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

[Interpreted] Ladies and gentlemen, good afternoon. Anna Sidorkina,Investor Relations speaking. Today, we're very happy to welcome you to our quarterly conference call, which will be dedicated to our performance on date covering 9 months of 2021. Traditionally, please allow me to introduce the management that is attending this call. With the comments on the financials, we will hear from Alexei Yankevich, who is the Deputy General Director for Economics and Finance. Upstream will be reported on by Igor Shkirov, the Head of the Planning for Efficiency Operations in Upstream. And then Nikita Anichkin, the Head of the Data on Department in Marketing and Sales will talk about the downstream. We also -- during the Q&A, we'll be joined by various colleagues from our core streams. And as always, before we start the presentation, I would like to remind us that all of the comments and all of the statements that may be made in the course of today's conference call, may and will probably contain various outlook statements, which pertain to the financials and the results of our business operations and all such statements with the exception of actual facts may be considered as forecast, whereby these are the statements about the future expectations based upon the current environment and various assumptions by the management and me, taken into account known and unknown risks and uncertainties, which may lead to the actual results materially different from the ones which have been referred to or were stated in the course of today's conference call. Thanks very much for your attention. Now I like to pass the floor over to Alexei Yankevich.

[Interpreted] Dear ladies and gentlemen, good afternoon and good evening. We would like to share with you today the performance update of the company's operations during the first 9 months of 2021. 2021 was when the markets have been recovering. And we ask that from that company, we're trying to use maximum opportunities at the market that are presenting us with and the fact that we do it and do it quite successfully can be seen through our volumes. We have been growing steadily, maximizing our output within the available type of opportunities. For example, the hydrocarbon production during the 9 months grew by 2.7% year-on-year. Similarly, we use all the available market opportunities in downstream, growing our refining volumes -- the refining growth volumes is considerable 7.5% compared to last year. And together with the favorable market environment that enables us to grow our financial performance. And in this way over the 9 months of 2021, our adjusted EBITDA has grown over RUB 7 billion with the growth of 13 years incremental on top of last year's with the net profit growing multiply towards the last year, and it is not very correct to compare to last year's but then once we've been able to achieve a very considerable level at RUB 375 billion, which puts us into the position which is much better than the pre-crisis here. As far as the quarterly dynamics are concerned, we're having consistently growing our output and the positive dynamics is seen quarter-on-quarter. The revenue growth was at 13%. The adjusted EBITDA grew by 10%. The net profit 5%, respectively, and that became possible remarkably thanks to the price recovery as well as us utilizing the output growth opportunities refining and the production of hydrocarbons for quarter-on-quarter grew by 5%, well in refining by more than 10%. With that, I will pass the call over to my colleagues in with respect to upstream and downstream in tradition, we'll begin with upstream. So the floor is over to Igor Shkirov.

