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

[Interpreted] Dear colleagues, ladies and gentlemen, good afternoon. I'm Sidorkina from Investor Relations speaking. As always, we are very happy to welcome you to our conference call dedicated to our operations and financial performance update for Q1 2021. And I'd like to introduce now you to the participants of our today's call. The financials will be covered by Alexei Yankevich, who is a member of the Management Board and Deputy General Director for Economics and Finance. Upstream -- and Upstream operations today will be presented by Igor Shkirov who's the Head of the Planning and Efficiency Management in E&P Department; and Nikita Anichkin, the Head of the Department of Economics and Data Management, Finance in Marketing and Logistics and Refining will tell us about the refining and logistics. Also during the Q&A session, we will be joined by all of our colleagues from different core departments. And before we begin, I'd like to briefly remind us that all of the comments as part of this presentation and various statements that may be heard in the course of today's conference call may and probably will be of a prognostic nature about the financial status and the results of the business operation of Gazprom Neft and all of the statements with the exception of the facts that already have taken place can be considered as those that are just outlook. So such statements will be about the future expectations based upon the current situation and the management's assumptions and may take into account various risks and uncertainties, which eventually may lead to the actual results differing from the ones that have been referred to in the course of today's conference call. Thank you very much. And now let me pass the microphone over to Alexei Yankevich.

[Interpreted] Dear, ladies and gentlemen, I'd like to greet everyone and present to you the results of Gazprom Neft's operations for first quarter '21. We can see that the oil market is recovering. And we, as the company, tried to do our best to employ all of the market resources. And as a result, we've been able to demonstrate very decent financial results in Q1. The adjusted EBITDA reached almost RUB 200 billion. Net profit was RUB 84 billion. And our income was RUB 611 billion. Besides the company demonstrated one of the best hydrocarbon production dynamics, the decline of our output was lower than the average in the industry. Unfortunately, we cannot talk about growth year-on-year because everybody experienced the production decline that was the consequence of the market environment and the OPEC limitations. But speaking about the quarterly dynamics, here, we can already witness a positive trend and a positive production, which grew 5%, also quarter-on-quarter. Our financials grew. The growth of adjusted EBITDA was at 4%. The net profit grew by 3%. Additionally, I'd like to note that we see a successful development of our new upstream projects. We see a considerable output in our flagship field such as the Zhagrin field, which is our main high potential greenfield in Yamal-Nenets in terms of the oil fringes and others. In downstream, the upgrading of our refineries is in the full swing. And I'd like to mention that in the first quarter, our company was the first in the industry, which entered into an investment contract with the Ministry of Energy, which gives us additional economic incentives in further running our refinery upgrading program. Now in terms of other events, you will hear more in detail from our colleagues about upstream and others. So let me pass the microphone over to Igor Shkirov about the upstream development.

[Interpreted] Slide 6, please. Respectively, as Alexei has already mentioned, in terms of the oil production quotas, we've been able to usually utilize that in Q1. We had registered growth both in the subsidiary and as well as in the joint ventures. And with respect to the first quarter, comparison with 2020, we experienced a bit of a decline, considering the fact that in the beginning of 2020, there were no OPEC limitations. Here, we had actually substituted our production out of mature fields with more greenfield project like Zima and Zapolyarye in oil fringes and others. Next slide, please. From the point of view of operational cost, we had the decline of 2.7% compared to Q1 2020, primarily related to the new projects, ramp-up of the production in [indiscernible] because of the low water cap as well as the low water cut having been put down in order for the maintenance in the mature fields. Partially, this has been deterred by various expenditures that we had to incur to fight COVID. But overall, it demonstrates the good dynamics because this average growth was traditionally related to a planned reduction of the oil out. Now next slide. And as far as Zima is concerned, we have increased our production twice as much compared to Q1 2020. Apart from that, we have completed the seismic acquisition with respect to all of the areas which are close to Zima, which enables to further expand production at that acreage. At Zima, we also have used cluster in production pad construction, which really stays as various expenditures. Also, we had also finished the upgrading of our oil treatment and water injection cluster, which will definitely boost our upgrowing trend for the next year in terms of the ARPU. In terms of Zapolyarye, which the company that is developing the oil fringes at the Pestsovoye, we have assembled the heavy-duty equipment, which is the stabilization column. At the Kharasavey field, we have completed the construction of the first production well and also confirmed the expected productivities. As far as the Chayanda field is concerned, we have installed various modules and have completed the construction of the unique well with the extension of the horizontal section, about 2.5 kilometers. Now a few more details about the Chayanda field. Last year, we have produced the fringes in the oil and gas cannons and filled about 200,000 tonnes of oil. For this year, we have our plans for 9,000 tonnes. And currently, the oil of the Chayanda on a daily basis comes into the Pacific destination. Currently, we're expanding the oil preparation and treatment based on the modular installation, the field pipelines, compressor stations and the launching of this will provide for a good quality treatment and will enable us to increase by [indiscernible] in terms of the overall output. Next slide, please. From the point of view of ESG agenda, I would like to point out to -- point to YaNAO, which is the Yamal-Nenets and the Messoyakha oil and gas have entered into contract to preserve permafrost. On one hand, our company is being active in preserving the arctic soil in the course of the development of the recoverable oil there. As part of this particular initiative, we'll bring in the representatives of academia to start a unique soil there and to understand what is the better methods to preserve it. So this cooperation with the scientists will enable us to exchange data and put some new and unique information into the development of the technologies, which would make it possible to develop the local environment without any impact. The second thing, together with the engineering center, we have produced various methodologies in order to contain the oil leaks which has been put together taking into account the arctic conditions of the seas, so has to be able to treat more than 10,000 liters of water from the Sea of Barents and the ice. And the laboratory test demonstrated the efficiency of the icing conditions reach up to 80%. And so currently, this is the only Russian reagent, which can help treat oil in low-temperature leaks. That's it. Thank you.

