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

[Interpreted] Good afternoon, colleagues. I am Sidorkina speaking, Gazprom Neft Investor Relations. We are very happy to welcome you at our Quarterly Conference Call, which will be about the performance of days for H1 2021. Traditionally, please allow me to introduce to you the speakers, and as far as the financials and the introductory part is concerned, we will hear from Alexei Yankevich of the Management Board, Deputy General Director for Economics and Finance. Upstream will be told about us by Igor Shkirov, who is the Head of the Planning and Efficiency Management and Data for Upstream. And then Nikita Anichkin, the Head of the Department for investments and data management in Logistics, Refining and will tell us about the Downstream. Also during the Q&A session, we will be joined by our colleagues from other core streams. And traditionally, before we begin the presentation, I would like to briefly remind us that all of the comments and statements that may be made or heard in the course of today's conference call may contain various outlook statements with respect to the financials and the performance results by Gazprom Neft. So all of such statement the exception of there's which are -- with regard to the actual events will be just the forecast, which is anything related to the future expectations based upon the current assumptions and may take into account known and unknown risks and uncertainties, which eventually may lead to the actual results being materially different from the ones which have been referred to in the course of today's conference. Thank you very much for your attention. Now I like to pass the floor over to Alexei Yankevich.

[Interpreted] Dear ladies and gentlemen, good afternoon. Today, we would like to introduce the performance results of Gazprom Neft's for the first 6 months of this year, and H1 this year, the markets have been recovering and Gazprom Neft was using and utilizing all of the market opportunities to the maximum. We've been able to maximize our production within the OPEC quotas. We produce maximum out of what has been made available to us by the Ministry of Energy in Russia, and part from it, we've increased refining and domestic market sales. We also utilized the opportunities in the product segments in the petrochemicals, ores and bitumen and other segments. And so in this way, the kind of the market situation, which evolved in the first half of the year in terms of its positives, we've been able to make the most of it, in order to improve and gain our financial and operational results. So in this way, we're able to achieve the adjusted EBITDA in RUB 435 billion. Net profit reached the amount of RUB 217 billion, while our output, we were able to maintain a level of the last year. So overall, hydrocarbon production, I mean, and increase our refining by 5.9%, year-on-year. As far as the quarterly dynamics are concerned, here, we do note a positive dynamics with respect to the EBITDA and the net profit, 24.5% and 58%, respectively. While quarter-on-quarter, and I'm starting to see things, we need to increase hydrocarbon production, which grew by 1.2%. Again, we've been able to utilize and make the most out of the quota increases that have been made available to us since the throughput and refining also was about 5.7%. So let me pass the floor, now, over to our colleagues, who we'll first hear from Igor about Upstream.

