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

[Interpreted] Dear colleagues, ladies and gentlemen, good afternoon. We are very happy to welcome everyone to our quarterly performance update, which is dedicated to the 9 months and the third quarter 2020. My name is Alexey Yankevich. I'm the CFO of the company. Unfortunately, our Investor Relations team is partially in the lockdown, so I would do the introduction and disclaimer on behalf of Anna Sidorkina, who is connected but not in the main room right now. So I shall begin by introducing the speakers at today's call. In terms of the financial reporting, it will be myself, as usual, giving you the information, respectively. And as far as the Upstream is concerned, we will hear from Igor Shkirov, who is in charge of the Economic division of the Upstream segment, followed by Nikita Anichkin, who oversees the economic part of Downstream, who will share with us events in the downstream logistics, refining and marketing. And then during the Q&A, we are going to be joined by various core stream representatives. And before we begin our presentation, I would like to yet again remind us that all of the comments and all of the statements that may be heard in the course of today's conference call may contain, and will be of a -- outlook in nature about the financial standing and the results of Gazprom Neft's operation, all of the statements, with the exception of the fact, may be considered of a forecast nature, which are the statements about the future expectations based upon the current environment. And the management assumptions may take into account known and unknown risks and uncertainties which may lead to the actual results and events considerably being different from the ones which were mentioned or referred to in the course of today's telephone conversation. With that, let us begin. And so now we will follow with the main part of the presentation. In Q3, the Gazprom Neft company continued its operations in the pandemic environment, and our priorities remained caring for our employees, customers and clients. And we also did our best to offer maximum support and aid to the society, particularly in the regions where we operate. So -- and as far as this is concerned, our efforts traditionally focused in several directions, the first one being employees and running regular testing more than 800,000 tests per day, and maintaining social distancing and entire virus infrastructure at all of our facilities as well as continuing the practices of the buffer terminals as well as raising the awareness and using our own IT tools in order to maintain control over the access to our facilities. From the point of view of our partners and customers, we similarly offer a complex testing service trying to cover with our virus test, also the employees of our contractors as well as establishing the mechanism for support for the oil service companies so as to increase the contactless communications at our gasoline stations for individuals and legal entities and complying with all of the sanitary precautions. We continue our complex program for the support of the medical personnel in combating COVID-19, continuing to provide fueling to volunteers and helping and offering aid in the regions where we are present to fight the pandemic. I shall begin the presentation of the performance updates from such an important event in ESG area since Gazprom Neft joined the global UN initiative and, apart from improving the efficiency, is something that we've really been able to do a lot of good things. We are setting the task of the environmental agenda, putting an emphasis upon it very seriously. That includes reducing the greenhouse gas emissions, then improving the level of the operational safety, preventing the environmental emissions, then rehabilitation and preserving the biodiversity as well as reflecting the climate agenda in developing our project portfolio and in their assessment as well as using and developing green technologies. Amongst other priorities in our work also remain developing our human capital resource in the regions where we are present, so as to set up and develop an intersectoral partnership. Now in terms of the quantitative outcome, principally speaking, the third quarter turned out to be quite successful, and most importantly, it sets a positive trend and positive dynamics. So overall, our financials throughout 9 months looked in the following way. Our revenue amounted to RUB 1.45 trillion. The adjusted EBITDA was about RUB 330 billion and the net profit, RUB 36 billion. So we came up very confidently into the black based on the results of 9 months. As far as the production was concerned, we remained approximately at the level of last year. The refining went up by 2.9% as a consequence of the evolving market environment. In Q3, as opposed to Q2, as I said, we are now seeing a positive trend. Almost all of the indications grew. The revenue growth was about 35%. The adjusted EBITDA growth was 77%, and net profit, 27%, respectively. The amount of production went up by 1.2% as the result of the OPEC+ and the amount of refining grew by 15.7% as the consequence of the market recovering. With that, I will pass the floor over to my colleague, Igor Shkirov, from Upstream.

