SET Announcements

Management's Discussion and Analysis for Business Operations For the three-month period ended June 30, 2008 Business Overview for 2008 Oil Price Situation For the second quarter of 2008, world oil market was in upward trend, oil prices have continuously increased since beginning of the year. This situation was resulted from fundamental factors such as strong demand in world oil market, tight supply of oil production as evidenced by the announced unchanged of OPEC's oil production level, as well as others factors i.e. unrest situation in middle east countries and unsolved problem in Iran's nuclear project. In addition, the volatile of U.S. dollar caused more mobilization of funds into commodities market. Most of analysts assign more weight toward speculative in oil market which encouraged oil prices in this quarter to be in an oppressively high (average Dubai crude price for the second quarter of 2008 was 116.59 USD/BBL, 79.9% increased from the second quarter of 2007 which was 64.82 USD/BBL and 28.0% increased from the first quarter of 2008 which was 91.09 USD/BBL). This sharply and continuously increased in oil price has caused most of refineries to have higher impacts in inventory gain; however, the refiners will also have to recognize higher crude cost for their next cargos shipment as well. In the other hand, decrease in oil price will cause refineries to have impacts on inventory loss. High level of oil prices had become agenda pressuring oil demand and GDP growth in many countries. The appreciation of U.S. dollar had reduced concentration of funds invest in oil market, these factors has pressured oil price weaken. However, the factors which support increasing in oil price still remain such as the concern over hurricane impact in oil production areas in Gulf of Mexico and political unrest in major crude oil production countries. Production and Sales For the second quarter, the Company's has successfully increased its crude run production level to reach 83.6 KBD. This is due to increasing in sales volume of diesel and fuel oil. The increased in diesel sales came from retail gas station business which sale volume was up to 230 million liter per month, increased from the second quarter of 2007 which was 179 million liter per month. This increased in sales volume was resulted from expensive oil price situation which encouraged consumers to turn to bio fuels i.e. gasohol 91 and bio-diesel B5, which is cheaper, in line with the Company strategy to expand facilities and gas stations to support sales of bio fuels. These has made the Company retail gas station market share during April- May 2008 to move up to number 2 or 14.7% comparing to the 4th rank or 12.7% of the same period of 2007. The demand of fuel oil very low sulfur (FOVS) has also been increased, mostly from China and Japan as the Company FOVS's quality matched with the importers requirement, The Company, then, achieved to raise higher level of crude run capacity than plan. Currently, most of fuel oil produced was export. 1. Explanation and Analysis of the Operating Results for 2nd quarter of 2008 compared with that of the year 2007 1.1 Profit/(Loss) Analysis 1) For six-month period, the consolidated financial statements recorded net profit of Baht 2,697 million, which was the Company's net profit of Baht 2,660 million and the subsidiaries' (Bangchak Green Net Company Limited- BGN and Bangchak Bio Fuel - BBF) net profit of Baht 59 million and adjustment of connected transactions of Baht 22 million. 2) For the second quarter of 2008, the Company and its subsidiaries recorded net profit of Baht 1,846 million, which composed of the Company's profit of Baht 1,818 million and the subsidiaries' profit of Baht 51 million. The consolidated figures were adjusted by connected transactions of Baht 23 million. 3) The Company's performance EBITDA for the second quarter of 2008 was Baht 1,017 million. The performance EBITDA if combined with another Baht 1,748 million inventory effect, it will show total EBITDA of Baht 2,765 million. Performance breakdown by business units are as follow: Table: Details of breakdown EBITDA 2nd Quarter,08 2nd Quarter,07 Changing +/ - (Million Baht) (A) (B) (A) - (B) Performance EBITDA 1,017 595 +422 - Refinery 1,589 513 +1,076 - Marketing (572) 82 -654 Plus Inventory effect 1,748 849 +899 Total EBITDA 2,765 1,444 +1,321 - Refinery 3,337 1,362 +1,975 - Marketing (572) 82 -654 - Performance EBITDA of the Refinery Business was Baht 1,589 million, increased from Baht 513 million of the same period of last year. Refining Margin (excluded inventory gain) for this quarter