Public Joint Stock Company Gazprom Neft (SIBN) Earnings Call Transcript & Summary

[Interpreted] Good afternoon, ladies and gentlemen. Anna Sidorkina, Investor Relations speaking. I'm very happy to welcome you at another conference call, which will be dedicated to the results of Q1 2020. We will present the operational and financial performance results for Q1. And allow me to introduce the participants of today's call. For the financial reporting, we will hear from the Deputy Member of the Management Board, Deputy Director for Economics and Finance, Alexey Yankevich. Upstream, we will hear that from Igor Shkirov, who is the Head of the Planning and Efficiency Management Department as well as E&P; followed by Nikita Anichkin, who's the Head of Economic and Investments in the Logistics, Refining and Marketing, will tell us about the events in downstream. And during the Q&A, we are going to be joined by our colleagues from other core departments. And traditionally, before we begin this call, I'd like to remind us that all of the comments to the presentations that you currently can see on the website of our Internet cast and all of the statements that may be heard or made in the course of today's conference call may, and most probably, shall contain these statements of outlook pertaining to the financial statements as well as the results of Gazprom Neft operation. All such statements with the exception of the references to the actual facts may and should be considered as having simply a prognostic nature, which are statements about the future expectations based upon the current environment and assumptions of the executives and may take into account the known and unknown risks and uncertainties, which may lead to the actual results and the performance and events substantially differing from the ones which were assumed or referred to in the course of today's conference call. So thank you very much for your attention. And please allow me to pass the floor over to Alexey Yankevich.

[Interpreted] Dear, ladies and gentlemen [Audio Gap] without a doubt, it produced a very tangible impact upon our financials. And always, whenever such a dramatic price decline occurs, and that one was actually a record one in itself, the effect of the low price brings about several concomitant factors, which are very difficult to predict, which do produce a substantial effect. Duty lag, whereby the duty is delayed in payment as well as a write-off of the more expensive stocks, although we do follow the methodology of the average cost, but the costs do end up being in the remainders, which have been evaluated against the higher oil price environment. And you know that the cost and the tax included do depend upon the price. And so the more expensive ones are being written off and the cheaper ones remain on the books. And so these kind of effects usually are nontangible whenever prices are moving around gradually. But whenever the hiccups happen, these effects become stronger, and these do affect the duty lag, and the cost effect produced more than RUB 30 billion in Q1. Additionally, the net profit is being affected by the exchange rate differences. And so these comprehensive round of effects was making it difficult to predict any financial results. And I do caution everyone that the outcomes may not conform to certain expectations and forecasts, and the figures are quite unusual. So based on the results of Q1, we have fixed EBITDA at the level of about RUB 100 billion, the net loss of RUB 14 billion. But let me underscore right here and now that without one-off effects, the net profit will be definitely positive. And this itemization is what I'm going to show later in my presentation as far as the financial performance results are concerned. So the whole company was able to demonstrate positive dynamics. We were able to increase our output by more 6% year-on-year as well as the refining by 3% upwards. Speaking about the results, it is impossible not to talk about the environment that all of us are currently in. And Gazprom Neft, being a responsible entity, was able to expediently respond to the pandemic and the COVID-19. And here, our efforts were focused within 2 main areas. The first one, protecting our employees and the contractor employees at our facilities wherever possible. We organized remote employment for our people in the first place that affected the administrative and commercial stuff. And as far as site operations, we covered with the infection test as much as possible wherever it was not possible to put people remote, but it was more than 160,000 tests done. We extended the time length for the shift, applying various buffer terminals and zones for the shift changes so that personnel could undergo testing for infection and, respectively, making sure that the people who arrive at and in the field are not infectious. So -- and we used to make more than temperature taking systems at 17 facilities of ours and, similarly, provided all the necessary PPE to our staff and contractor people. Second, was basically help to the community and the medics because we launched a special program, aid to the medics, which included providing PPE within this program. So it was more than 1.3 million various PPE items that we handed out, medical equipment and pharmaceutical products as well as filling up the gas tanks of the ambulance cars for free as well as aid to the volunteers, for example, within various voluntary programs. We have made available to more than 200,000 gasoline for free available to them. It all enabled the company to avoid serious consequences from COVID-19, and all of our operating facilities do work in the normal way. We were able to localize everything. And no infectious outbreaks occurred. Now let me pass the floor over to my colleagues from Upstream and Downstream. The first will be Igor Shkirov, who will give us a review of the E&P work.