[Interpreted] Yes. Next slide, please. So in terms of the daily production, as Mr. Yankevich said, it is growing according to the possibilities that are being given to us within the OPEC+ framework, annualized, or at the half annualized, over the first half year 2021, we produced approximately at the level of the first half of 2020. Traditionally, we see production declining at mature fields, we are balancing in terms of more effective production in terms of the Zima, Zapolyarye and other greenfield projects. So respectively, the OPEC sales in terms of our dynamics, we've been able to keep them at the level of the last year in mature fields simply because the production is declining. So you see the stats. And with respect to the major fields and various joint projects, OPECs are going down with the growth of production in terms of the overseas assets, the costs are growing because of a natural declines. Next slide specifically demonstrates production growth in our major projects like Zima, the fringes and the Kharasaveyskoye. Production has been growing because of the further development of these sales, and we are doing it as much as technically and positively with respect to Zima, we launched the cluster cracking project, which enables us to materially save on costs, introducing the digital drill rig projects and many other effective completions. And as far as the fringe project is concerned, we are passing through the Urengoyskoye and Bovanenkovskoye at the En-Yakhinskoye. We have introduced various energy supply centers, and we continue drilling 26 production and safety and injection wells -- exploration wells, in Tazovskoye, there was a big event. We launched this particular field into the commercial production, more details about it on the next slide. In Russia, this is the first oil and gas producing field, the infrastructure for which had been developed within the tough pandemic restrictions. The subsets reserves are about 425 million tonnes of oil. The production infrastructure includes the oil and gas wells, gas turbine stations, the gas and water treatment centers and the living quarters for the personnel. The total capacity of that particular structure is 1.7 million tonnes of oil into the oil and gas treatment, 1.7 million and 8 billion meters -- cubic meters of gas. So this year, we're planning to produce about 550,000 tonnes of oil and 1.3 trillion bcm with a gradual ramp up to the maximum capacity. When designing and building this production we use definitely digital technologies, and we were able to do the remote tracking and by using drones and various other technologies which enabled us to capitalize -- to maximize our capital spending like modular construction. From the point of view of drilling, we are using multi cracking going here with the directional -- with the fishbone technology. So in terms of the complexity of that particular field and its uniqueness, it's comparable to the Moscow, it is one of the most difficult ones in Russia. The next slide from the point view of technology, the maximum value and efficiency in terms of how complex projects can be achieved in partnership by converging better ideas and competencies, specifically at the St. Petersburg International Economic Forum, we entered into cooperation agreement for the -- that efficiency in production with Tatneft, together with NOVATEK with sort of a joint venture to work with Arctic offshore to develop the North Vrangelevsky license together with Shell Company, we are putting our efforts together to decarbonize our operations. Next slide, please. We are focusing our attention upon the environmental protection issues, specifically the Western Messoyakha field, we commissioned into operations, the geoseismic monitoring of the PNG subsurface storage. We previously said that in 2020, we launched this particular storage site in this particular system. It operates using solar power and enables us to start here the gas distribution, physical processes and there's -- and control all of the physical process taking place. We're also part of the Hydrogen Valley consortium because company produces quite a lot of hydrogen, but in terms of the technology agent for refining, and so becoming a member of this association is quite logical apart from Gazprom Neft's other industrial partners, which entered into this particular association like Russian railroad, SIBUR and some of the key areas will be Tomsk, Sakhalin, Amara, whereby the first pilot projects in the area of hydrogen energy may soon appear in these regions. We're also enhancing our system for the environmental control by using the state-of-the-art environmental monitoring station in Orenburg region because those steels, they have a bit more sulfur. So the environmental monitoring agenda is one of the most vital and that is where we continue to improve our systems to further safely operate. That's it. Thank you.

[Interpreted] Good afternoon. I would like to tell you about the Downstream review for the first half year and the second quarter 2021. On this slide, we can see that the oil prices are recovering, the main drivers is moving out of the pandemic and the lifting of the OPEC restrictions in refining during Q2. This throughput grew 20% considerably exceeding the oil export netbacks, Similarly, the cashback for gasoline recovered and against a gradual recovery in demand the cashback for the jet fuel and diesel also recovered in terms of the crude operation despite OpEx reductions, the company was able to meet the growing loading of the refineries and extent -- export delivery commitments. Next slide, please. So as far as refining is concerned, the overall throughput over the first half year is growing and it has been growing, not only compared to 2020, but also compared to 2019 by more than 3%. We can see a slight reduction in the refining depth compared to first half 2020, which is quite a natural consequence in terms of the loading of our installations. It is also important to note that the profit margin of the old basket and the output of the lighter products has been growing. Next slide, please. With regards to the B2B segment, the company continues to retain and grow its market share through the premium channels and amongst various events with management activities, one can specifically point to the jet fuel segment where we're able to increase the number of the airports where we are present by another 21 location, up to 321. In terms of the development services technologies, we continue to scale out our blockchain technologies in the Smart Fuel area, the overall number of airports where the new services are being used through the additional 3, which is Saratov, Murmansk, Novosibirsk, altogether with the help of the corporate platform, the company already filed more than 100 regular flights and up till the end of 10, we continue and plan to expand this Smart Fuel platforms up to 10 fueling stations in the key airports. In the oil and lubricants, amongst various events, I would like to note the work we are doing for the major industries. For example, amongst our results in the first half year, we won various tenders in terms of the supply of the packaged lubricants and oils to the metallurgical producers like Severstal and Novolipetsk. We also continue to open up new centers for the analysis of the status of the oil, which enables us to increase the level of commercial cooperation with industrial users, which is very important. In the bitumen segment, we continue to strengthen our leadership in the Russian market for the premium bitumen and diversify our offerings. During the second quarter, we started selling the bitumen polymer materials for the hydro insulation of roofings. One can also note that the breed insulation material was being used to cover the Formula 1 track in the Sochi. In bunkering business the backdrop of the poor requirements in environmental and ecology. There is still some volatility because we observe the decline in the capacity of the market and the shortage of the resources. But despite that, the company was able to grow each share by 1.5 percentage points. And also up on the next slide, you can take a more detailed look at what the management was doing in this area. Certainly, under the current circumstances, Gazprom Neft has been expanding its opportunities to produce the environmental bunkering fuel, specifically at the Moscow Refinery due to the in-depth treatment of the vacuum distillates and the cracking, we were able to start producing the low sulfur bunkering fuel at the level of 0.05%. We started buying more of the blending and low-sulfur fuels from third suppliers. But all of this, put together, would enable the company towards the end of the year to maintain its big share of bunkering fuel sales in the market. Next slide, please. In conclusion, I'd like to say a few words about the development of an important area in the technology and innovation in the beginning of 2021, the new in Downstream innovation center was given the status of the special economic Novoorlovskaya zone in St. Petersburg, where we started building a lab for the research work. We have put together a portfolio of R&D projects, which are going at different stages from searching and assessment all the way to the practical pilots, along with the catalysts for refining. In our portfolio, we have also petrochemicals and chemicals for the oil production, which, overall, would enable us to increase our presence in these adjacent sectors. It is also important to note that as part of our R&D, we are paying particular attention to green projects such as production of the hydrogen and processing of CO2 in plastics. Thank you very much.