[Interpreted] Good afternoon, good evening. Yes, indeed, the 2.7% was the growth of hydrocarbon output, up to 74.6 million tonnes of oil equivalent over the 9 months, the basic drivers were the production as well as the storage [indiscernible] field and considering the completion of the optimization program as well as the launching of the oil and gas infrastructure, which I'm going to tell you in a few more details later as well as including the targets. In gas, we do see a very daily -- good daily financial growth in terms of the process gain and the quarterly performance there it demonstrated so far. Next slide. In terms of the operation of course, here, the existing infrastructure and the environment that enables us to grow our production within the OPEC box, growth is -- we respectively are growing also our optimization program necessary to increase further our ARPU, and as a consequence, of the reduced production growth, but in terms of the brownfield is traditional decline that we do see and the low base compared to what we do otherwise. Next slide, please. So in terms of our major projects, wherever we like multiple growth in the Zima because the field has produced already 3 million tonnes of oil since the start of its operation. The first infrastructure facility has been committed into operation. And similarly, there a lot of achievements in terms of the efficiency of the field development, 112 fracking operations have been done, is partnered by just through one fleet, and we're demonstrating further records in terms of the drilling, 4.5 days from 25 by switching to a [indiscernible] . In terms of the fringes, we are launching the infrastructure also in the oil equipment facility at Chayandinskoye. At Pestsovoye we have commission to operations a central collection point as well as the pipeline for the high pressure at this province in Messoyakha. We also have the field pipeline launched operation because of the considerable growth of output now. With respect to the Tazovsky project, it was already has been put in place in the production drilling is ongoing. Next slide please. From the point of view of new technologies, I shall highlight a few points. The first is digitalization of the field structure. This is the digital twin of a physical facility over a process when in the virtually, you can see the operation of all of the facilities in terms of the production in the wells, but specifically reproduce all of the production process at an asset, which makes it possible to make a well-informed decision online. So as to optimize the overall field in a comprehensive way. So effectively, this is the core element in terms of the center for the production element, and that is being applied also at [indiscernible] and at the Eastern part of the Orenburgskoye. The second technology is the digital fracking, which is successfully being applied. This is the methodology which was set up in the consortium with the Gazprom Neft Institute, which is R&D center. It has gone through various tests and demonstrating very good outcomes. And what's important is that very considerable. We have been able to improve the oil production from the low permeability and the fact that it is being applied inside the company initially and then the drilling, which is effectively the self training program that we have launched, which enables the engineers in real time based on the indirect specifications to further identify and specify the collectors and the reservoirs because traditional information comes from the census, which are very much below the surface depending upon different levels and technologies in this particular program enable us to take data from the drilling beat really convert so as to correct the drilling trajectory. Next slide, please. Technology. The first ever in Russia, where we have the processing of the associated petroleum gas right there in location. Thanks to this particular technology, we are capable of effectively separate gas from the compensate and because it's a modular and it can be assembled 3x faster and technology is cheaper, so that enables us to reduce almost down to 7% CO2 emissions because this is kind of concentrate that effectively is not being flared, and that is being used in order to consume locally and very considerable effect from the cascading this solution throughout all of our operations.

[Interpreted] Yes. Good afternoon. I would like to introduce your attention the report about the downstream operations over the 9 months in the third quarter of 2021. As Alex previously mentioned, it has been quite a favorable environment. We remember how in the third quarter, the oil prices continued to grow. And here, you see the results of the growing demand as well as the gradual increase of our production within OPEC+ and the refining margin also has been growing at an advanced base. Primarily that is conditioned by 2 factors. First of all, the crack spread in automotive, gasolines and jet fuel. But here, I would like to know that by September month, the taxes on the gasoline return to the pre-pandemic levels of 2019. And secondly, the premiere on the domestic market grew primarily that growth has been conditioned by a massive maintenance in the Russian refineries, which can led to a shortage of the motor fuels and respective price correction in the production of the motor fuels that Gazprom Neft refiners during that period was at their technological maximum. In terms of the balance of distribution, we have been going compared to 2020 against the backdrop of a favorable environment and the maximization of loading of the refineries. There was a little bit of an overflow from the export channels. But at the same time, the company was able to fully extend to its commitments in terms of the shipments. Next slide, please. Well, in terms of refining, like I previously said, it's a very good situation, enabled us to effectively grow our refining volumes over 9 months in 2021. We're growing compared to 2020 as well as pre-pandemic 2019. Overall, in terms of the depth of refining and the output of the light one products, in 2020, I should remind you, against the declining demand, the loading of the refineries was much lower which predetermined the averages. And so in 9 months 2021 against the comparable configurations in our technology, we were able to grow our refining volumes. And we can see that definitely there is a slight decline in terms of the gas ones as well as the output of the light ones. But one should also note in terms of the Moscow refinery, the planned upgrading of some of the units have happened. But like I said in the previous slide, the refining margin and the whole basket remained at a very high level. Next slide, please. Now with respect to B2B segment, the company has been growing its sales volumes with respect to most of the premium channels, sustaining a high share in the domestic market, the various management events. One should specifically mention the jet fuel segments was where we were able to grow our number of airports up to 24. Amongst the new initiatives, I would like to say that we entered into an agreement with Aeroflot to set up a new jet with the minimum carbon footprint. So in the future, this new fuel is going to be certified under the Russian International standards. The company also switched to its settlements with China counterparts, generation, for example, investment apart from lowering the transaction cost. It also bears a very positive impact upon the capital. In the bunkering business in Q3, we introduced into operation Dmitry Mendeleev was new Russian bunkering vessel that we told you about. Also a positive review has been received from the government regulators in terms of the compliance of this particular bunker vessel, to the environmental requirements and protection in the Baltic and other seas. In terms of the lubricants, we continue confirm our competitiveness with respect to our products in the international market. Amongst this particular event, so I should say that our industrial lubricants have been approved to be used by such company as well-known international brands. We started selling lubricants through the electronic exchange by Gazprombank. So this electronic platform improves the access by the consumers to the products of the company, enabling us to additionally sell more. In terms of the bitumen business, I would say an important event in Q3 was entering into a contract with the federal agency for aviation on a joint development of the high-tech bitumen materials to service airport infrastructures in our R&D center, Gazprom Neft and a special recipe for the materials was developed in terms of the airports as well as to withstand specific close that the landing strips are requiring. Next slide, please. A few words I wanted to say about our introduction of the lean system. The company continues to improve its operational efficiency due to a very in-depth survey of the internal optimization possibilities. And so as to comply with the best international practices. The success indicators and the work we do was being rewarded by the Lean Forum Rewards, where 3 projects have been nominated for the development of the infrastructure and the gasoline station network as well as the project that enabled us to expedite the crediting of the payments into our business account down to 3 days as well as reduce operational downtime for the I guess, in stations and switching to the electronic cash registered checks. In conclusion, I would like to separately identify an important events in the logistical area. We are currently doing work to decarbonize, which fully embraces the -- follow the whole of the supply chain from the field all the way to the end consumer in Europe. We have signed a bilateral agreement in cooperation with the Sovcomflot company. The basic driver behind that joint work will be decarbonization and the green agenda. But during the first stage, we plan to switch our shuttle, vessels and tankers, which deliver our refining to the [indiscernible] in terms of the ethanol, ammonia and hydrogen. The next point will be the floating oil and depots, which half the system in terms of the exchange of fuels between the shuttle vessels and the floating tank farms, completely excluding any [indiscernible] from Rotterdam [indiscernible] Sovcomflot, long-time charters, which operate off the LNG. So thank you very much for your attention. This is it for me.