[Interpreted] Good afternoon. I represent the Upstream. So the next slide is #7, which shows our production in Q1 2020. Production was 24.8 million tonnes of oil equivalent, respectively. That is 6.7% in terms of growth compared to Q1 2019 and 2.6% compared to the previous quarter, which was the Q4 2019. The basic driver was the production from the oil fringes, and these projects were all going according to the schedule and the production from the [indiscernible] field, which produces basically the growth of output overall. In terms of the operational expenditures, the growth compared to Q1 2019 is considerably lower than the inflationary pressure, just 1% at our brownfields. There is a little bit of growth, which was propped up by the inflationary pressure. And respectively, the ARPU growth was fully able to compensate the inflationary effect. The key challenge to us in this quarter, effectively, like in the case of all of the oil companies, was a continuous need to respond to the changing environment the way we approached it. We effectively, all of the limitations we are complying with based upon the economic indicators, we analyze the profitability of the basic well stock, all the way down to individual wells, trying to take a look at its efficiency as well as the cost and services. And besides, we're trying to optimize not only the cost per every well but to assess. It's in the cluster kind of an approach so as to be able to understand a whole group of well, which are united by a single infrastructure like the drainage and a pump station. And this way, we're able to optimize not only our variable but as well as our fixed cost as well. And so we are being quite comprehensive and scholastic in this approach. The next step is where we not only take a look at the base production but also to take a look at various optimizations in such a way so as to create a proper equilibrium between the well stock operation as well as the active drilling and other SAP service. [Audio Gap] Operations, looking in terms of the throughput, trying to understand the efficiency of the collection and treating and because our factor there is a large amount of the sulfur oil. So we do assess the value of every barrel in terms of which particular field we should go first and second and third. And this is the kind of work that we do in this way responding to the environment. Now how do we do this technically? The prevalent majority of the wells we do transform into the isometric stock or to conserve temporarily, which doesn't require any or excessive expenditure without lifting the submersibles. We do install the evolving -- we close them. So that requires a very short period of time; cost, not much. And that enables us to maintain our future stock if we need to bring them back around. Some of the wells are, however, we will need to conserve. And here, the time frame here is about 6 months. But this can be extended, according to the legislation. And some of the wells, which won't be effective to relaunch could be conserved. But we will definitely try and minimize the number as much as possible. So respectively, Alexey Yankevich already told you about our measures against coronavirus. I shall repeat that we are doing mass testing of our employees under the legislation and the regional regulations at -- in a number of the regions we have organized buffer zones. And this way, we're able to protect terminals and shifts, trying to fend for our personnel as much as possible in safeguarding them against coronavirus. Thank you.