[Interpreted] And as far as the financials are concerned, as I've previously stated, EBITDA and net profit have materially grown. So let me go over to the factoring on slide right here now. Undoubtedly, the biggest driver behind the operational profit growth where price is and the recovery of the pricing environment. But at the same time, like I've mentioned, we make the most out of the market opportunities, which evolved. So the most important point is that we didn't lose any volumes, the volume of our business was able to sustain and the company were able to make the most out of the pricing factor in full, but at the same time, we have manage to more than compensate for the negative impact from the pandemic, which was out in the profit margin positions, particularly in downstream as well in the downstream sector in our survey and entity -- the impact there was much stronger than in our case. So all this negative impact upon the margin. We were able to set off by various internal events. Like I said, the bigger volume of sales in the domestic market and various opportunities which we used in our product lines like optimizing the whole of the product basket. So we were able to more than just compensate a lower margin as well as various additional expenditures, which we had incurred because of the COVID-19, which we had to bull bear with the start of the pandemic and to some extent, we use to continue to carry them. So overall, this price factor is something that we're able to make the most out of and so EBITDA grew to RUB 435 billion. In terms of the quarterly dynamics, and that is in the next slide, here are the contribution from the internal sector unrelated to pricing was more tangible. Here, we've managed, apart from the pricing factor, to do with additional quotas and the additional asset, which appeared as part of the OPEC+ restrictions being lifted and the redistribution of various quotas by the Ministry of Energy. Additionally, there is optimization efforts, which we undertook both in Upstream and Downstream in the second quarter, produced additional RUB 10 billion. So in total, the quarterly EBITDA in -- due to the second quarter reached RUB 341 billion. Then moving over to the cash flows. It is worth noting that -- if any of the financial indicators define any good cash flow has result in -- so consequently, we've been able to come up with a very good trade cash flow, which was used to pay dividends, to reduce our debt burden and some of the funds have been placed into the instruments, which according to IFRS are not cash equivalent, and that has been demonstrated as is deposits and placements. With regards to investments, the CapEx dynamics also define the cash flow growth, the overall investments in the first half compared to the previous one, declined a little bit, which was the consequence of the optimization effort, which we started as our reaction to the pandemic of the crisis, like I mentioned, we are quite flexible in managing our investment portfolio. So as a response to the crisis and to the lower volumes, we reacted by adjusting our investment. And so it was, a, downward dynamics. And so we were able to maintain stability under the dire circumstances. So this particular coil is unfolding again. So we have new opportunities in terms of the volumes. We enjoy additional market niches in terms of the production. And so also, we got an opportunity to go for additional projects. So generally looking at the quarterly dynamics, the Q2 investments compared to Q1 have grown. And so jumping a little bit here, this is exactly the kind of the damage that one should expect during Q3. So regional guidelines about CapEx do stay irrespective of the half year to half year decline, which primarily are the consequences of the kind of optimizations which we did last year. And in conclusion, a few comments about the leverage. I believe that the most important point here is the main indicator of financial stability, to net debt-to-EBITDA went down to fairly comfortable values, which is below 1 and so respectively, this makes us feel quite snug and okay, although, we're not planning to do anything with in terms of using. But nevertheless, that creates a better stability and sustainability. And so in terms of the profile of repayments and no particular changes and average borrowing rate has nudged up because the market has grown, but the cost to us hasn't grown materially, as yet, and remains at a competitive level, which is 5.27%. So let me finish my part of the presentation. With that in conclusion, I would like to say that the company has been quite successful in passing through the pandemic crisis. One may even say that we are emerging from it now, and we are writing the upward curve, the upgoing trend, and we've got all the opportunities to make the most out of areas emerging opportunities in the markets, which can be explained by the fact that our main investment project and the development project are something that we were able to keep and that consequently currently creates the possibility for us to grow further in terms of the volumes and our financial indicators. Thank you very much for your attention, and I would be happy to answer your questions. Thank you very much.