was 7.97 USD/BBL (equivalent to 1.63 Baht/liter),higher than those of the second quarter of last year which was at 3.24 USD/BBL (equivalent to 0.71 Baht/liter). And the Company's crude run was at 83.6 KBD also higher than those of last year at 73.8 KBD. USD/BBL 2nd Quarter 2nd Quarter Changing GRM from 2008 2007 +/- Base GRM 9.40 2.71 +6.69 GRM Hedging (1.43) 0.53 -1.96 Total 7.97 3.24 +4.73 Base GRM for this quarter was quite high due to significantly widen Dubai's crack spreads especially Gas oil/Dubai (GO/DB). In this quarter, GO/DB crack spread was increased to 37.47 USD/BBL comparing with the same period of last year which was average at 16.44 USD/BBL. Major factor that drove oil price was the stronger in world's demand particularly Gas oil demand for utilize during the coming Summer Olympic Game in China. In the meantime, the negative spread of Fuel oil/Dubai was also wider; however, the export of FOVS to China and Japan supported the overall performance of the Company since the export price were set at premiums over MOPS. Products crack spread were shown below. USD/BBL 2nd Quarter 2nd Quarter Changing Products crack spread 2008 2007 +/- UNL95/DB 12.87 20.95 -8.08 IK/DB 37.86 17.45 +20.41 GO/DB 37.47 16.44 +21.03 FO/DB -24.09 -10.79 -13.30 GRM hedging was lowered since the actual crack spreads were greater than the hedged spread and therefore, the Company has booked loss on GRM hedging at 1.43 USD/BBL.The hedged position for this quarter was at 22% of average production level while the same period of last year was at 23%. - EBITDA of the Marketing Business was Baht -572 million, decreased from Baht 82 million of the same period of last year, since the squeeze of Marketing Margins due to lagging effect of prices adjustment between ex-refinery prices and retail (ex-service station) prices. The record breaking oil prices have made the retail oil prices difficult to adjust to reflect their cost (ex-refinery price) and hence the overall Marketing Margin (exclude lubricant margin) was at -51.9 satang/liter (equivalent to -2.54 USD/BBL). However the Marketing Business sales volume was increased from 52.7 KBD to 57.5 KBD. Improvement of marketing business sales volume for this quarter mostly came from successful promotion of bio fuels. - Regarding to the fact that the harshly increased of crude oil price in this second quarter have resulted the refinery business to have inventory effect approximately Baht 1,748 million compared with the same period of last year which was at Baht 849 million. 1.2 Income Analysis 1) Revenues from sale and services of the Company and its subsidiaries for six-month period of 2008 were Baht 69,406 million, composed of the Company's revenues of Baht 68,931 million and its subsidiary's (BGN) of Baht 10,325 million, adjusted by connected transaction of Baht 9,850 million which mostly were sale transactions from the Company to BGN. 2) Revenues from sale and services of the Company and its subsidiaries for the second quarter of 2008 were Baht 39,587 million, composed of the Company's sale revenue of Baht 39,367 million and its subsidiary's (BGN) of Baht 5,496 million, adjusted by connected transaction of Baht 5,276 million. Major changes of the Company's revenues when comparing to that of last year were as follows: - Revenue from sales (both refinery business sales and marketing business sales) was Baht 39,367 million, higher than those of last year by Baht 15,502 million or 64.9%. The improvements came from 1) sale volumes increased by 14.4% and 2) average selling price in term of US dollar was increased by 56.8% even though the Thai Baht was appreciated against U.S. Dollar by 6.8% (reference average T/T selling rate of 2Q2008 at 32.45 Baht/USD compared with 2Q2007 at 34.81 Baht/USD) this Baht appreciation; on the contrary, had also reduce cost of sales. - Interest income was Baht 15 million, decreased by Baht 42 million or 73.2% since the Company has spent up cash from PQI funds raising proceed to pay the PQI contractor in accordance with their milestone achievement. 