[Interpreted] Dear colleagues, good afternoon. I would like to present your attention the review of the operations of Downstream in Q1 2020. The environment within which downstream had to operate in Q1 in terms of the average Brent price, the net refining netback went down as opposed to Q4 2019, on average, by $13 per barrel or about 30%. But despite this fast decline in the oil prices towards the end of the quarter and the considerable growth in the effective excise rate, it became competitive with the export netback, and that was the positive driver. Next slide. The amount of refining throughput compared to Q1, as Alexey previously mentioned, grew by 3.2%. Besides the refining debt grew by 30 percentage points. The share of lighter products also went up, which, overall, demonstrates the conformance to the strategy of the company in upgrading its refineries and increasing the margin -- profit margin of its refining process. I'd like to say a few words about digital technologies that we apply in our company and our new opportunities, which we use up against the high volatility in the market. Let me remind you that we previously had established an efficiency management center -- control center, which undertakes comprehensive operational planning. As of right now, this center really quite successfully manages the whole value chain from production to marketing, and the latest pricing per requisites are being taken to account as well as any changes in the macro and micro environment. We particularly currently also attain the contactless control systems are all very important. For example, the Neftekontrol oil control undertake continuous monitoring for the quality and the quantity of the refined products in transfer from the refinery to the end user. And previously also spoke about the optic logistics system, which is branded as Capitan. Today, the system enables one together and process information to build most economically viable and safe transportation route for the delivery and transportation of all of the northern produced oil in real-time world. Speaking about the B2B segment, undoubtedly, we note a very high negative effect from the epidemiological situation but, nevertheless, in Q1 2020, we've been able to grow the lubricant sales by bringing out into the market 7 new brands and products, including the well-known antiseptic for hands and the line of the high-quality synthetic turbine oils. The B2B business also demonstrated the growth, particularly within the premium bitumens. The company also continues to grow amongst its bitumen consumers in Latin America. In jet fuel, we grown our presence up to 284 airports. Gazpromneft-Aero entered into the IAT Association, which makes it possible for the company to be a planned global jet fuel market as well as comply with the new industry standard. But I would like also to note that despite the decline in the premium sales, minus 4%, the general volume of the jet fuel sold, including the large wholesale sales, demonstrated growth by 1.5% compared to the similar period last year. When in the bunkering segment, new rules have come into effect. And as we previously noted, the company started selling the bunkering fuel with a sulfur content of below 0.5%. Also in Q1 2020, we're able to increase our market share in the Russian Black Sea Ports up to 29%. So respectively, it is growth on the first quarter of last year by about 7% margin. In conclusion, I would like to demonstrate this -- say that Gazprom Neft is making its contribution into combating COVID-19. We have launched, as Alexey Yankevich mentioned, launched the program of Gazprom to the medics, which offers the free resources and material to the health care professionals in the regions where the company is present as well as to the health care institutions as well as offers discounts for the payment for gasolines and fuels. To the regional hospitals where we are present, we have already delivered 1.3 million face masks and PPEs in the hospitals. In Omsk -- [indiscernible] and Omsk where medics work with the COVID patients. We have provided them with the ventilation units. Thanks to our international connections, we were able to procure the ventilation devices made in Switzerland. And also Gazprom Neft took upon itself to provide fuel as support to the health care institutions in Noyabrsk [indiscernible] and others. Thank you very much for your attention. This is it with me.

