SET Announcements

Management's Discussion and Analysis for Business Operations For the year ended December 31, 2007 Business Overview for 2007 Oil Price Situation For the year 2007, the world oil market was in upward trend, oil prices were continuously increased since beginning of the year. This situation was resulted from concerned over possible supply shortage due to geopolitical problem especially in Nigeria and Mexico, the lower than expected U.S. oil reserves and the unchanged of the OPEC's oil production level. In addition, the economic problems in the U.S. caused the U.S. dollar to depreciate continuously. These factors has pressured oil price to be in an upward trend (average Dubai crude price for year 2007 was 68.41 USD/BBL, 11.3% increased from the year 2006 which was 61.48 USD/BBL). For domestic market, oil price had followed same pattern as the world market. However, the retail domestic oil price was moved at slower pace than the world price and resulted to diminution in domestic marketing margins. Dubai Crude oil price had reached a new record high at 90.13 USD/BBL on Nov 26, 2007, it was droved by expectation that supply will remain tight throughout the year 2008. Moreover, the U.S. Federal Reserve's decision to further cut interest rates caused more mobilization of hedge funds investment into commodities market and it will be additional factor for oil price to increase further. However, at this high level of oil price, Funds might rebalance their portfolio by assign lower weight of oil and add higher weight of other commodities. Furthermore, the concern over economic recession in the U.S. may impact global oil demand growth so as to weaken the oil prices. Refinery Production For the year 2007, the Company's crude run production was 66.3 KBD, comparing to 56.3 KBD of the year 2006. This is due to the successful execution of Fuel Oil Very Low Sulfur (FOVS) export contracts with various Chinese refineries which will convert the FOVS to Gasoline and Gas Oil. The average volume of FOVS under these contracts is around 100-120 million liters per month. Currently, the Company has reached agreements to extend the term of those contracts until the end of 2008. Marketing Situation For domestic market in the year 2007, the retail marketing margins were squeezed by increasing in cost of refined products (increased in Ex Refinery prices) according to world oil market. However, the Company has turned this expensive oil price situation to become opportunities to expand sales volume in retail gas station business trough biofuels i.e. gasohol 91 RON and B5 bio-diesel. Currently, bio-fuels has become widely acceptable by consumers due to government's various support and promotion, assurance by car's manufacturers and guaranteed by oil companies. 1. Explanation and Analysis of the Operating Results for the year 2007 compared with 2006 2007 2006 Consolidated Company Consolidated Company Total Revenues, Million Baht 95,456 94,593 95,377 94,600 Net Profit (Loss), Million Baht 1,764 1,691 196 248 Gross Profit margin, % 6.41 5.96 2.25 1.94 Net Profit Margin, % 1.85 1.80 0.21 0.27 Earning Per Share, Baht/Share 1.58 1.51 0.20 0.26 1.1 Net Profit/(Loss) Analysis 1) For year 2007, the consolidated financial statements recorded net profit of Baht 1,764 million, which being the Company's net profit of Baht 1,691 million and the subsidiary's (Bangchak Green Net Company Limited- BGN) net profit of Baht 71 million and adjustment of connected transactions of Baht +2 million. 2) The Company's EBITDA was Baht 3,977 million, increased from Baht 1,613 million of last year by Baht 2,364 million. Performance breakdown by business unit are as follow; Table: Details of breakdown EBITDA 2007(A) 2006(B) Changing+/ - (Million Baht) (Audited) (Revised) (A) - (B) EBITDA 3,977 1,613 +2,364 - Refinery 3,768 1,141 +2,627 - Marketing 209 472 -263 (Less) Inventory Gain (1,857) -1,857 Plus Inventory Loss 710 -710 Adjusted EBITDA 2,120 2,323 -203 - Refinery 1,911 1,851 +60 - Marketing 209 472 -263 - EBITDA of the Refinery Business was Baht 3,768 million, increased from Baht 1,141 million of last year. Total Gross Refining Margin (GRM) for this year was 5.10 USD/BBL higher than last year which was at 2.29 USD/BBL. The Company's crude run was at 66.3 KBD higher than last year which was only at 56.3 KBD. In case of excluding inventory effects, GRM would be 3.19 USD/BBL higher than last year which was at 3.05 USD/BBL. USD/BBL GRM from 2007 2006 Changing +/- Base GRM 3.13 2.01 +1.12 Improvement Program 0.02 3.19 0.31 3.05 -0.29 0.14 GRM Hedging 0.04 0.73 -0.69 Inventory Gain (Loss) 1.85 (0.70) +2.55 1.91 (0.76) 2.67 Write Down 0.06 (0.06) +0.12 Total 5.10 2.29 +2.81 Base GRM for this year was increased from last year by 1.12 USD/BBL since