[Interpreted] Yes, good afternoon. Slide #8 with your permission. Production in Q3 declined as opposed to Q2 by 1.2%, which was quite logical because Q2 in a certain part covered April where we didn't have any production restrictions, but nevertheless, we tried to do it in the most efficient way. And we are optimizing and we are looking at the -- where we deal with every challenge and the way we did it. We can see that this particular reduction falls upon the joint venture operations that we have. The next slide demonstrates the work we do in improving production efficiency. Another thing that is conducive to it is that our production grows from our new high efficient assets, which enables us to masterfully manage our production under the OPEC+, reducing the production from the mature fields where the water cut is greater and the costs are higher. And these measures also enable us to reduce our average operational cost by -- for 1 tonne of oil, and you can visually see it on the next Slide #10, where we note in the middle that major projects enable us to reduce our ops by RUB 44 per tonne. At the same time, even despite the decline in production at the mature fields through the kind of measurement that we undertake, including our [ OpsCons ] and our OpExes and the recovery of liquids. Nevertheless, we are able, despite the inflationary factor, to maintain these costs at the level which do not exceed the 9 months of 2019. A slight growth of our expenditures in terms of our overseas assets is related naturally to the production decline at the [ button ] field. The next slide, #11, an undoubted focus in our attention is not only operational costs, but investments. In the first place, we took a very close look at the projects which contain higher risks and the ones which do not carry any returns to us in the immediate future, like the fracking projects, which we put on hold. Which means that we are to complete the work that we started earlier, looking at the success of the projects and the way it fits into the new reality. And so from the planned projects, the decline in [ fracs ] projects is going to be RUB 9 billion. And only because our restrictions not only apply to the oil price, but also to the output volumes. Without that, we are reducing our investments into drilling, and we have already reduced them by about 30% as opposed to the beginning of the 2020, I mean, in terms of the crews deployed. And respectively, we are looking further at various trends as -- so as to predict activity. With respect to the major project, we are focusing upon reducing the cost to build infrastructure project and optimizing these particular expenditures without changing dramatically the period within which we are going to commence them into operation. We are very actively working on our technologies, which enable us to enjoy direct feedback and direct returns from our direct activities in the very immediate future with the lowest cost involved, disseminating and scaling out the successes that we achieve. Specifically during the previous call, we talked about the cluster technology where we build the wells stage by stage when we first do the first, the top part of it and then go further down. And then we complete all of the wells at the pad, and we can confidently talk about the results in terms of employing such a technology, which reduced our drilling period by about 35% as well as run down the cost. And so the workover is also being reduced by about 35%, and so the cost is maintained at about 35%. And we'll also introduce our technological solutions. So completing the upstream section, a couple of other words about the exploration work. We don't stop our activity in terms of expanding our reserves, but we do that at a minimum possible cost involved, and this is additional coming in when we have an acreage that we do the fringes on it. And in this way, we've been able to achieve additional 20 million tonnes of recoverable reserves at approximately $3 per barrel as a cost. This is it for me. Thank you.

Nikita, please.