[Interpreted] I would like to introduce your attention to the review of the logistics, refining and marketing for quarter first 2021. Next slide, please. Over the first 3 months, we've seen the growth of the average Brent price almost by 40%. I mean the price environment in the market has demonstrated certain stability, particularly in as far as gasoline fields are concerned. But here, I'd like to note that for the first time since the pandemic, the average quarterly net back to the refining turned out to be above the export one. Next slide. Here, briefly about the refining, the amount of throughput has slightly gone down compared to the previous quarter, which is about 3.3%. But overall, that has been conditioned by the plant maintenance at the Yaroslavl refinery as well as the Pancevo. But here, I should think to mention that as far as the Moscow refinery is concerned, there has been a considerable growth in refining and the output of the lighter products overall and the motor fuel, specifically compared to the similar period last year. Those incremental growth became possible because of launching of the EURO+ standard that we've previously mentioned more than once. Next slide, please. As Alexei Yankevich mentioned before me, an important event for the refining economics in Q1 was the introduction of the investment in the markup for the oil input as well as on March 22, Gazprom Neft amongst the big Russian company was the first to sign the contract with the Minister of Energy to create new capacities in refining. We have included in doing the hydrocracking and the delayed coking at the Omsk and Moscow refineries. And as a result of this particular work, the investment markup on top of excise the company was able to start receiving as of the first quarter of 2021. With respect to the B2B segment, while it is worth mentioning that the pandemic and different challenges as well as the demand being not as active as before, nevertheless, the company is able to maintain a very high margin in the segment. Specifically in the jet fuel segment, we've been able to achieve a round figure of 300 airports of our presence in terms of expanding the development potential in Q1. We started selling in JET A-1 fuel produced by Omsk. In lubricants, the company continues to promote the -- its products in the European market. So based on the results of 2020, five products of the company won an award in 100 best products of Russia. It's also worth mentioning that in Q1, we have received an approval from Mercedes Benz for using the motive lubricants by Gazprom Neft for the extra terrain vehicles and mining equipment. Also against a shortage of the bunkering fuel, the bunkering company was able by 60% to grow its production of compounded bunkering fuel by using its own as well as third party resources. And in as far as the bitumen materials is concerned, the company was able to grow its exports into motor boat by more than twofold compared to Q1 2020. And specifically, the new destination was selling the insulation materials in the German market. Next slide, please. In conclusion, and in continuation of the bitumen business information, I'd like to mention a few words about the new project in the area of the premium bitumen. Gazprom Neft is developing the project of a unique production for the manufacturing of the high-tech materials at the Rostov area. The new technology is going to be fully integrated into the supply chain by the production of the bitumen adhesive and high viscose hydrocarbon by the Moscow refinery. The construction is going to be completed in Q3 2021. As a result of this new facility, we'll be producing about 120,000 tonnes of the polymer bitumen materials for supplies to the road construction companies in the South Federal District of Russia. This is it. Thank you very much.