almost all of products/Dubai crack spread was improved from last year. The Fuel oil/Dubai crack spread was significantly increased by 2.29 USD/BBL compare with 2006 due to the increasing in fuel oil's demand as a result of the incident of nuclear power plant in Japan. Products crack spread were shown below. USD/BBL Changing Products crack spread 2007 2006 +/- UNL95/DB 14.55 11.74 +2.81 IK/DB 16.17 16.51 -0.34 GO/DB 16.72 15.22 +1.50 FO/DB -10.40 -12.69 +2.29 TP/DB 8.44 6.95 +1.49 This year, the Company had no fuel oil co-cracking with TOP but concentrated on exportation of fuel oil (low sulfur grade) to Chinese refineries. This export program help the company to achieve average crude run production of 66.3 KBD, compared with last year which was only at 56.3 KBD. GRM from oil hedging decreased by 0.69 USD/BBL from last year which was gain at 0.73 USD/BBL, since the actual GRM crack spread was in line with the hedged spread that the Company had executed. The hedged position for year 2007 was at 37% of average production level while last year it was at 41%. Inventory gain for this year was equivalent to 1.85 USD/BBL while last year the company suffered inventory loss of 0.70 USD/BBL since oil price has continuously increased until the end of the year. - EBITDA of the Marketing Business was Baht 209 million, decreased from Baht 472 million of last year, since this year the world oil prices were sharply increased as it made ex-refinery price to increase accordingly while the retail oil prices failed to adjust at the same pace while the situation was in opposite way last year. Marketing Margin (exclude lubricant margin), then was averagely at 26.1 satang per liter lower than last year which was at 38.5 satang per liter. The sale volume for Marketing Business was at 51.9 KBD increased from 51.2 KBD which major contribution came from sales through gas station. Gas station sales has increased from 34.8 KBD to 36.1 KBD in 2007 as a result of a successful promotion of bio-fuel i.e. Gasohol 95, 91 and Biodiesel B5. 1.2 Income Analysis 1) Total revenues of the Company and its subsidiary for the year 2007 were Baht 95,456 million, composed of the Company's revenues of Baht 94,593 million and its subsidiary's (BGN) of Baht 14,246 million, adjusted by connected transaction of Baht 13,383 million. Major changes of the Company from last year were as follows: - Revenues from sales were Baht 94,134 million, higher than last year by Baht 595 million or 0.6% since sale volumes increased by 1.0% and the selling price in term of US dollar was increased by 9.9%; however, this improvement has been adjusted downward by Thai Baht appreciation. The Thai Baht was appreciated by 8.8% as compared to last year (reference average T/T selling rate of 2007 at 34.69 Baht/USD compared with 2006 at 38.03 Baht/USD). This Baht appreciation had reduced the cost of sales as well. - Other incomes-others were increased by Baht 118 million. Different was mainly came from 1)premium on foreign exchange hedging contracts of Baht 44 million 2)transportation revenue increased by Baht 26 million 3)margin from NGV sale increased by Baht 24 million and 4)settlement claim of 1987 corporate income tax with the Revenue Department amounted Baht 20 million. 1.3 Expense Analysis 1) Total expenses of the Company and its subsidiary for the year 2007 were Baht 93,692 million, which composed of the Company's expenses of Baht 92,902 million and its subsidiary's (BGN) of Baht 14,176 million, adjusted by connected transaction of Baht 13,386 million, major changes of the Company from last year were as follows: - In this 2007, the Company have no allowance for write down of inventory value since world oil price was increased as it has made the current market prices to be higher than cost of inventories while the end last year, the Company set Baht 55 million for write down of inventory due to average cost of inventories was higher than the net realizable value at that time. - Loss from foreign exchange was Baht 47 million (last year was gain of Baht 120 million), this lost came from the Company has realized FX forward sale at the rate lower than the then current market rate. - Interest expense was Baht 655 million, decreased from last year by Baht 90 million or 12%, since the interest rate was decreased by 0.1% p.a. and average loan principle was decreased by Baht 1,425 million. - For the year 2007, the Company has booked another tax adjustment item of Baht 102 million. This adjustment has resulted from a decision to suspense the tax benefit the company may have from capital investment in PQI in accordance with the Notification of the Director-General of the Revenue Department No. 156 which the Company had applied such benefit in 2006 financial statement. The Company may resume this benefit subject to the result of the Revenue Department's verdict. However the Company believed that the tax benefit should be rewarded as the capital investment record has been prepared under good faith consideration. 