1.3 Expense Analysis 1) Total expenses of the Company and its subsidiaries for six-month period of 2008 mainly were cost of sale and services of Baht 63,774 million, which composed of the Company's cost of Baht 63,598 million and its subsidiary's (BGN) of Baht 9,985 million,adjusted by connected transaction of Baht 9,809 million, which mostly were cost of sales from the Company to BGN. 2) For this second quarter, expenses of the Company and its subsidiaries mainly were cost of sale and services of Baht 35,535 million, which composed of the Company's cost of Baht 35,496 million and its subsidiary's (BGN) of Baht 5,517 million, adjusted by connected transaction of Baht 5,478 million. Major changes of the Company's expenses comparing to those of last year were as follows: - Selling and administrative expenses were increased by Baht 105 million or 21.1% since crude/product transportation expenses have been increased in accordance with the diesel price. The SG&A also increased from higher export cost from higher volume of fuel oil export to China and Japan. - For this second quarter the Company recorded loss from foreign exchange of Baht 323 million compared to the gain of Baht 15 million of the same period last year.The reason came from Baht depreciation against U.S. Dollar in this quarter as compare to the previous one; therefore, the Company has exposed to loss on FX hedging transaction. However, the Baht depreciation has made the Company to gain higher GRM in term of Baht. - Loss from oil hedging contracts was Baht 353 million against the gain of Baht 127 million for the second quarter of last year. Please see more explanation in section:Profit/ (Loss) Analysis - GRM hedging. - Interest expense was Baht 141 million, decreased from those of last year by Baht 25 million or 14.9%, as the market rate was decreasing by 0.2% p.a. and reduction in loan outstanding. 1.4 Profitability Analysis 1st Half 2008 1st Half 2007 Consolidated Company Consolidated Company sales and services, Million Baht 69,406 68,931 44,078 43,655 Net Profit (Loss), Million Baht 2,697 2,660 839 791 Gross Profit Margin, % 8.11 7.74 4.73 4.23 Net Profit Margin, % 3.89 3.86 1.90 1.81 Earning Per Share, Baht/Share 2.41 2.38 0.75 0.71 2nd Quarter 2008 2nd Quarter 2007 Consolidated Company Consolidated Company Total Revenues, Million Baht 39,587 36,367 24,093 23,866 Net Profit (Loss), Million Baht 1,846 1,818 881 845 Gross Profit Margin, % 10.23 9.83 6.85 6.35 Net Profit Margin, % 4.66 4.62 3.66 3.54 Earning Per Share, Baht/Share 1.65 1.62 0.79 0.76 Gross profit margin has been impacted by world oil price fluctuation which had direct impact to both refining and marketing margin. Gross profit margin for the six-month period and the second quarter of 2008 were 7.74% and 9.83% respectively, increased from 4.23% and 6.35% of the same period of last year. This higher gross profit margin came from total refining margin of the refinery business and inventory effect as mentioned in item 1.1 section 3. The net profit margin then increased from 3.54% to 4.62% for the second quarter and increased from 1.81% to 3.86% for the six-month period. 2. Explanation and Analysis of the Financial Position as of June 30, 2008 compared with December 31, 2007 2.1 Assets 1) At the end of the second quarter of 2008, total assets of the Company and its subsidiaries were Baht 52,951 million, which comprised of Baht 52,662 million of the Company's total assets, Baht 830 million of BGN's total assets and Baht 164 million of BBF's total assets, adjusted by connected transactions of Baht 705 million which was mostly from account receivable of Baht 641 million. 2) At the end of the second quarter of 2008, the Company's total assets increased by Baht 7,822 million, comparing to the end of 2007. The major changes of assets were as follows: - Trade accounts receivable as of June 30, 2008 were Baht 7,274 million which was increased by Baht 1,293 million or 21.6% because of the increase of oil prices and volume sales. However, the average AR day was decreased from 20 days to 17 days. - Inventories were increased by Baht 4,723 million or 43.9% to be Baht 15,468 million,due to increasing in oil prices (average Dubai price in June 2008 was 127.88 USD/BBL increased by 48.7% while at December last year was 85.98 USD/BBL).Inventories volume increased by 0.3 million barrels, providing for increasing of crude run level. - Oil Fund Subsidies Receivable was Baht 628 million, increased by Baht 431 million or 219.1%. This year Energy Policy and Planning Office (EPPO) has promoted more subsidized for bio fuel price e.g. gasohol and biodiesel resulting to increasing in the receivable in Oil Fund Subsidies since the Company had high portion of bio fuel sales. - Other current assets-others were increased by Baht 252 million or 176.9% mainly from VAT receivable since the VAT claim item "the export" has increased from both volume and price. - As of June 30, 08 values of property, plant and equipment (PPE) was Baht 22,947 million increased by Baht 4,540 million or 24.7% since this year the Company has invested in PQI project of Baht 4,753 million and other normal CAPEX of Baht 303 million. For this first half of the year, the Company also recorded depreciation of PPE of Baht 516 million. - Other non current assets-others were increased by Baht 799 million or 84.5% mainly from the margin called deposits of oil hedging contracts with counterparties. The deposits will be released if the relevant crack spreads move downward. The Company also earns interest income for this deposit. 