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

[Interpreted] Gentlemen, we are happy to welcome you to our conference call dedicated to the full 2021 and Q1 2022 operational and financial IFRS performance. We will offer the general review and the comments by Alexei Yankevich, member of the Management Board and Deputy General Director for Economics and Finance. The upstream will be presented by Igor Shkirov, who is the Head of the Department for Planning, Efficiency Management and Data Management in E&P; and Nikita Anichkin, Head of the Department of Economics Investments and Data Controlled in Logistics, Refining and Sales and Marketing, will tell us about the downstream. And during Q&A, we might be joined by various colleagues from different streams. And as usual, before we go about the presentation, I would like to draw your attention to the fact that some of the statements during this call will be those about various outlooks and the future forecast based on the current assumptions, while actual results may be materially different from various valuations expressed in today's call because of risks and uncertainties and other factors. So over to Alexei Yankevich.

[Interpreted] Dear ladies and gentlemen, I'm happy to welcome everyone. Today, we are presenting the performance results of Gazprom Neft in 2021. The external environment in 2021 was recovering. And so we were able to make the most out of all of the market opportunities. We raised our production additional 5.6%, taking all of the volumes that were made available to us as part of the OPEC deal. We increased our refining with 7.8% growth both through the market opportunities as well as launching the EURO+ facility at the Moscow refinery, all put together enabled us to achieve the financial results. EBITDA grew by 103%, reaching practically RUB 1 trillion, which is RUB 0.99 trillion. The net profit exceeded RUB 500 billion. Based on the results of Q4, we also ensured positive dynamics compared to previous quarter. And as far as the current activities are concerned, specifically in Q1, I would note our efforts to prepare our production leap because in Q4, we already saw that the market would require additional volumes. And so we increased our drilling optimization at the current well stock, which, at the beginning of the year, enabled us to follow our course with confidence because we look at production growth month by month. In February compared to January, we're fully compliant with the quota. And our daily production growth shall continue, and that produced a certain impact. You saw it up on the quarterly dynamic in OpEx and CapEx in Q4. But we did it intention because we are sure that this spending will be returned because currently we see that this company is demonstrating confident growth and all of the opportunities that are being taken within the OPEC quarter is something that we are sure of being able to perform. We are also confident in terms of our plans to grow our outlook by more than 10% this year. And so we also plan that our production dynamic compared to the rest of the industry will look really good. Amongst highlights, I'd like to, first of all, mentioned the commissioning the operation, the Yamal Gas pipeline, the launching of the Tazovskoye field and the establishment of a new cluster on the base of the basis of the Tazovskoye in North [ Yamal Squre ] because this cluster will be developed together with LUKOIL company that we have signed an agreement to set up in our respective JV. An important element is also launching the oil infrastructure at the Pestsovoye and En-Yakhinskoye field as well as the system for the transportation and commercial delivery of the Chayandinskoye field. So in this way, we practically have finished developing the infrastructure for the fringes. And over the next 2 years, we will reach the peak of production in these projects. In terms of refining, we have completed the hydrocracking installation. And also this year, we are also planning to commission the operation the whole set of [indiscernible] planning facilities and our refinings, and that would be a big milestone in developing our refining acumen. We're developing the petrochemical segment, and one of the important events is that our Serbian asset with the joint venture with Republic of Sakha increased this share to 90% in the HIP Petrohemija, which is petrochemical operation that we are planning to develop, and that is going to be a good expansion of the refining chain, particularly taking into the risk in terms of the demand for the traditional fuels longer term. Separately, I would like to mention the results of the company was able to demonstrate in the ESG. We have confirmed our high rating in the B category in CDP, which is Carbon Disclosure Project, which is a very good indication for the oil industry operators. The company entered into the establishment of the National ESG Alliance as well as continues to run various projects to reduce the emissions and other ESG developments apart from that I would like to note. The fact, this year, we are running the project to raise green finance into our environmental projects in the area of refining. So overall, I would like to say that despite the COVID restrictions in 2020 and 2021, all our projects are following the schedule. And specifically, the commissioned operation of such a project as the Gas Yamal when it happened before term. And similarly, I would like to highlight that we put the right path upon the window of opportunities to grow our production in a timely fashion. We started working on additional set of projects. And so today, we both have the opportunity to grow our output this year as well as within the midterm outlook, and we have the midterm growth drivers. Amongst such drivers, the immediate ones, the old fringes, Tazovskoye field and our flagship greenfield project, which is the West Zimnee, the production where is going to double this year up to 4 million tonnes. And at the peak, it will be comparable to the production of Novoportovskoye. Longer term, which is '24, '26, we see a considerable point of growth which is going to be our project to develop new [indiscernible] oil field. So you can see that our portfolio is quite balanced because we have the immediate drivers as well as midterm outlook and as well as the project, which will provide us with the growth longer term. With that, let me pass the microphone over to my colleagues. And the first one will be Igor Shkirov. He will present about the E&P.

