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

[Interpreted] Good afternoon, colleagues. We are very happy to welcome you to yet another conference call, which today is going to be about the company's performance through 2020. Traditionally, let me introduce. There's an attendance at this call in our side, who will hear the comments about the financials. And the main part of the presentation will be done by Alexey Yankevich, member of the Management Board and CFO. Igor Shkirov will tell us about refining and efficiency and the exploration. And then Alexey Urusov, who is in charge of the Corporate Planning will tell us about downstream, as well, as the Q&A session is when we're going to be joined by Sergei Vakulenko, who is the Head of the Strategy and Innovation Department and different other colleagues from various core streams. And traditionally, before we begin today's presentation, I would like to remind us that all of the comments through the presentation and all of the statements that may be made in the course of today's conference call may, and probably will, contain various information of the prognostic nature about the businesses that the Gazprom Neft has worked with. And all statements or assumptions without the actual facts should be considered as those of an outlook nature, which are about future expectations based upon the current environment and various assumptions on the part of the management, and may take into account known and unknown risks and uncertainties, which eventually may lead that the actual results and the outcomes might be materially different from the ones which were referred to in the course of today's conference call. Thank you very much. And now, let me pass the floor over to Alexey Yankevich.

[Interpreted] Dear ladies and gentlemen, I would like to greet all of you. The results of 2020 point to the year turning out to be very extraordinary and complex. And starting, to talk about the results, we, as the responsible corporate entity, paying due attention to ESG values, would like to begin by highlighting the results about us resisting the spread of the COVID-19 pandemic. And here, I'd like to note, we believe that we were able to put up quite a descent resistance to this epidemic, in many ways, being able to compensate for the negative consequences. On the one hand, we were able to protect our contractors and the employees without allowing for any business disruptions. We had more than 600,000 tests as well as different facilities, terminals and ship camps. We're over to the next stage of vaccination, which is currently underway. And so, an effective immunity is being developed. And so, we very much count that the company grade is going to go back to its normal game. On the other hand, we were able to help the regions of our operation, help the medics, help the volunteers. And this was being actively pursued, both by the company as well as by the individual employees and managers, practically all of our top managers, as well as those who had an opportunity to join in were collecting contributions. And at the very height of pandemic, we were hopping both the health care workers and various hospitals as well as -- through that, making our contribution to fighting coronavirus. So Gazprom Neft really set its very focused site upon ESG, which could be viewed not through how we fought against coronavirus, but we started paying serious attention to ecology and environmental issues and climate agenda because this, as a topic, is in -- on the screen of our top managers. And we see the results of this work in 2020. We joined the global UN agreement. We seriously improved the quality of our reporting and ESG disclosure. As a result, we have received a very high appreciation, a CDP, very authoritative agency, which rates companies in the area of environmental protection and ecology. And so now, let me go over to the quantitative results. And again, I shall begin by talking about our industrial safety result because that is the way we traditionally review our results. We set also the target of 0. Zero of injuries is zero damage to our partners, our assets. This is what we are moving towards. This is a very ambitious goal. For example, 2020 passed with zero fatalities. And certainly, this is not something that we should be only proud about, but if you take into account the large scale of our operations, the fact that we haven't had any fatalities, nobody here suffered, is a very good indication for the industry. Now with regards to our financials, without a doubt, it's difficult to compare them with 2019 because practically, the life of the whole of the oil industry was split in between before and after. And so using any factor any, this would be difficult to bridge these two, but we, nevertheless, believe that the results are quite decent. The adjusted EBITDA was RUB 485 billion, the net profit, RUB 118 billion. And what is important, from the point of view of net profit that the company, quite in an agile way as compared to its industry peers and the global peers, went into the black, starting off the second quarter and the third and the fourth. Second quarter, we were getting net profit, gearing it up. And so the third quarter was better than the second one and the fourth better than the third one. So overall, the profit ran up to RUB 118 billion. And that, amongst other things, enabled us to announce and as well as pay our interim dividends, exactly as we stated at the very peak of the crisis. We're saying that we won't step away from our dividend policy. We won't give up on the interim dividend. Exactly that is what we did. We made an announcement. We paid our 9-month dividend. The, yes, RUB 5 per share may not seem to be quite a big amount. If you take a look at it in terms of the per share and compare what the peers did in terms of the dividend payment, then this figure would look really very decently. And some canceled paying the dividend. So first of all, we didn't give up on that. And our level of payment as opposed to other companies looks in a very different way, if you choose to take a look. As far as our operational production performance is concerned, the production of hydrocarbon has practically remained at the level of financial '19. Of course, that happened primarily because of the gap because we take a look at the liquids and hydrocarbon, the production declined as a result of having to work under the OPEC limitations. As far as refining is concerned, the throughput in volume was defined by the economics in the market environment, and we were refining exactly the amount that the economics allowed us in order to sustain the black and exactly the amount that the market was able to consume. And so the dynamics is exactly what we're seeing. So with that, I would like to pass the floor over to Igor Shkirov. And he will resume after me, telling us about our upstream performance. Igor, please.

