Filing summary
Registrant and period: The supplied filing is BMB Munai, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2011—not a Freedom Holding Corp. filing. The company reported under U.S. GAAP and classified its oil and gas subsidiary, Emir Oil LLP, as discontinued operations because a sale was pending.
Financial results and position
| Metric | Three months ended June 30, 2011 | Comparable 2010 period |
|---|---|---|
| Continuing-operations revenue | $0 | $0 |
| Loss from continuing operations | $4.33 million | $3.07 million |
| Income from discontinued operations | $8.65 million | $3.95 million |
| Net income | $4.33 million | $0.87 million |
| Basic and diluted net income per share | $0.08 | $0.02 |
| Net cash from operating activities, consolidated | $13.49 million | $9.37 million |
Emir Oil’s discontinued operations generated revenue of $25.02 million versus $12.79 million and operating income of $8.60 million versus $3.92 million. The revenue increase reflected higher oil prices and sales volumes. Oil sales averaged $98.21 per barrel, up 68%; oil production rose 15%, and reported average daily production was 2,767 barrels per day versus 2,415. Export taxes, export duty, operating costs and depletion materially reduced revenue. The filing does not provide a consolidated continuing-operations revenue margin because continuing revenue was nil.
Continuing-operations expenses rose to $4.32 million from $3.08 million. General and administrative expense increased 12% to $2.18 million, attributed mainly to transaction-related legal and consulting costs; interest expense nearly doubled to $2.12 million following the debt restructuring.
At June 30, 2011, total assets were $326.89 million, total liabilities $103.95 million and shareholders’ equity $222.94 million. Cash and equivalents on the balance sheet were $247,525 in continuing operations; Emir Oil held an additional $3.77 million, reported within discontinued operations. Continuing operations used $2.69 million in operating cash, while discontinued operations provided $16.19 million. Consolidated investing cash outflow was $11.08 million, mainly reflecting oilfield investment, and consolidated cash ended at $4.02 million, including discontinued-operation cash.
Convertible senior notes had a $61.4 million principal amount, a $65.82 million redemption value and a $62.11 million net carrying value. Accrued coupon interest was $3.06 million. The filing lists $79.32 million of notes and interest obligations in its contractual-obligations table.
Material changes and transaction
- On February 14, 2011, BMB agreed to sell all of Emir Oil to Palaeontol B.V. for an initial $170 million, subject to closing adjustments, with $36 million to be held in escrow for 12 months. Shareholders approved the sale on June 2; the filing says closing conditions, including required regulatory approvals, remained to be completed.
- Management estimated an initial shareholder distribution of $1.04–$1.10 per share after specified adjustments, escrow, debt repayment, costs and reserves. A possible second distribution of up to approximately $0.30 per share depended on escrow releases and actual costs. These were estimates, not guaranteed payments.
- In March, the company restructured its $60 million 9.0% notes into $61.4 million of 10.75% notes due July 2013, made a $1 million cash payment, and accepted tighter covenants, including restrictions on dividends, debt, capital spending and investments. The restructuring also provides for semiannual payments of 30% of excess cash flow, if any. Sale proceeds must be used to redeem the notes at 100% of principal plus accrued interest.
Outlook, risks and contingencies
- Management stated that failure to complete the sale would likely leave the company unable to repay the notes at maturity and could lead to liquidation, including bankruptcy. Even if the sale closes, BMB expected to have no continuing operations producing positive cash flow; management disclosed substantial doubt about the company’s ability to continue as a going concern in either scenario.
- Emir Oil’s exploration contract runs to January 2013. The company reported a $14.84 million exploration-spending commitment and a requirement to drill at least nine new wells; failure to satisfy contract terms could result in loss of exploration rights. Commercial production rights for key fields were also necessary to complete the sale.
- Other disclosed sale-related amounts include expected executive severance of approximately $4.11 million and a $5 million extraordinary-event payment to the board chair, deferred until escrow release and potentially reduced or eliminated depending on escrow funds.
- A long-running plaintiff appeal in U.S. federal court remained pending after the trial court entered judgment for BMB. The company said it could not assess the likelihood of an unfavorable outcome.
- Oil revenue was exposed to commodity prices, export restrictions, taxes, transport routes and Kazakhstan’s political, legal and regulatory environment. One customer represented 99% of oil and gas sales in the quarter. Kazakhstan bank deposits within discontinued operations were uninsured.
- Management reported that disclosure controls were effective as of June 30, 2011 and that no material change in internal control over financial reporting occurred during the quarter. The filing reported no off-balance-sheet financing arrangements.
Important facts for investors to verify
- Confirm the registrant and filing: the provided document is for BMB Munai, not Freedom Holding Corp.
- Check whether the Emir Oil sale closed, final proceeds and adjustments, escrow terms, debt redemption, and actual shareholder distributions.
- Verify the company’s post-sale cash, remaining liabilities, costs and ability to operate after divesting its principal business.
- Review compliance with the notes’ covenants and the sale-related regulatory and commercial-production approvals.
- Assess the status and potential outcome of the appeal, and the consequences of the exploration commitments and Kazakhstan operating risks.