[Interpreted] Dear ladies and gentlemen, here, I'm back to give you a review of our financial performance. The dynamics of our financial indicators that you can see up on the current slide, I suppose, doesn't require any additional comments. So let me go straight to the slides where we itemized our dynamics of the operational income as well as the net profit because it is important to speak about it. As far as the EBITDA dynamics compared to last year's is concerned, the biggest driver is the price one, RUB 112 billion. But inside it, you find these additional one-off factors, which is the revaluation of cost and duty lag, as I previously mentioned, which are within this RUB 112 million and account for about RUB 30 billion. Without them, the net operational income would have been about RUB 130 billion for Q1 2020. They're having certain positive drivers as a result of the management action, unfortunately, they couldn't compensate for such a tangible amount of negative factor influence. And here, we've been able to grow the amount of our output. And consequently, we ended up being at the positive but, similarly, we've been able to optimize our basket of refined products, and we're able to exit from the maintenance period for a number of our refineries and, similarly, optimized our sales and marketing structure, gaining a positive effect from it. So altogether, the internal positive factors accounted for about RUB 13 billion. But overall, the total dynamic is still somewhat negative. As far as the comparison to the Q4 is concerned of the previous year, it's the same kind of situation. In this RUB 86 billion, there is additional RUB 30 billion of one-off effects of the duty lag and various others from the point of view of the IFRS reporting financial results through the revaluation processes. Now let me switch over to the net profit. That is, I believe, the most interesting and important part. Indeed, as I have commented previously on the first slide, principally speaking, one takes only the impact from the operational income and deduct from it, as always, the profit tax and the minority share. A part of the profit should have been up at EUR 30 billion. However, even taking into account this slight growth through the introduction of new fixed assets, these 2 major factors and the exchange rate differences as well as devaluation, they brought the net profit into the red. And the explanation is reevaluation of a number of the oil and gas assets due to a very dramatic oil price decline. And unfortunately, one couldn't help here. As far as exchange rate differences were concerned, partially, they are rebatable -- reversible because, to the extent you are aware, towards the end of March, there occurred a practical peak of the ruble depreciation. It was, I think, RUB 77.5 -- even RUB 78, if I'm not mistaken. Without that, we don't expect such an exchange rate to happen towards the end of the year and, most probably, it will be definitely lower than that. So not the whole Q, but at least part of it, which is about RUB 10 billion to RUB 15 billion will definitely be reversed to us towards the end of the year simply because the oil price will be recovering. And consequently, the ruble will be appreciating. That is why, without doubt, one may say that, principally, without taking these one-off factors into account, net profit would have been in the black. But as far as exchange rate difference is concerned, they are reversible as far as the loss of value is concerned. In many ways, it is not reversible due to this loss of value taking place in a lower value than the cash flow and even the forecast here is increased, but let us remind you that we had a good practice. And during the previous period, when we adjusted the net profit level for the net dividend payment of such loss of value, so this particular approach, we definitely can apply for the future periods when estimating our dividend payment. Next slide is the Q4 dynamics. And here, principally speaking, is the same set of factors and rationale. The exchange or difference and the loss of value, if you take it away, you will end up being in the positive. Now speaking about the CapEx here. You also see a few peculiarities, which, I suppose, it would have been very difficult to predict. The seasonal factor is the first one. And here, one should -- we've noted it already because in Q1 2019, amongst other things, due to the seasonal factors and weather, we had a bit of a shift in terms of our investment program, particularly in the upstream. And principally speaking, we've been able to do less by about 20% from the average annual volume during Q1. This year, nothing like that happened. And so this year, we've been quite evenly spread out. And so we were able to do more than 25% from the annual CapEx program. So that was the seasonal factor and the low base effect brought about this kind of a growing dynamic in upstream. And apart from it, there is also a certain physical kind of change, which is a growing volume of greenfield operations. Because the execution of several greenfields ended up being in the active phase, particularly the local one, so called, within the brownfield perimeter, which is the remote group of fields, which is the Zapadno-Zimniy, Western Zima and [indiscernible] and the fields -- the oil fringes. These are all very potential projects. Higher profit margin can be achieved there and the higher level of probability of being done. They remain profitable even against the current oil prices. So respectively, and as far as downstream is concerned, the