[Interpreted] Good afternoon, dear colleagues. I would like you to switch over to Slide #15. And here, I would like to present to you the refining, logistics and marketing performance results over the 9 months, so in Q3 compared to Q2. As you know, the market somewhat recovered, and so the Brent price went back by about 50%, but we do see that a lot of refining remains at the export parity level, which is conditioned by a very slow recovery of the crack spreads for the refined product as well as a higher level of a tax burden. But at the same time, the refining efficiency overall throughout the company remains positive. That is being achieved through creating the protected sales channels, both in the small wholesale as well as in retail market. Next slide, please. So over to refining, the amount of refining, as was previously mentioned, in Q3, grew almost by 16%. This growth was possible thanks to the demand recovering for the motor fuels, very good demand in terms of the premiums channel in the domestic market, enabled us to optimize our product basket and efficiently achieve the refining as opposed to the second quarter. Similarly, the company continues to increase its refining depth so as to produce lighter products at the Moscow refinery. The main driver was the introduction of the EURO+, which we mentioned more than once before. And at the Omsk refining, the depth grows through the optimization of the mixing in between the light and darker products. And so practically, we completely ceased to produce to KM 16 in favor of more better margin -- [ bunkering ] the fuels with a better profit margin. In terms of the B2B segment, I should say that despite the pandemic and the lower demand at Gazprom Neft in 2020, gains its market share in terms of the premium channels. It became possible through a number of efforts undertaken by the management, amongst which, in Q3, you can take a look at the bitumen supplies that we entered into as an agreement with [indiscernible] and also for the sales of the insulation materials. And as far as the bitumen products are concerned, we have entered into a contract with the TANECO company, which would really make it possible to supply this fueling deficit in various ports. And we also continue to gradually introduce various additional solutions for the jet fueling and in direct interaction with consumers. With respect to the motor fuel segment, the company, in terms of the B2B example, also grows its presence amongst the drivers. Here, you can see the leasing of the new fuel distinction as well as the growth in average daily sales. And as far as this item is concerned, Gazprom Neft is a confident leader in the Russian market. The amount in one station is 18.6 tonnes per day. Apart from big volumes for throughput, we are also able to maintain and raise the level of our servicing. Over the past year, the rights of the consumers and the quality of services of the Gazprom Neft was awarded in 2 nominations, retail services in fueling stations and the choice of consumers in fueling. In conclusion, a few words about what we do in green energy. Gazprom Neft consistently continues to develop the alternative green sources of energy. I shall remind you that in the end of last year, we've launched the first module of the solar production at the Omsk refinery. Today, we have considered the possibility of using solar energy in order to make our fueling stations work. And in the reporting quarter -- in the Yaroslav region, we had the first retail station which works off the solar batteries. Apart from the environmental impact, better impact in the midterm perspective, that would give the company additional economic effect, as we expect. This is it with me. Thank you very much for your attention.

