Anna Sidorkina - Head of IR
Alexey Yankevich - CFO
Mikhail Zhechkov - Head of Economics & Investment Department, Exploration & Production
Vladimir Konstantinov - Head of Economics & Investment Department, Refining & Marketing
Vadim Yakovlev - Deputy Chairman of Management Board, First Deputy CEO
Karen Kostanian - BofA
Artem Konchin - Otkritie Capital
Sergei Pigarev - RMG Securities
Ksenia Mishankina - UBS
Gazprom OAO ADR (OTCPK:OGZPY) Q2 2014 Earnings Conference Call August 12, 2014 9:00 AM ET
Good day, ladies and gentlemen. Anna Sidorkina, Investor Relations, Gazprom Neft.
We are happy to welcome you at our regular conference call devoted to our IFRS financial and operating results for second quarter of 2014.
Let me, as usual, start off by saying a few words of disclaimer and then introducing the participants of today's conference call.
Highlights and financials are going to be commented on by Alexey Yankevich of Management Board and CFO. Upstream block is going to be covered by Mr. Mikhail Zhechkov, Head of Economics and Investment Department, Exploration and Production Division.
Subsequently, Mr. Vladimir Konstantinov, Head of Economics and Investment Department in Refining and Marketing Division is going to tell us a few words about the new developments in the downstream area in the second quarter of 2014.
And finally, Head of Strategic Planning Department, Sergey Vakulenko is joining us for strategy as well as Director on Capital Construction, Mr. Abdulla Karaev and Advisor to Director General, Mr. (Pavel Kashoski) [ph]. He's also Assistant on Government Relations.
We also expected other colleagues. First, our Deputy CEO Vadim Yakovlev is going to join us from Moscow.
Before we start this presentation that is going to be accessible in webcast mode on our website, I would like to remind you that our statements other than statements of historical fact that are going to be made in the course of this conference call may and should contain forward-looking statements that have to do with current expectations.
And everything that has to do with something other than historical facts are or may be deemed to be forward-looking statements. Forward-looking statements are statements of future expectations that are based on management's current expectations and assumptions and involved known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements expressed in this conference call.
Thank you for your attention and I now give the floor to Mr. Alexey Yankevich.
Good day, ladies and gentlemen. Today, we are publishing financial and operating results for second quarter of 2014.
Results of first six months made us happy. We are growing sustainably and this six months are no exclusion. All our operating results are growing.
We have 4.1% of increase in production. Refining volumes grew up by 3.8% year-on-year. And premium sales went up 11.1% year-on-year.
This is due to our activities in cost optimization and management efficiency which allowed us to increase revenue by more than 16%. EBITDA [indiscernible] went up by 18.5%. And net income went up by 12.9%. Additionally, we also grew in cash flows.
As far as the happenings of this second quarter are concerned, I'd like to point out specifically that we started industrial production at Badra in Iraq. We also began exploratory drilling at Dolginskoye field in Arctic.
And Gazprom Neft, SIBUR and Titan Group established a joint venture based on Poliom plant in Omsk, which allows us to maximize value of refining at Omsk refinery.
Another positive piece of news for you, ladies and gentlemen, is that we have prepared all the necessary documents and we expect the Board of Directors to approve of interim dividend figures.
It would be RUB463 per share which is 13% greater than interim dividends that we paid our shareholders last year.
At this, I'd like to give the floor to my colleagues to speak on upstream.
Good day colleagues, ladies and gentlemen. This is Mikhail Zhechkov speaking.
First slide on upstream, please.
As far as our new projects portfolio, it continues to grow. In SeverEnergia, we reached agreement on the 50/50 ownership with Novatek. And now we'll have 55% de facto and [indiscernible].
In Prirazlomnoye, Gazprom Neft acquired Gazprom Neft Shelf which owns the license to develop Prirazlomnoye field with 9.1% in Nortgaz which is acquired effective stake at Nortgaz. It also adds to our overall production potential.
We also, in Gazprom Sakhalin in Severo-Vrangelevsky results were quite [indiscernible] Stakhanovskoye Block in YNAO and Purovskoye region which is close to (Noyabrsk) [ph].
Next slide, please.
Another important factor in upstream and upstream achievement, I would say, is positive dynamics in production. We have increased production by 3.7% in second quarter of 2014 versus second quarter of 2013.
We began drilling well at Dolginskoye field in Barents Sea offshore. At Badra, we have created new infrastructure that would allow us to carry out full scale production. And we began to drill Shakal-2 on Zagros project in Iraq. It's in our international projects as you may well know.