[Interpreted] Thank you, Alexey. Yes, good afternoon, take a look at the Slide #8, which is oil production. Looking at a quarterly schedule for 2020, the hardest one was the third quarter because the main limitations fell upon it because since August, OPEC went in the second stage of the deal, having the 2 billion barrels a day, which really affected our Q4 production in terms of joint ventures and ourselves as well. Slide 9. Annualize this particular factor, combined with the high production in the first quarter and the growing gas production enabled us to maintain the overall hydrocarbon production at the level of 2019. The gas share growth was brought about by introducing the end of 2019, it compresses the station at the Krasnoleninskoye field. This is also to enhance the production of the gas in Novy Port and greater production. As far as the current asset, the production is pretty concerned to the greenfield, much as OGFZ, and Novy Port and the off ranges grew by about 15%, and so, in a bit of a way, really was able to compensate the loss of production in the material fields. You can see, in the next slide, our operational cost year-on-year. In the Russian federation, we reduced it by 5% in all mature fields and in the brownfields because of the larger upgrading and the stopping of the high watercut stock. In new fields, the production really grew, was able to reduce costs. A little bit of growth in terms of cost in our overseas asset. But nevertheless, the 12th slide -- sorry, 11th slide -- 11 -- yes, a few more details about traditional projects that we traditionally cover. Zima, in 2020, we gained real -- again, in the recoverable reserves, we drilled 79 wells, increasing the output to 1.2 million tonnes a year. At the same time, we're actively building infrastructure facilities, and we continue drilling for further production growth. And without a doubt, we're focusing upon enhancing our efficiency. For example, the accumulated reduction of the wells we're doing in the past year grew by 15%. And similarly, these kind of lines are reducing as CapEx per tonne. In terms of OGF, we continue drilling. The production growth was 33%. At this time, the exploration wells were also drilled as part of the project to demonstrate a very good recovery, creating the foundation for the further development. In terms of the oil fringes, it is worth noting, the start of the production in the Chayandinskoye oil field and the considerable increase of output at Pestsovoye and the En-Yakhinskoye, in the west of Tarkosalinskoye field. Thanks to launching the mobile oil treatment, the production was 1.6 million output. Next slide, please. We -- in a systemic way, we approach developing our partnership diversification of our portfolio. A good example of that, in 2020, was the joint venture together with Shell in terms of our exploration work. But this kind of a strategy, we also pursue within the Tazovskoye project, which a large-scale project, with a peak of production up to 8 million tonnes of oil equivalent in the start of the industrial development by 2021 already. And so the production plan this year, 3.3 million tonnes of oil equivalent. And thank you very much. I'm passing over the floor to Alexey Urusov.