[Interpreted] Dear ladies and gentlemen, I'm now back with you about our financials. Let's go over to the next slide. So basically speaking about the EBITDA and the net profit quarter-on-quarter and year-on-year, I've already mentioned it. And let me go over to a detailed factor analysis or the overall dynamics. So in as far as the annual dynamics is concerned, in the 9 months -- or 9 months last year, we can see the overall decline. But principally speaking, it is being dissected into 2 parts, which is the impact from the external environment, which has been seriously negative in the first place as a result of the oil and refined products prices going down. On top of it, there occurred a decline in volumes as a result of OPEC+ agreement. Besides, there is also an impact from the pandemic and specifically from the pandemic upon the domestic market and the Russian Federation, which affected the refining volumes and the downstream operations. As well as there is a separate tax factor, which is about Novoport field, which principally speaking as of 2020 started paying EPT tax similarly because of the accumulated losses finished. And so respectively, the tax emerged, which we didn't have last year, because there used to be historical losses, which were being compensated and the EPT tax base was 0. But at the same time, we, as the management, tried our best to compensate for these, and respectively, in E&P, we were optimizing our expenses. We have optimized the volumes as part of the OPEC+ limitations. We're trying to produce in the maximum efficiency way, which gave us additional RUB 5 billion. At the same time, optimization, logistics, marketing, refining and sales produced additional RUB 23 billion. And there is also the maintenance factor, which, within this period, gave us an additional gain. So in terms of the intercorporate factors, we came up with additional RUB 37 billion in as far as the EBITDA dynamics was concerned. The next slide demonstrates quarterly dynamics. Here, we can see certain gains as well, and the main factor was the prices recovering for oil and refined products, which produces about RUB 60 billion. There is a slight consequence of OPEC+, which started in the second quarter, not in the very beginning. So we see a certain difference in between the second and the third quarter. And as far as the effect upon the downstream and the domestic market, this impact was positive because we saw a certain recovery. And also in Q3, we continued working in optimizing our business processes and compared to Q second, we added additional RUB 5 billion as a result of the internal factors. Next slide, please. Let me go over to the analysis of our capital investments. I believe this is the most interesting slide for you. What we can see here is that despite the fact that compared to last year's 9 months on 9 months, we do note a slight but nevertheless a growth of [ 2.5% ]. But simultaneously, in the quarterly dynamics, we do see that the kind of efforts that we've made in optimizing our investment programs that we discussed during the previous calls produced the results. And as you can see in the overall investment level going down in Q3 compared to Q2, so we're definitely moving in the proper direction. So this reduction was about 25%, and that produces a very strong confidence that our target to optimize 20% compared to our business plan, which we announced previously, is quite feasible. So overall, during Q4, we expect price minus the level of the third quarter and maybe even lower. And as far as the annual dynamics is concerned, yet again, I shall remind you that this is related to the implementation of several major projects, without which we could have lowered it year-on-year. But there are such major project as Zapadno-Zimniy field, as Tazovsky cluster, as well as the oil fringes. And these projects, I shall remind us, remain profitable and generate good revenue even under the current prices so it doesn't make any sense to stop them. We continue working with them. Additionally, as far as Tazovsky is concerned, there is a one-off factor related to the fact that the transaction with deal with Shell didn't happen so we are funding it almost ourselves 100%. But we continue to actively work to bring in additional partners. We have certain interim results, and there are companies who are stating interest because the market is recovering, reviving itself. But unfortunately, that -- Shell deal occurred at the very peak of the crisis. So right now, situation is improving. And so we definitely do estimate and expect that with a high level of probability, we'll be able to find a partner, and these investments are going to be compensated for. The next slide, cash flows. Well, in this regard, we also promised you during the previous calls that we will make our best effort to make the free cash flow into the positive because if you recall it was in negative, considering the half year results. Principally speaking, we've been able to be true to our words. And based on the results of 9 months, we're practically at 0. Those [indiscernible] RUB 0.4 minus, but you can definitely state that that is very -- bearing in mind the fact that the net cash flow from the sale of the net assets, we can conditionally attribute to the free cash flow as well. So generally speaking, we did the proper work, and that is a consequence of the optimization of our investment program and the consequence of our control over the costs. So overall, our free cash flow amounted to approximately 0. And besides, we were able to reduce our credit portfolio, the net borrowings, minus RUB 22 billion. And despite such complex times, we found the possibility, and we paid quite a significant amount of dividends, RUB 93 billion, and are running a little bit ahead. You know that there is an extraordinary Annual Shareholders' Meeting is supposed to endorse our dividend payment based on the 9 months result. So in terms of the dividends, we are true to all of our commitments. And then the deposits, there is an FX factors, which bring minus 59 to the net cash flow, but negative because of the RUB 93 million of dividends paid, without which the cash flow would have been positive. Next slide. I shall round up my presentation showing of the slides about our financial stability. While our financial status remains a very good one, principally, we do demonstrate a very good resilience in terms of both liquidity as well as the ability to pay different categories of our banking obligations. The average maturity has grown from 3.18 to 3.23 as of September, and the average interest rates in -- from 6% went down to 5.08% as of September 30. That is a very good rate. A very well-balanced portfolio in terms of its maturities. And the ratings have been confirmed by almost all the rating agencies at the investment-grade level, which makes us confident that we can believe that we have survived through the most acute crisis phase and are going to further recover. And so to wrap up, I can tell you that all of our plans and commitments remain as they are. The company is operating very smoothly. We don't have any major outbreaks. So we do work according to our schedule. Thank you very much for your attention, and now we are ready to switch to Q&A session.

[Foreign Language] [Interpreted] [Operator Instructions] So the first question comes from Evgenia Dyshlyuk from Gazprombank.

[Foreign Language] [Interpreted] And I will have a few questions to ask. And the first one is about the tax changes that are going to come into effect next year. And so could you describe to us what will change in terms of the tax benefits with regard to the Novoportovskoye field? And have you been given the tax exemptions with respect to the Priobskoye field that you are jointly developing with Rosneft? So that was the first question. And I will ask my second question after receive the answer to this first one.