Next slide, please.
On this slide, I'd like to point out specifically that the growth of production amounted to 3.7% as I've already mentioned. And very importantly, great achievement of our Company.
Apart from the growing assets we have averaged daily hydrocarbon production in Noyabrsk going 2.4% from 18.7 to 19.2 tons per day. This slight decrease is just related to the difference in one day.
Next slide, please.
What we have here is the dynamics of hydrocarbon production, second quarter of 2014 compared to second quarter of 2013. And you can see here that both oil and gas are growing.
It's worth mentioning that despite a decrease in Slavneft, in 2014 in February we had a negative dynamics. And we agreed upon additional program to get rid of this lag in production.
Next slide, please.
A few words about our new field developments. In Chona group of fields, we carried out seismic data acquisition. On June 8 final production with utilization was launched and we also drilled two exploration and two production wells.
In Kuyumba, we were in time to complete 3D seismic data acquisition. We started on drilling our wells.
In Dolginskoye field, we started to drill on Barents Sea offshore, like I said. And we did all the necessary support actions and now we are constructing our exploration well.
We also carried out engineering. And we now have the approval of the correspondent authorities.
In Kurdistan, in (Garmian) [ph] we have [indiscernible] one. On Shakal-2, we have finalized construction activity. We started drilling Shakal-2 well. And completed preparatory work for Shakal-3.
On the next slide you can see new field development continued in Nortgaz, like already mentioned. We have our results on this slide...
In SeverEnergia, we have Samburgskoye central processing facility start up. And temporary operation of gas processing plant at Urengoiskoye field.
We also plan to transport up to 400 tons per annum. We have tried out our pumping station and our development still is in place. So development plan is in place.
In Messoyakha, we completed preparatory engineering works, completed exploration wells.
In Prirazlomnoye, we had first crude shipment. And our leaders of the state participated in this event. Purchase of 100% share of Gazprom Shelf has already -- is already get done [indiscernible].
As far as Badra is concerned, like I said, we started drilling production wells and we also completed construction on the first well for first oil production.
This will be all, thank you.
Good day, colleagues, ladies and gentlemen.
Downstream is going to be presented to you. Right now, we are carrying out our two strategic goals. The first of them being a revamping of our refineries. And the second strategic goal of Gazprom Neft, downstream, is to increase in sales of premium segment goods.
As far as refining is concerned, in the first half of the year 2014, as compared to the similar period of 2013, we have achieved considerable refining throughput, increasing 3.8%.
Main reason for this were the logistic opportunities that we made use of, especially in winter period. Besides, we had greater refining efficiency as compared to the crude.
And as a result of our investment last year, we have increased the share of highest class of products in our yield. Another important event in the first half of 2013 is completed polymer-modified bitumen production facility and first products being produced there.
As far as our strategic measures and events that are going to continue in the second half of 2014, we will keep working on the processing units. And we have already almost completed certain -- our major projects in Omsk and in Moscow, including the processing unit. And in Moscow, it includes delayed coking unit.
Besides in the first quarter -- first half of 2014, we carried out reconstruction of cat cracking unit in YANOS refinery. And planning to complete reconstruction of gasoline pool units there at YANOS.
As far as premium sales are concerned, we keep developing our premium sales gas stations. And in the first half of the year we carry out project works and the number of stations commissioned is relatively low.
We only built one and rebranded eight stations in the first of the year and reconstructed four of them. But in the second half of the year, we are planning to build 20, reconstruct 57, acquire seven and rebrand 10 stations.
Obviously, this will allow us to keep improving on our premium sales performance as a company.
In particularly in the first half of the year 2014, in Russia, we have achieved the highest in industry sales in gas station of 18.7 tons per day. This is our average daily throughput per station.
And besides, as compared to the first half of 2013, we have 11% increase in premium sales volumes. We keep improving in our assets in premium sales segment. As well as non-fuel related segments that has to do with aviation fuel, jet fuel in particular.
And the first half of the year, we have acquired a stake in Sheremetyevo Airport. And right now, we are 100% owner of Gazprom Neft Aero.
Let me continue by commenting on price factors. This was the backdrop against which we operated. In the last five or four quarters, crude prices remained around $108, $110 per barrel.
As far as netbacks are concerned, or difference between efficiency of refining and export of crude, in the second quarter of 2014, netbacks were much higher for refining as compared to netbacks for crude export.