[Interpreted] Yes. Good afternoon, dear colleagues. I would like to introduce your attentions to review of the downstream operations through 2020. On Slide 14, you can see the way the netback of refining grew, not particularly adjust to incremental percent in Q4. However, because of a record-low crack spreads, there remains -- the refining margin is below the export netback. Particularly, notable, is in between Brent and euro, also a reduction of the spread because the euros became even more expensive compared to Brent, and that also impacted the refining financials. At the same time, our efficiency in the area of refining, through the premium domestic market and through the efficiency of the refined product sales. On Slide 15, you can see that the amount of refining of oil. Throughout 2020, the average went down by 2.6%, which is the result of the declining demand for refined products. During the pandemic, In terms of mix, the amount of refining growth is the result of the maintenance work done in 2019. We also ascertained that in 2020, there is a considerable growth of the depth of refining and the share of lighter output that comes from the upgrading of our refineries and various measures to improve the efficiency and the profit margin characteristics of the finished product, also successful completion of the maintenance work done in 2019. On the next slide, you can see that -- and as far as the premium sales channels are concerned within the B2B segment, the company through 2020 was able to grow the market share, practically in all of the channels in significant reduction of retail market, and the sales of refuels is related to the optimization of refined product sales, and again, the backdrop of an aggressive market development Gazprom Neft went into the right wholesale channel without compromising the margin. Also, the jet refueling in the Baikal in Ulan-Ude, we started our operations there. As far as the bunking business is concerned, 2020 was under the guise of the MARPOL introduction of requirements in terms of the environmental requirements. And so, we were able to produce the hybrid bunkering with low-sulfur, which has become the main product in our assortment, which would enable us to already take up 22% of the market for low-sulfur fuels in Russia. Gazprom Neft Lubricants really achieved another victory in the auction to provide and supply lubricants to one of the biggest Russian automobile producers, Hyundai. In the segment of bitumen materials, Gazprom Neft became one of the first Russian producer of premium bitumen, reaching the amount of more than 1 million tonnes. Slide #17 is where you can see how in the motor fuel segment, we continued to introduce the digital and energy-efficient technologies in our retail network. Previously, we were already telling you about introducing the power station using solar batteries. And you may recall the online application, which is the Gazprom GO. Also, we have introduced the cash rise project in the territory of our retail stations, using which the customers can independently pay for the products they buy in the cafeteria and other various products. 100% of our retail stations were able to be equipped with this system, which reduces our operational cost, reduces their downtime and extends the efficient work. One should also see that in terms of the average daily sales per one retail station, 17 tonnes of refined products. Gazprom Neft is a confident leader in the Russian market. Slide #18. The ever-first Russian bunker, to bunker the passenger ships in the technology ship-to-ship, was launched in December 2020. This new vessel is going to be part of the Gazprom Neft fleet in the second half of 2021, providing for the transportation and bunkering with a low tonnage LNG fuels in the Finnish Bay ports in Baltic Sea in St. Petersburg, Ust-Luga and Primorsk. This new vessel uses advanced technologies for shipbuilding, storing and the transportation of liquefied gas. The equipment conforms to the international convention and certified under the environmental standard of AGC. The vessel was designed with the zero emissions, and it's power units being used, using motor fuel and LNG. In November 2020 a comprehensive deep refining unit was commissioned, operation at Pancevo, a Serbian refinery. Investments amounted to more than EUR 300 million. This new facility makes it possible to increase the annual production of gasoline by 2%; diesel Euro-5 by 38%; the liquefied common gas, 7%. Since the start of its work, the Pancevo Refinery will give up and producing fuel oil, and will reduce its environmental impact. Commissioned to operation, this facility would also enable us to produce new product, which is the oil coke, which is very much in demand for the metallurgy and construction industries. Previously, this product was imported into Serbia. The production of this particular product at the Pancevo Refinery will be fully covering the Serbian market requirements, and also enable part of the output to export into other Baltic -- Balkan countries. On Slide 20, you see that the technology center of our company has produced and patented the technology of the construction of the road with asphalt coverage using the local materials in Ulan-Ude and En-Yakhinskoye, and they really were able to prove the applicability of this particular technology to build good roads, the economic effects being achieved by reducing the construction costs at the same time. Also -- and the option is being considered in order to use the drilling mud by way of the construction material, which would reduce its disposal costs. This technology enables to develop the business outside of the industrial roads and to roll out and scale out this particular experience in the civil construction industry. Ladies and gentlemen, I shall now continue covering now the financial results. As far as our profit and EBITDA dynamics are concerned, I would only, additionally, note, yet again, that we're really quite pleased with the quarterly dynamics. First of all, in terms of our profit, starting from Q2, it has been going up. And you can see that the last quarter, which was Q4, we were able to register net profit in the amount. If you annualize it, it is very much close to the pre-crisis level. And then, bearing in mind the fact that Q4 in terms of the seasonality, a little bit was soft than the second and the third one. But if you approximate it, that would be quite close to the pre-crisis figures. Now, as far as the year-on-year, low as compared because we always try and itemize our operational income for you. But you can see that the main emphasis came from prices, which was the biggest driver, almost RUB 300 billion. Additionally, there is OPEC restrictions, which impacted our production capacities. And so, following the decline in the production of liquid hydrocarbons, that also produced a negative