the Operating Results for 3rd Quarter 2006 compared with that of the year 2005 Please be further informed that at this period, being effective from July 1, 2006 onward, the Company has changed accounting policy regarding inventory cost valuation method from First In First Out (FIFO) method to Weighted Average method, as a consequence this 3rd Quarter financial statements was prepared and compared with the Weighted Average-adjusted financial statements of last year as follow: 1.1 Net Profit/(Loss) Analysis 1) Regarding the business operations for the third quarter 2006, the Company and its subsidiary recorded net loss of Baht 34 million, of which loss of Baht 2 million came from the Company performance and loss of Baht 32 million from its subsidiary's (Bangchak Green Net Co,ltd.- BGN) and adjusted by connected transactions. 2) The Company's EBITDA was Baht 243 million, decreased from Baht 1,659 million of the same period of last year by Baht 1,416 million which resulted from the following factors: * EBITDA of the Refinery Business was Baht -89 million, decreased from Baht 1,949 million of the same period of last year since Gross Refining Margin (GRM) (excluding inventory effects) was 3.23 USD/BBL, lower than that of the same period of last year which was at 5.36 USD/BBL. This effects were resulted from rapidly decreased in oil price due to fundamental factors changed i.e. a relief pressure concerning conflict in the Middle East, no serious damage to US and Mexico production units during a Tornado season. The Company has maintained crude run level to be at level of 60 KBD compare to 58 KBD at the same period last year. As a consequence of oil price reduction, the Company recorded inventory loss of 1.00 USD/BBL or Baht 232 million as compare to last year gain of 3.50 USD/BBL or Baht 877 million. When take into effect this inventory loss, the total Gross Refinery Margin for this period was 2.23 USD/BBL In addition, as another consequence from oil price reduction especially at the end of quarter, the Company has set allowance for write down of inventory value at Baht 350 million as the average cost of inventories was higher than the net realizable value at the end of the period by 3-4%. * EBITDA of Marketing Business was Baht 332 million, increased from Baht -290 million of the same period of last year, since the Marketing Margin (excluding lubricant margin) was 68.40 satang per liter (retail margin was 75.42 satang per liter and industrial margin was at 54.85 satang per liter) higher than that of the same period of last year which was at the level 17.50 satang per liter. These gains were resulted from retail oil prices which were adjusted slower than their cost during down trend market situation. * Please be further noted that without having effects from inventories, the adjusted EBITDA of the Company at this period was Baht 825 million, higher than those of last year by Baht 43 million as illustrated in the table below. Table: Details of breakdown EBITDA Unit : Million Baht 3rd Quarter,06 3rd Quarter,05 Changing +/ - (A) (A) (A) - (B) (Reviewed) (Revised) * EBITDA +243 +1,659 -1,416 - Refinery -89 +1,949 -2,038 - Marketing +332 -290 +622 * (Less) Inventory Gain - (877) +877 Plus Inventory Loss & Write Down 582 - +582 * Adjusted EBITDA +825 +782 +43 - Refinery +493 +1,072 -579 - Marketing +332 -290 +622 1.2 Income Analysis Total revenues of the Company and its subsidiary for the third quarter of 2006 were Baht 23,956 million, composed of the Company's revenues of Baht 23,742 million and its subsidiary's of Baht 2,934 million, adjusted by connected transaction of Baht 2,720 million. The major changes of the Company's revenues were as follows: 1) Revenue from sales were Baht 23,655 million, higher than those of the same period of last year by Baht 2,487 million, since the average selling price increased by 12% (the average oil price was Baht 20.6 per liter in 2006 comparing to Baht 18.4 per liter in 2005) while the sale volumes were not significantly changed. 2) Interest income was increased by Baht 64 million from Baht 4,726 million (PQI fund raising proceed yet to be paid) financial investments. 1.3 Expense Analysis Total expenses of the Company and its subsidiary for this third quarter were Baht 23,990 million, which composed of the Company's expenses of Baht 23,744 million and its subsidiary's of Baht 2,965 million, adjusted by connected transaction of Baht 2,719 million. The major changes of the Company's expenses were as follows: 1) Cost of good sold amounted Baht 22,820 million, increased by Baht 3,485 million from those of last year, since crude costs continuously increased (Dubai price increased by 11 USD/BBL or 19% on average comparing to the same period of last year). 2) The Company set the allowance for write down of inventory value at Baht 350 million due to average cost of inventories was higher than the net realizable value at the end of the period by 3-4% 3) Loss from oil hedging contract was Baht 50 million while same period last year recorded gain of Baht 37 million. This period, the hedge level was 33% of average crude run. 4) Interest expense was Baht 209 million, increased from that of the same period of last year by Baht 49 million, since the reference loan interest rate has increased from last year approximately 1.5% per annum. 5) The Company had credited back income tax for this period of Baht 144 million. This tax credits were resulted from 1) performance loss of this quarter at a credit amount of Baht 41 million and 2) Baht 103 million, tax benefit for capital investment program (mainly PQI project) in accordance with the Notification of the Director-General of Revenue Department on Income Tax (No. 156)effective date the 1st of January 2006. 