[Interpreted] Dear, ladies and gentlemen, I'm now coming back to you with the update on our financials. Let me dwell upon the adjusted EBITDA dynamics. I'm not going to talk in detail about the quarterly dynamics as shown on the slide. Principally speaking, it is quite consistent. I will say a few more words about EBITDA through the lens of the main drivers, which impacted it. And let me begin with the annual dynamics, which is the result of the Q1 2021 compared to Q1 2020. Here, the main factor was the external environment, the pricing and taxation, which have been combined into the total figure of RUB 112 billion, which is a bit of a positive development. Regrettably, this positive thing was slightly helped back by the fact that as the result of the pandemic COVID-19, the possibilities of selling refined product in downstream and refining generally were not as strong as they were in Q1 2020. That was why, overall, there is a bit of a negative effect upon the downstream, besides negative impact also came from the OPEC+ restrictions. Overall, it was a positive thing. But if you deduct the pricing factor from it, then the reduction of the output volumes carried within a certain negative is because -- in itself is the pricing factor. We have RUB 112 billion. In terms of the quarterly dynamics, the external environment, again, here was a more modest one in the amount of about EUR 30 billion and EUR 8 billion specifically comes from internal factors, the overall output growth as well as the efficiency gains, both in upstream and downstream together. Now moving over to the cash flow analysis. It is worthwhile mentioning that in Q1 2021, the company continued to generate the positive free cash flow, amounting to RUB 42 billion respectively. With the deduction of dividends and the net borrowings as well as the banking deposits, the overall changes in the pricing policy was minus RUB 134 billion and at the same time, the most important indicator was and is the operational and free cash flow. But as, basically, we have previously promised, the company continues to generate positive free cash flow. Next, let me speak about the investments and capital expenditures. The CapEx dynamics compared to last year, this is the 19% decline. The main driver behind this was the less investments into the upstream, which primarily is explained by the mature assets, investment program adjustments because of the OPEC+ as well. There's a lot of which investments on the brownfields went down. With regards to the refining and marketing investments remained approximately at the level of 2020. So overall, I can say that we are targeting the figures that we previously mentioned in our forecast and so 400-plus basically remains for this year as well. And I shall conclude the presentation by the description of our financial stability and the way we work with our debt portfolio. And here, I would like to note that the company is regaining its position in very comfortable financial resilience and net debt-to-EBITDA. Based on Q1 results, it was 0.6 in terms of the net debt-to-EBITDA, which is a very good run for us, enabling us to feel really quite stable. On top of it, our current liquidity is also at a very good level. Our remaining cash and the committed lines enabled us to pay off all of the short-term obligations. So we do feel quite comfortable in terms of our repayment schedule. At the same time, the average maturity shortened from 3.2 to 2.1 years as of the end of the quarter as well as the average interest rate amounted -- based on the results of Q1, 5.1%. In conclusion, I'd like to summarize by saying that the company continues to develop successfully. The impact from the crisis is waning, but our priority remains very much in focus upon the optimization and development, and we've been able to demonstrate it based on the results of Q1, specifically, that we've been able to reduce our average cost in upstream, as you've been able to see, by 2.5%. And that is against the decline in the output, as principally you know, whether the output decline upstream basically in terms of the cost grow because there is always some [indiscernible] costs remaining. But at the same time, optimizations enabled us to reduce this average cost, nevertheless. With that, I am finishing my presentation. I would be more than happy to respond to your questions.

[Foreign Language] [Operator Instructions] [Foreign Language] Ekaterina Smyk, Bank of America.

[Interpreted] Question comes from Ekaterina Smyk, and there are 2 questions with respect to upstream. The first 1 is about the production growth that you expect to achieve by July and this is the period that the OPEC+ quotas have been defined because Gazprom Neft had historically the kind of dynamics, which was slightly different from that, partially related to the [indiscernible] confidence. And so it would be good to understand, for May, June and July, what kind of changes you expect or dynamics for the liquid production? And the second question is about your plans for the drilling for 2021. What will be the extent to which your drilling plans may change compared to 2020? Is it going to be any decline as well as in your total CapEx, how much is with the upstream?

[Interpreted] Well, as far as the production dynamics are concerned, we intend to fully utilize the opportunities we may get from the OPEC+ quotas. There aren't any special additional situations that one should expect, so basically, you can count it yourselves in terms of how much we may gain in terms of production. So I am not in a position to give you a very precise figure because quotas are being made available to each company individually. And this is a process that is completely being under the Ministry of Energy. So you probably should direct this question to them. So whatever the quota the ministry gives us, we will definitely act on it, and we will produce exactly the volume within the quota. Now with respect to the drilling, I would say that this is quite a dynamic value. And you should understand it yourself that the market environment currently is quite volatile. There are so many uncertainties out there. So if everything remains positive, I would say that there might be some opportunities to produce more and the drilling volumes may also follow suit. If not, it will look differently. I want to say that we're keeping our hands on top of what the situation is in the market and align our expectations typically in terms of what the outlook may tell us. And respectively, we update our program. And that is happening very dynamically in the course of all of the 12 months in the year. So I'm not going to be telling you exactly drilling figure. Now with respect to the investment into upstream, its share is going to be exactly as what we have planned in our business plan, and there aren't going to be any differences from the business plan in the structure of our car packs. So if you need a bit of a reminder, we will be able to send you the itemized list in terms of how much we expect to invest into upstream according to our business plan.

[Foreign Language] Ronald Smith from BCS.

Yes. I have 2 relatively quick questions, 3 actually. First, you're forecasting almost 1 million tonnes of oil equivalent production from Chayandinskoye this year. Could you give us a breakdown between liquids and gas on that? That's one. Second, how much did the reverse excise tax premium add to your EBITDA in the first quarter? And how much could we expect it to add in Q2? I just want to check my numbers. And finally, do you have guidance for 2021 capital expenditures? [Foreign Language]

[Interpreted] Thank you very much for your questions. And so with your permission, I would respond to the first and second question in writing individually because I don't have all of the figures at my finger tips right now. So it's going to be either me or our Investor Relations people who are going to share it with you shortly. Now with respect to our CapEx for 2021 and its guidance, like I previously stated in the presentation, part of my narrative, we are and targeting our regional 2021 guidance, whereby we originally quoted the figure of approximately 420 give or take. So I suppose it's going to be 420 give or take, a little bit.