1.4 Profitability Analysis Gross profit margin has been affected by world oil price fluctuation which had direct impact to both refining and marketing margin. Gross profit margin for year 2007 was 6.41% increased from 2006 at 2.25%. This higher gross profit margin came from better refining margin of refinery business as mentioned in item 1.1 section 2. The net profit margin for year 2007 and 2006 were 1.85% and 0.21% respectively. 2. Explanation and Analysis of the Financial Position as of December 31, 2007 compared with December 31, 2006 2.1 Assets 1) At the end of 2007, total assets of the Company and its subsidiary were Baht 44,987 million, which comprised of Baht 44,848 million of the Company's total assets and Baht 740 million of BGN's total assets, adjusted by connected transactions of Baht 601 million most of which were Baht 599 account receivables. 2) At the end of the year 2007, the Company's total assets increased by Baht 6,905 million, comparing to the end of 2006. The major changes of assets were as follows: - Trade account receivable was increased by Baht 2,853 million or 91% because of the significantly increased in export sales of FOVS which the normal credit term of 30 days and oil price was increasing as well. - Oil inventories were increased by Baht 2,104 million or 24%, due to increased in oil price (average December 2007 Dubai price was 85.98 USD/BBL while last year was at 58.70 USD/BBL). While there were no significantly changed in inventories volume. - Other current assets-others was decreased by Bath 478 million mainly from Bath 369 million 2006 tax refund from the Revenue Department. - At the end of 2007, Property, plant and equipment was increased by Bath 2,720 million which consists of 1) capital investment during the year of Baht 2,373 million (Baht 2,063 million investments in PQI and Baht 316 million investments in annual capital expenditures), 2) an revaluation of asset which has made PPE increased by Baht 1,225 million in accordance with accounting policy 3)annual depreciation of Baht 858 million and 4)reserve for impairment of fix asset increasing by Baht 26 million. 2.2 Liabilities 1) At the end of 2007, total liabilities of the Company and its subsidiary were Baht 23,762 million, which comprised of Baht 23,649 million of the Company's total liabilities and Baht 712 million of BGN's total liabilities, adjusted by connected transactions of Baht 599 million. 2) At the end of 2007, the Company's total liabilities increased by Baht 4,398 million comparing to the end of 2006. The major changes of liabilities were as follow: - At 31 December, 2007, Trade accounts payable were Baht 8,960 million, increased by Baht 4,814 million or 116% since at the end of 2006 the Company had made advance payments for 2 shipments of crude oil purchased at the amount of Baht 1,725 million (0.73 million barrel) while this year, one account payable for crude amounting Baht 1,306 million is due on the first working day of 2008. In addition,increased in oil price has also made account payable to increase as well (average price on December 2007 was Baht 21.7 per liter against December 2006 was Baht 16.5 per liter). 2.3 Shareholders' Equity 1) At the end of 2007, the consolidated total shareholders' equity were Baht 21,225 million, which comprised of Baht 21,199 million from the total shareholders' equity of the Company and Baht 28 million from BGN's, adjusted by Baht -2 million connected transactions. 2) At the end of 2007, the Company's total shareholders' equity were increased by Baht 2,507 million comparing to 2006, since the Company generated net profit of Baht 1,691 million for year 2007. However, the Company had amortized Baht 219 million of surpluses on fixed assets revaluation and had paid for dividend of Baht 190 million. As of December 2007, the Company conducted revaluation of asset which has made PPE increased by Baht 1,225 million in accordance with accounting policy. Resulting to the Company's total shareholders' equity to become Baht 21,199 million. 3) As of December 31, 2007 the Company has financial instruments (CDDR, subordinated convertible debenture, warrant and ESOP) which holders can exercise their conversion right (subject to the terms and conditions of each instrument), if fully converted or exercised shall be equal to 287 million common shares or approximately 20.4% of total shares in fully dilution. 