[Interpreted] Yes. Good afternoon, dear colleagues. First slide is about our reserve growth because this year has turned out to be quite successful because the first time we crossed the threshold of the 4 billion tonnes of oil equivalent, where the growth was 283 million tonnes of oil equivalent. And what is important is that this is the kind of reserves which can import into production in the foreseeable future, which is the Zima project as well as the oil fringes project. Next slide, please. From the point of view of production, we're confident to grow both in oil and gas. And that is something that you can observe on the left chart. Now with regards to the key production growth factors, again, the fingers and the Tazovskoye field, where we launched an infrastructure this year as well as the Zima that [indiscernible]. And what is important in terms of our output, we have set ourselves a various psychological kind of a milestone with 100,000 tonnes of oil equivalent. Next slide is the dynamics of the operational expenses noted in the previous slide. There, you could see that in many ways, the kind of growth that we have coming from the new projects partially enabled us to reduce output in our mature assets. Overall, our operational expenses have been growing considerably below the inflation level, even below the consumer inflation. But with respect to the material field brownfields, we do see growth because the production is being substituted. We grew our optimization operations that is the factor that occurred mostly in Q3 and Q4. So the fact of the output is going to be reflected in the first half of this year mostly, but that produced a slight impact upon our expenses in a temporary way. But as far as major projects are concerned, in a standard way because of the production growth, the average expenses for production, they fall down like RUB 8 downward. With respect to the key operations and major projects, I will note Zima, one, where we continue to grow our resource base, which grew up to 550 million tonnes of oil and went out remaining complacent because we continue our exploration program because we can foresee the involvement of a new cluster. And so we are sure that growth here will be coming as well. We produce 4 million tonnes in total of specifically from Zhagrin oil field. And previously, during one of the reports, we spoke about the technological innovations such as the cluster-based fracking. We achieved some of the record indications, which is 112 fracking operations within a month. Also, the fringe projects had an infrastructure introduced into it. Later on, I will mention a few words. And now in terms of the Tazovskoye fields, like Mr. Yankevich mentioned, the infrastructure facilities are being introduced. And on the other hand, we have a JV coming with LUKOIL. Next slide, in terms of the large-scale projects, the launching of the marine Gas Yamal pipeline was -- I mentioned, that's being launched, a few more details. It is indeed a large scale happening, 20 billion cubic meters of throughput capacity, almost 60 -- I mean it is the length of the underwater section turned out to be quite an environmentally friendly project. We put it down more than 5 meters in depth because we're trying to protect the biosphere. And so all work has been done in order to avoid [indiscernible] being damaged. So that was quite a technology fleet. On the other hand, it has been commissioned to operation before term and enables us to grow our hydrocarbon production on that cluster. Next slide, please. These are the Pestsovoye and En-Yakinskoye field fringes, where we also commissioned operation. The infrastructure first and foremost at the Pestsovoye filed, we have now a central oil connection facility working, which enables us to achieve project performance. What is really notable is that this is kind of assistant which on the one hand, enables want to do that much quicker. But on the other hand, to do everything in a much more compact arrangement, which enables, one, not only to save in terms of timing and commissioning, but also during the run of the mill operations, but this is something so optimally designed. So I suppose that the key thing here is the infrastructure. Next slide, please. Well, I guess that's it. Thank you very much.