In the second quarter of 2014, this difference increased even more. It became even more conspicuous than in the first quarter of 2014.
At present, as you can see on the plot, difference in netbacks between refining and crude export is around $15 to $20 million per barrel.
In this context, one of the major tasks that we have is to provide the highest volumes of refining. Therefore, refining throughput in the second quarter of 2014 as compared to the second -- to the first quarter of 2014 was increased.
We increased feed stocks send to Omsk and YANOS refineries. In Omsk, as compared to the second quarter of 2013, the growth amounted to 0.3%, which is quite considerable. We also increased our shipments to Moscow refinery and YANOS.
Quality program realization, quality control and quality assurance program realization led to the fact that in the first half of 2014, we have increased the yield of class 4 and class 5 products.
As compared to last year, the share of fourth and fifth class in our yields amounted almost to 100% in gasoline. And the share of class 5 went up from 65% to 89%. As far as diesel yield is concerned, you can see the increase from 63% to 95%.
Just a few words about our sales channels. Here, the results of second quarter of 2014 are very promising. And we have sustainable positive dynamics here.
In particular, just like I said, the increase in throughput is very obvious. It amounts to 3%, it's 3% increase. And the increase in premium sales is also quite considerable along all the lines of our sales activity.
As far as aviation fuel is concerned, here we still have the market share of 23%, which is pretty large. We keep expanding the number of airports where we are present, both locally and abroad. It increased by 29% in the first half of 2014. I mean the premium sales volume growth in the first half of 2014 in aviation amounted to 29%.
As far as bunkering is concerned, the increase in premium sales amounted to 32%. And market share increased by 18.9%. We have expanded on bunkering.
Lubricants; well here we also have increase in market share and considerable growth in premium sales.
That will be all concerning downstream, thank you.
And to wrap up, I'd like to comment on financials.
Like I said in the first half of 2014, we managed to increase revenues, net income and cash flows. What I didn't mention, however, was that not only did we have an increase against similar period of last year, we also have positive dynamics against the first quarter of this year.
Our revenues, EBITDA and net income increased quarter-on-quarter as well. Like we always do, we mention to you what were the factors that contributed to these dynamics.
Apart from the positive impact of price environment and depreciation of ruble that gave us a positive effect, we also had a major contribution related to management activity. As well as increase in hydrocarbon production and increase in refining and also sales of premium products.
So apart from exogenous factors, we have positive effects from these factors. As positive dynamics compared to the previous quarter of same year is concerned, I'd like to mention the contribution of premium sales.
We increased our premiums sales through external factors and we also increased access conversion -- conversion factor.
As far as cash flow was concerned, cash flow increased by almost 16% year-on-year. We keep generating good cash flows and we can see that we have positive free cash flow of RUB38b.
In year of major M&A that we carried out in the first half of this year, free cash flow with all the M&A and investments included is slightly below zero, which led to an increase in our debt portfolio -- a slight increase in our debt portfolio.
However, if we compare free cash flow against other periods, it's not worse.
As far as investment is concerned, just like I said, major difference of first half of this year from the first half of 2013 was that we indeed closed a couple of major M&A deals. Apart from organic growth, we're now growing inorganically.
You know that we increased our share in SeverEnergia project, we have finalized first phase in entering Nortgaz project. We also had our deal closed on Sheremetyevo. And acquired stock in Gazprom Neft Shelf. We consolidated it there.
And just like I mentioned above, we are now part of joint venture on petrochemical sector, Poliom.
Investments in brownfield increased through introduction of new technologies and drilling on our mature fields that not only allows us to avoid decline in production on our mature field and current assets but also to achieve increase in production. Although those are the fields which could have been expected to decline.
And what we see here is that we are having active phase in commissioning of Novoport field. We're constructing all the necessary facilities. We are also consolidating Dolginskoye field and we are increasing activity in Orenburg and in Purovskoye field.
As far as investment in downstream is concerned, just like in the first quarter of 2014 as compared to the 2013, our investment went down. Since we have finalized serious stage of revamping activity. And last -- the latest of such activities was related to Moscow refinery.
Now that all the units have already been commissioned to increase conversion ratio, first stage is over. And on the next stage we are, right now, in the very preliminary engineering and design stage.
In marketing and sales, our investment went down again because we finalized certain stage in the rebrand and in reconstruction of our filling stations.
This program was quite sizeable last year. And this year we're bringing it to an end.
What will happen next, we'll just bring the new stations that were built and that were acquired up to our standard?