effect upon our EBITDA. Apart from it, in Novoport, we started accruing the windfall tax, a profit tax. But that was no surprise because we always used to say that, that would kick in once the tax will start to be charged. So we tried our best to compensate for the negative environment influence. And we can see that approximately RUB 45 billion is the profit growth, which became possible, thanks to the company's reaction to the crisis, thanks to the optimization of cost, thanks to the optimal stock management under the OPEC restrictions. And so, under comparable conditions, that enabled us to grow our profit by RUB 45 billion. Now -- and as far as the quarterly dynamics is concerned, like I said to the Q4, traditionally, is not as good as the third one in terms of the seasonal properties. And one of the main drivers here was the downstream. Without that in Q3, there was a bit of a livening. And a good profitability downstream was able to demonstrate in Q4, taking into account the oil price growing. So profitability of downstream somewhat went down. Amongst other things, there was a number of one-off factors and maintenance activities, which also affected quarterly dynamics. But all in all, Q4 turned out to be better than the previous one. Now in terms of our investment work, I would say they're the most interesting and quite -- not straightforward slide because I recall that back in summer and autumn together, we were talking about our CapEx plans. We set ourselves the task to try and optimize our investment streaming in order to cushion any impact upon the cash flow. So respectively, what is it that we were able to do? We seriously optimized our investments into our brownfields and refining and refining, amongst other things. That was a bit of a postponement of projects, a certain set of smart intervals. But at the same time, we tried to retain the projects, which remained profitable, even against a lower price environment because all of our projects in those days, we were testing against the kind of a price of below the ones that we see them today. We stress test them for $14 -- $45 per barrel. And so the projects, which demonstrated stability and resilience, we respectfully tried to keep them because that was creating the added value and giving us the ability to further grow our cash flows in the future. And so, canceling them would have been simply a disruption. So we tried to entertain a very balanced approach. And here, one should also take into account that in the base scenario, we were planning to establish the Meretoyakhaneftegaz joint venture. And we were not planning to fund it ourselves, but you know that the closure of the deal really coincided with the peak of the crisis. And so the setting up of the partnership didn't take place or rather was delayed. So we're back, actually working to find a partner. We are currently in a very intense and constructive negotiations. And we, principally speaking, do believe that we would find a partner. And so we'll go over to our target implementation. So if you take away this effect, the reduction was at about 11%. Apart from it, one should also take into account that we had a surplus in terms of the selling and buying of assets because the divestiture from our assets exceeded our acquisitions and gave us additional RUB 14 billion. So altogether, this net investment amount was about RUB 400 billion. Yes, I do remember that we're trying to reach RUB 370 billion to RUB 380 billion, but one should be aware that it was in summer, in autumn, but later on, we noticed that the situation in the market was recovering. And that is why we decided that a profitable project is something that we were not going to with delay in order to lose value. And we had quite a heated debate about some projects. For example, one of them was the production of base oils in the second and third group. We had a bit of an issue about it. But we thought that since the situation was improving and makes it possible for us to fund this project, the one that creates additional value, we should keep it in our active portfolio. And so our end figure reached RUB 400 billion. Next slide, please. And eventually, considering all of the efforts contributed, we ended up having a positive net cash flow. We were able to retain some good residuals. And at the same time, we currently feel quite confident in terms of our financial stability. We have obviously a low net debt-to-EBITDA and the current liquidity is a good one. So principally speaking, I believe that we've been able to achieve such a good equilibrium between the fact that in the crisis, we needed to maintain our financial resilience, on the other hand, to keep up and continue working on the projects, which are profitable, which are lucrative to us, the ones that create additional value to the company, even it can stay very modest price outlook as well as OPEC restrictions. And the next slide pays our debt repayment schedule. This is where we really feel ourselves quite comfortable because there is a bit of short-term debt that we have. So the average maturity of our portfolio, we're trying to extend. And so in 2020, a certain extension also took place. But at the same time, we've been able to reduce our interest rate in a good way. And so the average cost of our debt is 5.13%, which, principal speaking, is a very good level. And so, the fact of our good financial status is being confirmed by the rating agencies, which capped our investment rating with a stable outlook. And I would like to finish off by a very important, I would say, corporate event announcement, specifically in adopting a new dividend policy. I know that I've been asked this question quite a few times. Are you planning to update your dividend policy, and officially, accept the 50% level as a marker? And I used to say that this is not something that is positive for us because we've always have been true to our word. Even without writing it into document, our word is also all the big value. But nevertheless, I believe the fact that we were able to reflect it in the document, once again, strengthens our commitments with respect to the shareholder value and investors because that proves that we look at it as an important something, and would like in all it's possible to confirm to investors that we walk out talk and that all the guidelines that we previously gave you is something that we would follow through whatever I saw, we've written 50%. And so the interim dividend practice is something that is a standing measure. And so we will continue that. So the question is, how we're going to structure 6, 9 months? But the fact that we're going to be paying our dividend twice a year is exactly something that we came to intentionally. With that, I would like to finish my presentation. I'm very grateful to you for your attention. We would be now ready to answer your questions.