active modernization still carries on. We've got key projects, which are attributable to the depth improvement. They are fully working according to schedule. Next slide. The cash flows. One, it is important to note, and this is something positive, despite serious decline in the operational and net profit, the company was able to generate positive free cash flow by demonstrating the positive growth in the remaining stocks towards the end of the year, which created a very good buffer, a very good stability cushion in order to persevere through this crisis, which was the oil price decline. And the subsequent several slides demonstrate the extent to which, in the current environment, we -- as you can see here quite clearly, we are giving a comparison to the last similar prices in the oil industry. Of course, it wasn't such a scale as now. That was the pricing war, let me remind you, In 2014, it happened. But in those days, the liquidity cushion was almost 4x smaller -- more than that, 4.5x smaller than now. So our resilience currently is much better. So in terms of our debt structure and from the point of view of the maturities and currencies, we're much better prepared. We've got much fewer in our short-term debt compared to the previous period. And the ruble part of our debt is much bigger, which reduces our currency risks whenever the ruble strongly depreciates like the case it was just now. And the next slide, in terms of the debt repayment, we also feel ourselves very comfortably. It all just says that we are very much in a position to survive through this crisis and this price decline without serious damage to our key projects as well as our strategic objectives. Such a good financial stability is acknowledged by the rating agencies, specifically, recently, the S&P confirmed our rating at the level of investment grade with a stable outlook. But that basically says that the company is indeed is well off and demonstrates financial stability. Next slide. And in conclusion, I suppose -- I should mention the most important thing, which is what we do in terms of our response to the price decline, the prices in the oil industry, as I've previously stated. You know what we do in terms of pandemic, but I'm sure that you are more interested to find out about what we do in terms of the mitigations and dampening that negative impact from the external environment. First of all, we have optimized our investment portfolio. We are going to reduce the level of the investment cash flow. This optimization would run up to more than 20%, approximately about RUB 100 billion, well, from the kind of guidance that we shared with you for 2020. And that will happen without any damage, like I stated, to the key projects, to the major projects, to the ones which remain profitable, even against the lower pricing environment. Besides, we are going to optimize our cost structure. More than RUB 10 billion we expect to be derived from the operational cost in the Upstream, where the average cost would also be brought down. Additionally, and amongst other things, we did some good work with commercial and administrative, the overhand, so-called, where optimization amounted to more than 10% from the controllable costs. And what is important to us, that has more than compensated all of our additional expenditures to combat coronavirus and COVID-19. Basically, this whole effort that we undertook in terms of the cost side are going to be more than compensated by the kind of work that we're doing on the administrative and SG&A and other cost like that. Well, and in conclusion, I would like to say that, without a doubt, the oil industry is currently living, I would say, through the most active quake during its temporary history. But on the other hand, we currently already observed positive changes, amongst other things, through the OPEC efforts and the gradual recovering of demand. We do acknowledge it, looking at the prices as well as reading the reports, which are saying that the kind of criticism, with respect to the stock levels, that the situation is already improving. And therefore, we feel confident that we will be able to come out of this crisis in a very full financially stable condition continuing our key projects. And we'll be able to quickly rivet back to our strategic journey. Yes. The output and production might be adjusted, but we will continue diversification in the first place. I mean our gas condensate projects, which do not fall under the OPEC restrictions. Apart from it, the production from the new oil projects will be able to compensate for the decline in the less-profitable wells and in the brownfields with high cost and high water cuts. And in this way, we will provide for the growing financial performance without adding more output. Apart from it, our refinery and upgrading is also falling according to schedule, which will produce additional good effect upon the financial outcome. And what is also important to note is that we continue to do everything possible to provide for the shareholder value even despite the oil price decline this year. You know maybe already that we previously proposed it, and the Board of Directors supported us to pay the dividend for the second part of 2019 at a level of 50% from net profit. And here, we didn't do any reductions. And the kind of commitments that we took upon ourselves last year, we will stand true to them. And the company will continue doing the interim dividend payment as well. So with that, I would like to thank you for your attention, and we are now ready to answer your questions.