As far as major projects and other investment is concerned, we are almost on the level of last year. We have passed the peak of investment in Prirazlomnoye field. That right now is seen in these figures as financed through lending. And we'll see it in organic CapEx during our next period.
Let me finalize by saying a few words about debt structure. Financial stability is pretty high for our Company. Debt to EBITDA is 0.64 which is a good result and it allows us to stay quite calm in quite difficult situation.
And if we look at the debt portfolio structure, the share of long and short debts changed. And we can see that in the nearer future, we are not about to pay back too much.
In conclusion, I'd like to say that (we suppose) [ph] first half of the year as being very positive. We see increase in all our major performance indicators. And we keep realizing our major strategic projects.
At this, I thank you for your attention and we'll be happy to answer your questions, thank you.
(Operator Instructions). And our first question today comes from the line of Karen Kostanian with Bank of America/Merrill Lynch. Please go ahead.
Karen Kostanian - Bank of America Merrill Lynch
Good day, I have two questions. First of all, let me thank you for your presentation. You mentioned if you would, that new technology is become a very important effect, both in the mature fields where you see to use new technologies in order to avoid decline in production and also on the new blocks in West Siberia and offshore in hard to recovery assets.
Do you think that sanctions against the Russian Federation are going to affect you in any way in terms of acquisition of equipment, procurement of equipment, these kind of things? Do you think that it's going to hinder your plans in terms of applying these new technologies?
Do you think that this equipment is going to be available to you? So if you could comment on that one.
And my second question has to do with NIS and the news about investigation probing into the privatization process in this activity by Serbian Government. Do you have any comments on that one? Have you been brought to litigations in any kind of way? What's the status? Please comment. Thank you.
Well those were the most popular those were two most popular sanctions. Let me start off by commenting on the first one concerning sanctions. We do not currently feel any substantial impact of sanctions on our day-to-day activity.
And also we are not planning to correct or revisit our plans in any manner, otherwise then looking at new import sources opportunities and new supplies we are checking these capabilities obviously.
And now I'd like to give the floor for more detailed information to one of my colleagues.
Unidentified Company Representative
Let me now continue on commenting on the equipment and the role of sanctions and acquiring our equipment. In the short-term period of time I'd like to point out that we are not planning -- we are not seeing any consequences since -- in the list of sanctions both from EU and US. All the key equipment and spare parts have already been acquired for our project. So, as far as our assets development we are not planning to stop them in anyway, we'll keep going the way we have been going.
As far as offshore projects are concerned we have been proactive in searching for imports substitution opportunities. And in particular we are seeing prospects in this respect, and working with the local tubular manufactures and probably some kind of new well head equipment manufacturers. And we are also seeing Asian and Middle Eastern market as a major source for minimization of import sanctions in the long-term since they do have the necessary technologies and we see opportunities there.
This is Vadim Yakovlev from Moscow; I'd like to first of all tell you that this came quite unexpectedly. In our long-term relationship with Serbian Government that started back in 2008 we have always seen very partnership-like relationship and very constructive dialogue. I must say this has been a direct dialogue opportunity.
And this was based on very strong legal mechanisms represented by intergovernmental agreements that had all the responsibilities and all the mechanisms in place stipulated very clearly in the agreement. We have acted and complied with the propositions of this agreement in as much as investment is concerned. It did invest in -- with (At Pancevo) [ph] refinery, the investment exceeded EUR500 million.
Direct investments including what we spent on acquisition and getting minority stocks amounted to around EUR1 billion. And we did indeed modernize Pancevo refinery and increase its resource base and from loss-creating facility it became one of the best facility in the region and biggest tax payer.
More too it had -- it became public, we carried out an IPO, initial public placement of this facility. And it also shows great results, in terms of 25% of its revenue is distributed in the form of dividends. And like I said this is all thanks to intergovernmental agreement and the fact that it formed positive investment climate for us. And we do hope that this investment climate will stay favorable in the long run.
As far as investigation per-say is concerned, we are watching it closely and obviously if it does impact the investment climate, it will impact our strategy. Once again intergovernmental agreements have been verified by all the members of governmental coalition and all the political forces. And we do hope that we'll still abide by that intergovernmental agreement and we'll keep developing our relationship there.
As far as investigation is concerned it hasn't yet concerned any of our managers. We keep watching the situation very closely, but at this point our managers have not been called to any kind of legal action.
Thank you. Our next question comes from the line of Artem Konchin with Otkritie Capital. Please go ahead.