[Foreign Language] [Interpreted] [Operator Instructions] Alexander Burgansky, Renaissance Capital.

[Foreign Language] [Interpreted] There will be 3 questions, with your permission. First of all, could you please tell us about was the adjusted net profit in 2020 just for the purposes of calculating your dividends? Second question. Could you update us about your production plans and your CapEx plans for 2021? And my third question is related to the second one. Considering the growing tax burden upon Gazprom Neft in 2021, and that may be related to your answer to question the second -- answer to the second question, we would like to find out to what extent you are going to adhere to the positive free cash flow in 2021. Is it going to be one of your targets or are you going to allow yourselves to slightly go into the negative area in order to really adhere to your investment program this year?

[Foreign Language] [Interpreted] So answering the first question, Alexander, and good evening, and thank you very much for your questions. So the first one was about the way we're going to calculate our net profit for the purpose of defining our dividends for 2020 payment. Well, first of all, we definitely are not going to adjust this net profit downwards. Most probably, there will be certain adjustments or rather, the repetition of the kind of adjustment that we did for 9 months when we excluded one-off launch of values, which was quite characteristic for the whole industry, when many recognized some of the loss of value with respect to the asset base. So quite probably, we shall be repeating the adjustments, which we already did for 9 months. But overall, we haven't yet made any decision because it will depend upon how are we going to see the market because principally speaking, we want to remain competitive. We don't want to look worse than our competition, maybe even better than they. So I would say that we want our dividend payment level to really be very descent. And of course, we have the net profit indication, but this is just the basis, and afterwards, we'll be making the final position. But I can definitely tell you that this adjusted net profit is not going to be lower, it's going to be higher than what is seen in the reporting, at least by the things that we've been able just for 9 months. But then on, we will be looking at trying to arrive at a very good and decent dividend payment because, of course, 2020 profits, they are not very indicative in the case of many companies because the year really turned out to be not a unusual one because, basically, everybody was doing -- trying to take a profit as is and confident a certain percentage of dividends. But I'm sure that many companies this year are going to do the adjustments because the fluctuations were very material. So that is my answer to your first question. Now as far as the second question, which was about the production and CapEx dynamics, this seem -- my answer is going to be very simple. We expect them to be at the level of 2020. I mean, as far as CapEx is concerned, definitely lower than 20%, give or take, because it all will depend upon the environment. And we usually follow it in terms of the quarterly dynamics. But it's going to be closer to the level of 2020, for sure. And I mean, the RUB 413 million that we showed on the slide. Now and as far as the production is concerned, there are certain possibilities that we have, in order to grow production, but it will all depend upon the OPEC quotas and what kind of further limitations we may be having to comply with. But considering the market recovering, I'm sure there will be additional quotas and additional opportunities. But all in all, we are ready for any possible scenario. We have a certain flexibility. So it will all depend upon how OPEC agreement will unfold. And with respect to the question about the free cash flow. Yes, without doubt, the free cash flow -- positive free cash flow is the target, which we're going to try and get to. But at the same time, I should say that we are not going to set it as the one that should be achieved at whatever the cost. Principally speaking, there could be a certain compromise between good profitable projects and the free cash flow because we see that our financial resilience enables us to. And so, the debt-to-EBITDA is at a comfortable level with us. But, principally speaking, yes, the free cash flow is going to be one of the targets.