3. Explanation and Analysis of the Statement of Cash Flows for the year 2007 3.1 For the year 2007, the Company and its subsidiary had beginning cash and cash equivalent of Baht 2,705 million. During the period, the Company received cash from various activities of Baht 3,745 million, of which Baht 4,386 million were received from operating activities, Baht 1,235 million were received from investing activities and Baht 1,876 million were used in financing activities. Cash and cash equivalent at the end of 2007 were Baht 6,450 million, which consisted of Baht 6,088 million of the Company and Baht 362 million of BGN. 3.2 Cash flow of the Company had resulted from net profit of Baht 1,691 million; added back non-cash items of Baht 1,100 million, the Company then had cash profit from operation of Baht 2,791 million. The 2007 cash flow activities are as follows; 1) Net cash received from working capital was Baht 1,330 million; The Company used cash in operating assets of Baht 4,510 million which consisted of increased in Trade accounts receivable of Baht 2,819 million, increased in inventories value of Baht 2,104 million but other current assets were decreased by Baht 413 million. Cash from operating liabilities were increased by Baht 5,840 million consisted of increased in trade accounts payable of Baht 4,824 and increased in other operating liabilities of Baht 1,016 million. 2) Net cash received from investing activities was Baht 1,244 million; Short term investment was reclassified to cash by Baht 3,804 million since its remaining investment period was less than 3 months. Investment in fixed assets of Baht 2,306 million, of which Baht 1,673 million was PQI's. Cash used in other investments were Baht 254 million. 3) Net cash used in financing activities was Baht 1,876 million; Baht 320 million short-term loan were repaid to Krungthai Bank. The Company paid Baht 945 million for redemption at maturity of debentures and promissory notes (issued before restructuring) and paid Baht 421 million for long-term loan to Krung Thai Bank. In May 2007, the Company had paid dividend to common share holders of Baht 190 million (total share of common stock 1,119 million at 0.17 Baht per share). The Company cash and cash equivalents had increased by Baht 3,489 million. When combined with beginning cash of Baht 2,599 million, at the end of 2007, cash and cash equivalents was Baht 6,088 million which consisted of Baht 2,918 million appropriated for PQI project and Baht 3,170 million for operation. However, the Company have to prepare Baht 1,306 million for payment of trade account receivable which will be due on the first working day of 2008. Having excluded this item, the Company cash for operation was Baht 1,864 million. 4. Changing in accounting policy Since January 1, 2007, the Company changed its accounting policy regarding investment in a subsidiary so that separate financial statement, which formerly reported investment using the equity method, now reports using the cost method. This is to comply with TAS 44. Thus, the Company restated its financial statement by using the historical cost as the cost of the investment in a subsidiary of the separate financial statement. This adjustment caused the net income on the separate financial statement to be permanently different from that reported in the consolidated financial statement. The Company had made adjustment to retain earning at December 31, 2006 to be increased by Baht 0.49 million which equivalent to equity injections that the Company invested in BGN in order to reflect investing value by using the historical cost method. The cumulative effect of the accounting policy has been presented under the heading of "Cumulative effect of the change in accounting policy for investments in subsidiary" in the separate financial statements in the statement of changes in shareholders' equity. Million Baht Statement of income Year 2007 Year 2006 (The Company Only) Cost Mtd.Equity Mtd.Change Cost Mtd.Equity Mtd.Change +/- +/- Gain(loss) from investment - 27 (27) - (10) +10 in subsidiary Balance Sheet December 31, 2007 December 31, 2006 (The Company Only) Cost Mtd. Equity Mtd.Change Cost Mtd.Equity Mtd.Change +/- +/- Investment in subsidiary 0.49 28 (27) 0.49 - +0.49 Please be noted that, the change of accounting policy affects only the separate financial statement. It does not have any effect on the consolidated financial statements or business fundamentals. 5. Financial ratios analysis and the explanation for the year 2007 compared with 2006 Unit 2007 2006 (Audited) (Revised) Liquidity Ratios Current Ratio Time 1.8 2.4 Quick Ratio Time 1.0 1.3 Receivable Turnover Time 23.3 29.5 Average Collection Period Day 15.7 12.4 Inventory Turnover Time 8.9 9.3 Inventory Turnover Period Day 40.9 39.3 Account Payable Turnover Time 13.5 18.9 Average Payment Period Day 27.1 19.3 Cash Cycle Day 29.4 32.4 Profitability Ratios (more)