Artem Konchin - Otkritie Capital
I have two questions, first let me thank you for your presentation. And my first question has to do with a very technical issue. On slide 14 of your presentation where you give the netbacks you mentioned two figures. If you could comment on the difference between the net upstream price that you are giving here and the netback could export netback, just for my general understanding of where these prices are going and how you use them.
And I also have a question on Nortgaz, are you planning any changes in logistics and marketing of hydrocarbons and products there? Are you planning to take liquid hydrocarbons from the project? You probably have commented on that one earlier at some point, but I would really appreciate if you could comment on this as well. Thank you.
Let me answer the first technical part of your question. That upstream price is basically netback minus the mineral extraction tax. Well I just explained that upstream price to you, if we are talking right now about the graph with the two lines what we have here was basically this refining netback and crude export netback, we are back calculating all the way to the well head.
In the first case in refining netback case we are taking the petroleum products line up minus cost of refining minus transportation costs and that's how we get to the well head price. In case of crude export netback we get it -- we get the same well head price but as if we used that same crude for export. That's the basic difference. And net upstream price like I said is netback minus mineral extraction tax.
Mr. Yakovlev from Moscow, Nortgaz is, as far as Nortgaz is concerned we are not planning to change its logistics and marketing products at this point of time, very short answer to your question.
Thank you. Our next question comes from the line of Sergei Pigarev with RMG Securities.
Sergei Pigarev - RMG Securities
Well firstly let me congratulate you on great results of the first half of 2014, and thank you for your presentation. Well in the pageant of questions mine will probably be number three, after the ones you have already have. And it has to do with taxation and what are your -- what is your vision of taxation system in 2015 and the way it's going to impact your activity. And are there any plans to somehow improve or adjust to the new tax environment?
My second question is more of strategic nature and maybe it should have been addressed to Gazprom rather than you guys but probably you'll be also willing to comment on that one. Are there any plans to improve in the liquidity of your securities?
Let me first comment on the tax menu and in its latest version I'd like to point out that we are actually; Gazprom Neft is actually pretty supportive of the latest version since it's going to have a very positive effect.
We are currently still calculating the exact figure for this positive effect. You have to bear with us since it's quite a complicated calculation and it has to do with forecast of domestic market. However, we do see that we will have an opportunity to offset the once expected deterioration in economic situation of the Company due to the introduction of 100% export duty for fuel oil.
As far as your second question is concerned in increasing of liquidity through probably issuance of new shares, well firstly indeed it's a question to be asked -- to be addressed to Gazprom. Anyhow I don't think it's really timely. At this point of time it's not really a good idea to go ahead and issue new shares. We are not closing down on this idea completely. We are looking into it, probing into it, discussing it but I think you would agree with me that now is not the perfect timing for doing it.
Thank you. (Operator Instructions) And our next question comes from the line of Ksenia Mishankina with UBS. Please go ahead.
Ksenia Mishankina - UBS
Hi, thank you for the presentation. Most of my questions have been answered, just the remaining two. Do you plan any bond buybacks? And could you please give your CapEx forecast for 2014 and 2015? Thank you. That's 2015 and 2014 CapEx.
Yes 2014 and 2015.
Let me comment on the bond buyback first. Bond buyback is something that you do in two instances. First if you understand that you -- the fact you do not need this volume of debt and at this point of time you just wait for a window of opportunity to carry out this transaction with the other. Or otherwise you do it with the idea of earning again on this window of opportunity one you carry out buyback and then you put it back into the market, and thus earn some money.
In view of the fact that in the year 2015, 2016 we are going to need a lot of money for our projects we do not see any point in carrying out such buybacks. As far as buybacks for -- with the idea of earning money on it well it's a speculative kind of deal and it's really not for us we are not specialized financial institution. We are not good enough in analyzing risks and forecasting deals of transactions of this kind, so we are not planning on this kind of transaction.
As far as your second question is concerned about the forecast in CapEx we are like I said, we are planning to stay within the plan. In view of the M&A we had a CapEx of $9.5 billion with $8.1 billion spend on organic growth and $1.4 billion on M&A. As a far as our next year CapEx is concerned we are not prepared to share the exact figures with you just as yet since we are working on them right now. Yet, we are not seeing it being very different from the -- our projections for 2015 -- 2014 sorry for the current year.
Ladies and gentlemen at this I'd like to thank you for interest with our company. I also would like to thank management for detailed remarks and answers to the questions. Should we have failed to answer some of your questions and should you need any additional information please feel free to contact investor relations for this. Thank you for your attention.
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