[Foreign Language] [Interpreted] Ronald Smith, please go ahead.

[Foreign Language] My -- I have a couple of related questions or one big question about taxation. If I understood correctly, Gazprom Neft has recently moved a number of fields under the excess profits tax system that ended there. Could you elaborate a bit on your general strategy for approaching taxation, especially given all of the changes that happened last Fall? And also, how important for your development plans on the proposed tax breaks for the item of deposits?

[Foreign Language] [Interpreted] Thank you very much for your question. As far as, generally speaking, our windfall profit tax strategy is concerned, we always used to say that this kind of a tax is a very good and very promising system, and that it, successfully, can be applied for all of the fields, with the exception, I would say, the ones where gas factor is very high. But when the system was being initiated, everybody was clearly aware of that. And that is why it was made possible to move out of the windfall profit tax if the gas factor was to grow. So that's basically what defines our strategy. So whenever we'll have the possibility to switch to windfall property tax, and that goes for the brownfields, which had certain depletion exemption, so in Gazprom Neft, a list of fields, we have more than 20 like that, I mean, licenses. So the decision was made, particularly with respect to all of them to move them into the windfall profit tax, with the exception of Muravlenkovskoye, where exactly, there is a very high gas factor. Apart from it, I should say that the Messoyakha group of fields, the East Messoyakha license area, where the export duty exemption was canceled, and so, there is a possibility to switch over to the windfall profit tax. The decision also was made to do it. And that is why, overall, our windfall profit tax strategy is what I've just described. Now with respect to the Achimov, without a doubt, it is quite important for us to get the exemption for it because this is a strategic category of reserves. These are the reserves for the future, on the one hand. But on the other hand, we do understand that in our pipeline of projects, the ranking reserves, Achimov, are not the cheapest of them. And so, it will all depend upon the way the market is going to develop, what kind of OPEC restrictions will be announced, what kind of production capacities we will have in the future. So I do say it is important, but this is not the priority. We compare it with our other projects, where we also find it important to have incentives to develop them. So I would say that, yes, it is an important something, but not the very top priority. I mean, specifically from the point of view of time factor because in the meantime, Achimov is a strategic kind of project. It has many uncertainties, involves a lot of technology challenges. So we're moving towards it in a very diligent, prudent and staged way. So I'm not in a position to tell right now to what extent Achimov's work is going to be very successful. We do trust in ourselves. We're trying the best we can, but this is not 100% warranted in terms of the successful outcome as applies to many of our other projects.

[Foreign Language]

[Foreign Language] [Interpreted] Evgenia Dyshlyuk, Gazprombank. Thank you very much for your presentation and for the possibility to ask a question. I have an additional question about your CapEx. I wanted to ask you for the CapEx for refining that you plan for 2021 because a certain reduction was expected. And my second question is more detailed, and that is about your upstream. If one should expect the OPEC+ restrictions not to lessen, I mean, basically speaking, for, let's say, a longer term, in the range of between 1 to 3 years, what are the points of growth? What are the projects that you may have in upstream that might drive Gazprom Neft's development and growth in terms of, let's say, the ranking of their attraction and potential? And speaking longer-term, do you have any investment projects for the Arctic because we all know that Gazprom Neft is putting together plans to create a big cluster there. So are you thinking in any way in some maybe a remote future to develop your presence there as well?