2.2 Liabilities 1) At the end of the second quarter of 2008, total liabilities of the Company and its subsidiaries were Baht 29,514 million, which comprised of Baht 29,337 million of the Company's total liabilities and Baht 756 million of BGN's total liabilities as well as Baht 74 million of BBF's total liabilities, adjusted by connected transactions of Baht 653 million most of which came from account payable of Baht 641 million. 2) At the end of the second quarter of 2008, the Company's total liabilities increased by Baht 5,696 million comparing to the end of 2007. The major changes of liabilities were as follow: - Trade accounts payable were Baht 12,062 million, increased by Baht 3,102 million or 34.6% due to increasing in oil prices. - Liabilities on hedging contracts were decreased by Baht 438 million or 47.1% since payment on the maturity contracts had been settled. 2.3 Shareholders' Equity 1) At the end of the second quarter of 2008, the consolidated total shareholders' equity of the Company were Baht 23,437 million, which comprised of Baht 23,325 million from the total shareholders' equity of the Company and Baht 74 million from BGN's as well as Baht 90 million from BBF's, adjusted by Baht 52 million connected transactions. 2) The Company's total shareholders' equity were increased by Baht 2,126 million comparing to the end of 2007, since the Company generated net profit of Baht 2,660 million for the first half of 2008 however the Company had paid for dividend of Baht 336 million and amortized Baht 197 million of surplus on fixed assets revaluation. 3) As of June 30, 2008 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 six-month period of 2008 3.1 For the first half of 2008, the Company and its subsidiaries had beginning cash and cash equivalent of Baht 6,450 million. During the period, cash was decreased from various activities by Baht 4,257 million, of which Baht 47 million were used in operating activities, Baht 6,460 million were used in investing activities but Baht 2,250 million were received from financing activities. Cash and cash equivalent at the end of second quarter of 2008 were Baht 2,193 million, which consisted of Baht 1,923 million of the Company and Baht 223 million of BGN as well as Baht 47 million of BBF. 3.2 The Company's beginning cash of this year was Baht 6,088 million and had utilized Baht 4,165 million during this first half in the following activities; 1) Net cash used in operating activities was Baht 160 million; The Company received cash of Baht 4,594 million from operation before changes in operating assets and liabilities. Cash from operating liabilities were increased by Baht 2,680 million from increasing in trade accounts payable of Baht 3,096 million. However, the Company has paid for other operating liabilities of Baht 416 million during the period. The Company used cash of Baht 6,479 million in operating assets which consisted of increasing in inventories of Baht 4,723 million and accounts receivable of Baht 1,101 million as well as the other current assets of Baht 655 million. The Company used cash for interest paid and corporate income tax amounting Baht 955 million. 2) Net cash used in investing activities was Baht 6,207 million; Investment in fixed assets of Baht 5,390 million, of which Baht 5,040 million was PQI's. Cash was used in other investments of Baht 817 million mainly was the margin called deposit of oil hedging contracts. 3) Net cash received from financing activities was Baht 2,202 million; The Company had drawn down Baht 620 million short-term loan from Krungthai Bank. Baht 2,384 million of long-term loan was drawn for PQI project. Baht 466 million of long-term loan was repaid to the banks. Dividend payment was Baht 336 million (total share of common stock 1,119 million at 0.30 Baht per share). At the end of the second quarter of 2008 cash and cash equivalents was Baht 1,923 million which consisted of Baht 256 million appropriated for PQI project and Baht 1,667 million for operation. 4. Factors and major influences that may affect the Company's performance or financial status in the future Product Quality Improvement Project (PQI) 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. Thus 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 (more)