[Foreign Language] [Interpreted] Yes. Good afternoon. Thank you very much for this question. You definitely know that the tax topic is currently very much a hot potato and very sensitive with that. And I would give you the kind of an answer which may not be very precise as opposed to the way you worded it. But I will tell you basically what I can say under the circumstances, and whatever I'm not able to share with you, I will be later on ready to debate separately in detail. But at this point in time, I can basically show you that with respect to the [ Novoportova ], we are having quite an active discussion with the Minister of Finance. As you may know, as a result, the tax regime was slightly adjusted in our favor. We've been giving the right for a tax deduction for the [ Novoportova ], which amounts to about RUB 12 billion per year for 3 years. It will stay, so the total amount is going to be RUB 36 billion. And so to a certain extent, that compensates the negative impact in question. But we are maintaining a very complex dialogue with the Minister of Finance, and we are continuing to remain active in our interaction. And out of what we've been able to achieve so far, as I mentioned, that is the deduction for the Novoport. Besides, in the tax code, there appeared an article in as far as the terms and conditions governing the switching to the EPT taxation is concerned, which enables us to switch to EPT taxation certain formations in the first group, which include the Achimovsky formation as an example. That basically covers the north of Yamal, and that is about the oil reserves in the big gas deposits. So that is one of the measures which, to the second part, will be compensating the certain [ redress ] that we will encounter in Novoport. But I shall basically say that our dialogue with the Ministry of Finance continues. And we can say that the Ministry of Finance really gives us a very attentive ear. And so we're sure that we'll be able to work it out. And I would emphasize that speaking about the overall impact of the tax changes, this particular impact, I would say, almost 90% is for the Novoportovskoye field. And within this context, it's definitely not longer term. It's temporary in nature, would run for 3 years. And beyond that period, we have certain tools that would enable us to be in a compensation mode so -- and which will, for the first 3 years, will cushion the overall impact upon us. So that's basically whatever I was able to give you as an answer to your first question. Now let's hear the second one.

[Foreign Language] [Interpreted] My second question is about the dividend payment. So as it happens, the dividend payment is about 65% from the IFRS unadjusted net profit. So considering and comparing it to the amount that you paid previously, which was about 50% level. So my question, is this kind of ratio shall remain in the future where you may be reducing the ultimate amount of dividend payment?

[Foreign Language] [Interpreted] Yes. Evgenia, thank you very much for this second question. Like I previously stated, we as a company are trying to do a certain adjustment to the net profit that we use as the basis for the dividend calculation. And if there are certain one-off transactions that we encounter, primarily of a noncash nature, and the ones that do have a certain special characteristics, like the loss of value or some sort of a one-off write-offs, these particular line items we are trying to adjust for. As far as the exchange rate differences are concerned, we both adjust them in terms of the positive side and negative side and basically because there are pros and contras, so we don't do the same thing with respect to the exchange rate differences. But first of all, we've adjusted all of the noncash line items and the so-called one-offs. We're also trying to compensate for part of the exchange rate differences and tried in this way to compensate for the negative impact from the external environment and also to try and maintain for the shareholders a certain -- the certain highest possible decent level of a dividend payment. So as far as the dividend payout is concerned, it will remain 50%, it won't change. But in as far as the adjustments are concerned, we do them when we encounter such noncash line items which are of a material nature. And as far as what we're going to do in the future, first of all, we will continue to adjust by the one-off line items and the exchange rate difference I already mentioned. And principally speaking, we will be monitoring the net profit dynamics and the dividend dynamics. And whenever possible, we will do our best on the basis of the cash flow. We will also adjust for some for the exchange rate differences based on the results of the year. Most probably that will stay as is, but we will make up our mind based upon our financial capabilities, taking into account the intention to maintain a decent level of dividend payment for the sake of our shareholders.

Our next question comes from Ron Smith from BCS.

You've already answered some of my questions, but I'd like to go back to the tax regime, which is obviously on all the annual…

Ron Smith from BCS.