[Foreign Language] [Interpreted] All right. So thank you very much for the presentation. I have several question. The first one, you touched upon the topic of a temporary conservation of the well stock. I would like to understand how cost intensive it is in terms of the subsequent de-conservation of it and within which period you can do this. I would also like to learn, do you have any preliminary estimate of what part of the production that you're going to cut down, you will be able to bring back and which part of it will be gone for good? My second question is about the trends in the domestic efficiency of the refined products. Could you possibly comment how your refining levels went down in April, May in terms of general trends and, similarly, from the point of view of the sales volumes? And my third question is the follow-up about CapEx. You mentioned that you're going to cut CapEx by approximately RUB 100 billion against the original guidance. Could you remind us what is the level that you are talking about? Because I remember that, apparently, during the Gazprom's day of investor, the CapEx figure was being raised about USD 7 billion. So could you possibly just give us some more specifics on this?

[Foreign Language] [Interpreted] So answering the first question, Igor Shkirov will be giving the explanation. If you're asking about the temporary conservation, the costs here are totally immaterial in the sense that all of this work is what we do by ourselves. And as I explained, this is not related to the lifting or the submersion of the equipment, which may bring about any tangible costs. I may be mistaken in terms of the units -- specific units, of course, but this is definitely not material because we do it by our internal personnel. As far as the production losses may be concerned, principally speaking, in any case, the operation of the company is such that we do take out of the active operation the well stock that basically reached its -- the statutory period. And the way we currently work with our stock under the OPEC jurisdictions, we do not expect any extraordinary loss of production on a new reversal basis. We simply are trying to work with our stock and deal with the OPEC restrictions in such a way so that we are in a position to immediately bring it back when we see possible -- it possible.

[Foreign Language] [Interpreted] As far as the next question is concerned towards about refining and marketing sales and, indeed, in April, we witnessed the decline in terms of our sales volumes. That was basically the bottom point. I'm not able to quote you exactly because I will be able to forward it to you directly individually so as not to confuse. But what is important is that, right now, we do definitely positive trend in May as opposed to the April decline. And principally speaking, sometime in Q4, we plan to come back to our usual refining volumes. And so there was the third -- last question about CapEx. Well, look, our guidance, to the extent I remember, was about USD 450, USD 470. It was a nominated win. And again, here, I wouldn't like to give you any exact guidance in terms of the volume for this year because optimization is quite dynamic. And principally speaking, we do our recalculations practically several times a month. We are very watchful of the prices. And our task here, on the one hand, is to support our cash flow, meaning that we set out sales at task and not to borrow addition -- not to grow our debt. And respectively, we would need to fund our CapEx and our dividends. On the other hand, we ought not to lose important projects for ourselves, the ones which are profitable, in a broader range of oil prices. And therefore, we are going to respond flexibly. I quoted to you the figures and shown you the slide so that you can understand that the scale of optimization is very serious, in excess of 20%. But more precisely, we'll be able to see towards the end of the year that we are ready to handle that change because we have this flexible model and we have established the so-called investment tiers, i.e., that we've got a core portfolio, which is a set of projects which we're unequivocally going to execute because they're highly profitable, they are strategic ones. Then the rest of the projects allocated in between, the so-called tiers, depending upon their profitability, depending upon how quickly they are able to generate any cash flow and how important they are for the business overall. Therefore, these tiers are available to us. And if we fall short of our achievements within 1 tier, we can quickly revert to the different slide and so we -- a tier. And so we are ready to flexibly respond to any environmental changes.

[Interpreted] I would like to ask for a little specific -- more specific things. So within the OPEC+ arrangement, you are going to terminate production to temporarily close the wells within that regulation, and you do expect that the bigger part of the kind of production that they are going to point you will be able to bring back, and meaning to say, that some of the wells you are going to fully take out of operation because they won't be economically viable anymore, correct?

[Interpreted] I would say that, yes, you understood it correctly. Because one way or another, in the course of our current activities, we are closing some of the wells because they have reached their life cycle exploration. Their recovery is below what's economical. And then as far as the wells are concerned that we are conserving as part of the temporary regulatory measures based upon the OPEC+ limitations, we are going to recover them and bring back into the active stock once there are no limitations or, according to our operational model, it would be more attractive to bring them back rather than consider any other categories. So we are being quite flexible about it all.

[Foreign Language] Evgenia Dyshlyuk, Gazprombank.

[Foreign Language] [Interpreted] And the first one I would like you to explain, the production cuts. Is it proportional to your contribution into the reduction in Russia? Or there are certain other shortening of the production that you have in the gas condensate area as well? And to what extent -- my second question is, to what extent one may expect you to grow production this year, I mean, in the liquid hydrocarbons? And my third question is more of an open-ended one in terms of you giving me an answer, basically, this OPEC+ -- new OPEC+ arrangement, what do you think about its future development? And do you think that, within the next year or 2, it will sustain considering the fact that on the side of the United States there is no formal adherence to the agreement and that means that, at any point in time, the United States, once the price starts recovering quite agilely, it may bring back its production -- ramp up its production? And so the OPEC+ arrangement won't be effective anymore? So what are the thing -- how it would all evolve within the foreseeable future?