[Interpreted] Now a few more details about our financials. In conclusion, analyzing the dynamics of the adjusted EBITDA and the net profit, like I've stated previously, the primary driver was in the market, recovering in prices, growing as well as our maximization of volumes and efficiency improvements. Let me go to the next slide right now. It is a factor analysis of our main indicator, which is adjusted EBITDA. So over the 9 months, we do see that the pricing factor definitely was a defining one, but besides the company acted to grow its output volumes and refining volumes, which added additional RUB 28 billion to the financial results compared year-to-year. Now in terms of the quarterly dynamics, RUB 17 billion on top of the pricing factor and RUB 8 billion simply in terms of additional volumes and internal efficiency improvements. So the financial performance growing in such a way enabled us to achieve quite a material free cash flow, which enables us to both reduce our borrowings as well as pay out dividends like in the case with the dividends that we're going to pay this year as well as the ones that we're going to be paying in the beginning of next year covering the 9 months of 2021. With regards to investments, the dynamics here may not look very logical because the absolute level of investments -- investment expenditures went down by 7% year-on-year, I mean, 9 months this year to 9 months last year, which can be explained primarily first of all due to the staged nature of the major project execution because we finished the active investment stage with regard to a number of projects, but yet haven't yet started investing into the next phase of them. Also, it came because of an uneven optimization of investment activities, which we conducted as our response to the crisis last year. And the basic effort to develop on the third and fourth quarter, but also partially impacted the first and second quarter. So if you take a look at the 9-month dynamic, there is a bit of a reduction. But overall, our target and our guidance for this year, which is 450 plus take, it will stay. So one should expect a certain investment growth in the fourth quarter. And in conclusion about our financial stability and our debt burden. Here there's not much to say because the figures here speak for themselves. It is true that we've gone through a considerable debt burden decline. And the relative debt burden and our debt-to-EBITDA ratio of course, in the third quarter, it went down to 0.32, which quite naturally creates quite a resilience to us in terms of the debt burden generally. But as far as the payment profile is concerned, it's also quite comfortable without having changed considerably since our last conference call. With that, I would like to finish my presentation, so as to leave more time for Q&A. So please carry on now.