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

[Interpreted] There are several questions that will be asked. The first one is about Upstream. From the point of view of your brownfield productions, what generally is the current status of the brownfield spare capacities. Will they be able to go back to the pre-COVID levels or as a result of drilling optimization, a certain part of volumes, maybe deemed as completely gone away from the brown -- out of the brownfields. And then in terms of the greenfields with respect to the main project, what kind of output growth you expect within 2021 because you mentioned 3 groups, Zima, the fringes and the Tazovsky and maybe these ones and the OGMs. So could you add a bit of a comment and their growth for 2022? And the second question is about the refining from the point of view of your upgrading program, which you're about to complete. Is there anything else that is still left to be commissioned to operation before the end of this year and next year? And what kind of changes you expect in terms of the output of the lighter products.

[Interpreted] So the first question is being answered right now. So in terms of our brownfields. Under the restrictions, they effectively compete for the production against the greenfield because understandably, the production can be increased by drilling. And so now drilling in the greenfields is -- getting gas drilling in the brownfield. So naturally, it's going to be depending upon the kind of restrictions that we may have for the next year. And that depends upon what kind of production we will show from our brownfields. With respect to the greenfields, such as, for example, Yamalo or Tazovskoye and the kind of the infrastructure additions that I told you about, we effectively do have an opportunity to multiply increase our output next year compared to the current year.

[Interpreted] And as far as the second question is concerned, the whole set of the in-depth refining at the Omsk refinery, which includes hydro cracking, delayed coking and the hydro treatment are going to be operational before the end of the year and in the beginning of the next year, altogether. And respectively, as far as the outputs are concerned, we will additionally forward to you a detailed note.

[Foreign Language] Andrey Polischuk, Raiffeisen Bank.

[Interpreted] Could you please tell us, what is the overall production level you expect to have in 2021, considering the recent changes in the OPEC+. And a quick question about the fringes. Also, could you tell us how much do you plan to produce this year? And what is going to be the maximum plateau that you're going to be at and in which year?

[Interpreted] Andrey, thank you very much for your questions. As far as production for 2021 is concerned, the first thing that I can tell you is that in the second half of this year, we expect there to be growth compared to the first half. And consequently, in 2021, we plan to reach the level which is higher, the pre-crisis level 2019. That's the way I will put it. I'm not in a position to tell you the exact figure, let me keep this suspense, but we will definitely be above the pre-crisis level of 2019. And generally, we intend to make the most out of the opportunity that will be made available to us as part of an additional production quota granted to Russian Federation, which is the additional 100,000 barrels a day every month, before the end of the year. Starting from August until December, there will be an additional 100,000 on top of the quota. And so as far as our share is concerned, we would definitely need to make the most out of it. And that is the way we're going to act. And in case there is anything additional we will definitely use it because we do have production opportunities. Thank you. And as far as the fringes are concerned, I'm sorry that I needed to say it, but in order to save time, we will simply forward to you, it in writing.