2. Explanation and Analysis of the Financial Position as of September 30, 2006 compared with December 31, 2005 2.1 Assets 1) At the end of the third quarter 2006, total assets of the Company and its subsidiary were Baht 40,100 million, which comprised of Baht 40,052 million of the Company's total assets and Baht 363 million of its subsidiary's total assets, adjusted by connected transactions of Baht 315 million. 2) At the end of the third quarter of 2006, the Compan's total assets increased by Baht 5,853 million, comparing to the end of 2005. The major changes of assets were as follows: * The Company invested funds from excess cash and cash from PQI fund raising proceed (idle to be used as per project progress schedule) at the amount of Baht 4,726 million into fixed deposit accounts. * Total inventories were Baht 11,311 million, increased by Baht 601 million, comparing to those at the end of last year, since the average price of inventories increased by Baht 1.07 per liter, while the inventories level decreased by 8 million liters. 2.2 Liabilities 1) At the end of the third quarter of 2006, total liabilities of the Company and its subsidiary were Baht 20,714 million, which comprised of Baht 20,638 million of the Company's total liabilities and Baht 389 million of BGN's total liabilities, adjusted by Baht 313 million of connected transactions. 2) At the end of the third quarter of 2006, the Company's total liabilities decreased by Baht 668 million comparing to those of the end of the year 2005. The major changes of liabilities were as follow: * Trade accounts payable amounted Baht 5,034 million, decreased by Baht 444 million comparing to that at the end of 2005, since the attempt of the Company to adjust down inventory to appropriate level and therefore crude purchase was decreased in September. * Accrued corporate income tax was decreased by Baht 261 million, since this quarter the Company had loss from operation, therefore the Company has no accrued corporate income tax for this quarter. 2.3 Shareholders' Equity 1) At the end of the third quarter of 2006, the consolidated total shareholders' equity of the Company were Baht 19,386 million, which comprised of Baht 19,414 million from the total shareholders' equity of the Company and Baht -26 million from BGN's, adjusted by Baht -2 million connected transactions 2) The Company's total shareholders' equity increased by Baht 6,521 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 907 for the nine month period of 2006, * The Company paid dividend to common share holders by Baht 206 million in May 2006 and had amortized Baht 165 million of surplus on fixed assets revaluation as at September 2006. 3. Explanation and Analysis of the Statement of Cash Flows for the 3rd quarter 2006 3.1 For the nine month period of 2006, the Company and its subsidiary had beginning cash and cash equivalent of Baht 1,753 million. During the quarter, the Company used cash in various activities of Baht 221 million, of which Baht 32 million received from operating activities, Baht 6,173 million received from financing activities and Baht 6,426 million were used in investing activities. Therefore, cash and cash equivalent at the end of this period were Baht 1,532 million, which composed of Baht 1,459 million of the Company and Baht 73 million of BGN. 3.2 The Company had net profit of Baht 907 million, added back the non-cash items of Baht 646 million, the Company had cash profit from operation of Baht 1,553 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 1,448 million; * Inventories value were increased by Baht 601 million, since the average price of inventories increased by Baht 1.07 per liter, but the inventories level decreased by 8 million liters. * Trade accounts receivable were increased by Baht 204 million. * Payment of 2005 corporate income tax of Baht 261 million. * Trade accounts payable decreased by Baht 444 million. * Cash flows from other operating assets and liabilities were Baht 62 million. 2) Net cash used in investing activities was Baht 6,380 million; * The Company invested into fixed deposit accounts with total investment amount of Baht 4,726 million from excess cash and cash from PQI fund raising proceed (idle to be used as per project progress schedule). * Investment of fixed assets of Baht 1,748 million, of which Baht 1,690 million was PQI's. * Cash flows from other investments were Baht 94 million. 3) Net cash from financing activities was Baht 6,173 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 269 million from Krungthai Bank and initial drawdown of Baht 30 million of PQI's facilities from TMB Bank.In this nine months period, the Company also paid Baht 440 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 third quarter of 2006, the Company had cash and cash equivalents of Baht 1,459 million, decreased by Baht 102 million comparing to those the end of the year 2005. 4. Changing in accounting policy Regarding to changing in accounting policy for inventory cost valuation method from First In First Out (FIFO) method to Weighted Average method required the Company to adjust financial statements for the year 2005 as follow, 4.1 Profit and loss for the three month period; 2006 2005 (Million Baht) WA FIFO +/- WA FIFO +/- * Profit (loss) before tax (146) (277) +131 1,335 1,552 -217 * Income tax 144 183 -39 (235) (302) +67 * Net profit (loss) (2) (94) +92 1,100 1,250 -150 4.2 Profit and loss for the nine month period; 2006 2005 (Million Baht) WA FIFO +/- WA FIFO +/- * Profit (loss) before tax 1,134 1,069 +65 2,625 3,299 -674 * Income tax (227) (208) -19 (92) (294) +202 * Net profit (loss) 907 861 +46 2,533 3,005 -472 In addition to an adjustment of profit and loss statement for the three month period and the nine month period to reflect difference between FIFO method and Weighted Average method, the Company also made adjustment to balance sheets for the year ended December 31, 2005, as a result from this adjustment, retained earning was increased by Baht 23 million. 5. 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 high at this 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.