[Operator Instructions] [Foreign Language]

[Interpreted] So there are two questions. Congratulations on such excellent results. There are 2 quick ones. The first one is about your cash flow report over the 9 months, RUB 12 billion of revenue in terms of your sales or your shares and could you please explain the nature of this income? And my second question is about the dividend because we've seen that over the past 2 years, the company has been paying its interim dividends covering 9 months period. Should it be considered as a stable trend? Or are you thinking sometime in the future to also basically revert back to the interim payments for 6 month periods?

[Interpreted] Well, Andre, thank you very much for your 2 questions, but I'll again answering the one about the dividends. In as far as the dividend payment is concerned, well, first off, I would like to say that we adhere to the interim payment practice and that is what we're going to follow. Thus, we will be paying dividends twice a year. And as far as the specific timing for such payment is concerned, I mean whether we should do it for 6 months or 9 months. Every time it shall depend upon the current situation. And this is the decision that we will leave to our discretion, depending upon the situation, upon the market environment. And so here on this point, I'm not in a position to tell you specifically what are we going to do next year. For this year, we made the decision to make a dividend announcement for 9 months, which will finally be approved and paid in the beginning of next year. And so into next year, we will pay dividends for the fourth quarter with the announcement to be made later likewise for the final dividends. As far as future periods is concerned, we will monitor the situation. But this annual double payment is something that we will try and keep. And Andre, as far as the second question about this additional line -- income line is concerned, I shall say that we're actually developing partnerships. And this year and last year, turned out to be quite abundant in terms of us entering into different partnership. Quite often such deals entail not just one but several [Audio Gap] [Foreign Language]

[Interpreted] A couple of questions. First, what is your current level of idle production in terms of thousands of barrels per day? And question two follows on that. Assuming that OPEC+ continues to increase production by 400,000 barrels a day every month, when in 2022 or thereafter, will you run out of idle capacity?

[Interpreted] Thank you very much for your questions. So the first was basically about the idle capacities currently. And I shall respond by saying that effectively, we haven't got any left at present because when we were trying to manage our portfolio within the allotted quarter, we try to regulate our production, not simply by stopping, conserving or changing the well operation mode, but also through the drilling because if we were to do that only through the well operation, that would have been irrational and that would have pushed us into a frozen capital position. So we try to avoid exaggerating it. So whenever the growth opportunities presented themselves, we were able to compensate and use these capacities which haven't been practically left at all. And so towards the end of the year, we won't have any left. And so further on, we will grow our optimization and drilling. If we do see the opportunities for future growth, something that we are trying to get ready for. And answering the second part of the question, with regards to what the opportunities are for us next year, our senior executive, Mr. Dyukov, already stated that the company has the capacity to grow in terms of the [indiscernible] out by 10%. I do confirm it. Because in the end of the day, it will all depend upon the market environment, on the restrictions. But we do have the capacity to grow by additional 10% next year, which goes for the total hydrocarbon output.

[Foreign Language] Katya Rodina.

[Foreign Language]

[Foreign Language] The question was related to our ESG plans in terms of anybody who listen us into English. [Foreign Language] [Interpreted] Thanks very much, Ekaterina. But generally speaking, this was the ESG agenda. And so let me give you the answer because it's going to be such that we do entertain plans in the ESG area. And without doubt, we are keen to respond to this agenda. This is different matter that currently we are at the final stage of considering and preparing our strategy until 2035, and we plan to submit this strategy to the endorsement of the Board of Directors. In a certain part, that strategy would also have our sustainable development goals and various activities and plans, which touch upon this. And we would like to announce this new strategy once it is adopted by the Board of Directors, and we will definitely disclose our ESG plans within that strategy, it's a bit premature because we would like to wait for that stretch to be finally endorsed, after which we will definitely be sharing it with you and with the rest of the investment community once these plans are fully approved.