[Interpreted] Yes. Good afternoon, dear colleagues. I would like to present to you the review of the downstream performance. The market environment remains quite a favorable one in Q4 2021. The oil prices continued to grow as was previously mentioned. Thanks to the supply shortage. At the same time, the refining margin was growing at an advance pace and is actually currently staying at a record level since 2014. By way of the main growth drivers, this is growth of the crack spread for the jet fuel by 6.8% and this fuel spread by 8.0% comparing quarter-on-quarter. And the oil distribution balance growth year-on-year also comes from a favorable environment and the maximization of our refineries loaded up with the processes. Now next slide, please, refining. Good parameters enabled us to quite effectively grow our refining throughput in 2021. These volumes grew compared to 2020 as well as compared to the pre-pandemic 2019. Now in terms of the depth of refining and the output of the lighter products. In 2021, we also are way above through the level of 2019, practically catching up the unusually high 2020. With respect to the Moscow refinery, as you can see on the slide, there is a very slight decline of the performance indicators and considering the results of the previous quarter. We already told you about the results. This is the planned maintenance and the re-upgrading of the cracking. Speaking about the -- even despite the oil refinery planned maintenance in Q4, the overall annualized result is positive, particularly, as far as the output of the light products is concerned, which is a direct consequence of the commissioning and the operation of the new installations that Mr. Yankevich referred to. But a few more details on the next slide, please. Yes. We identify 2 main events, which were important to us, not only in terms of operation, but also of a good environmental impact. First of all, we completed the upgrading of the catalytic reforming installation with the capacity growing almost by 160,000 tonnes a year. And secondly, we also commissioned to operation the hydro treatment and preposition the of the diesel fuel with the capacity of 2 million tonnes a year. And the introduction into operation of these installations enables us to grow output of high-margin kind of products like the winter [ high state ] diesel fuel and the Arctic class of fuel, including the motor fuels. But in standard, also enables us to grow our supplies into the eastern part of Russia, where during the winter season, usually, there is a bit of a shortage of the winter fuels and arctic type of fuel. But apart from it, speaking about ecology, these installations by 2024 will enable us to reduce our emissions by about 1,200 tonnes a year. Next slide, please. Now over to our premium sales. The company has been growing the volumes of its sale throughout the majority of its channel. During the reporting year, our market share grew within all of the key areas. The high quality of our products continues to receive a lot of good consumption in Russia and abroad. In terms of the key events, the completion of the bitumen installation in the Russia, which is a major event for the bitumen business because the new installation would enable one to increase the supplies of the polymer bitumens in the South Federal District. Now the inputs for the bitumens means would be high [indiscernible] which is being produced by our Moscow refinery. So principally, this is a very positive kindly development. But at the same time, I would like to note, the purchasing of 51% of the jet fueling system in the Osh city airport in Kyrgyzstan. This transaction would enable us to grow the volume of sales by more than 6,000 tonnes a year. And overall, this kind of an acquisition is an important stage in implementing our strategy, both in terms of broadening our presence in the Middle Asia as well as increasing the number of airports where we are present. Similarly, I would like to note the development of the low carbon initiatives that the company is pursuing. We organized the first fueling with the minimum carbon footprint, which was fueling the Euros Airlines flight, but also the sharing in our fuel mix is now exceeding 30%, which enables us to reduce the CO2 emissions for that particular flight by almost 1/3. And this is a slide where I would like to give you more details about the work we do in the low-carbon jet fuels. That is an extension of the previous slide. In December 2021, we signed a declaration to create Eurasian SAF Alliance, which is the first Russian airlines of the developers and the producers of the jet fuel with the minimum carbon footprint, which is passed from Gazprom Neft, Airbus, Aeroflot, S7, Volga-Dnepr Company and the leading Russian R&D institutions. The key research center will be our technology and R&D development center in St. Petersburg. The pilot amounts of SAF are going to be planned to produce at the Moscow and -- on Moscow refinery. In 2021, together with the Alliance members, we are planning to go about various experimenting. And hopefully, by 2024, we will already perform the first flight by using our own environmental friendly jet fuel. Next, over to our engagement with the customers in the motor fuels market. Here, I would like to say a few words about the way we are developing the digital customer journey. Well, first of all, the number of active users of the mobile app for Gazprom Neft currently is 2.5 million people a month. In the small retail, almost about 58% of our customers use a personal digital office, while the amount of the small wholesale transactions which pass through that particular channel has reached 35%. Also, it is worthwhile mentioning the completion of putting together the customer journey in our interaction with the corporate customers. All transacting now can be done through the personal office as well as various financial services through such application, personal offices. Next slide, please. Personal accounts. Next, I would like to say a few words about the way we are developing the project to produce catalyst. In December 2021, they took place the inauguration of the center to test [indiscernible]. That center experimenting is a unique R&D facility, which would provide for continuous research and improvement of the technologies, both for domestic as well as for foreign customers who use our catalyst. Apart from it, in the center, we already finished the hydro treatment of that from gas oil catalyst and started trying the first Russian hydrocracking catalyst, following our own in-house technology. In conclusion, a few words about the way we develop our assets in Serbia. Mr. Yankevich mentioned previously, towards the end of 2021, NIS company entered into a strategic partnership agreement with respect to the petrochemical entity, which is HIP Petrohemija, which calls for increasing NIS' share up to -- from 20% to 90% as well as building a polypropylene production facility were 140,000 tonnes of output a year with a budget of EUR 150 million. Apart from that, certainly, we plan to upgrade and improve the efficiency of the current existing operations because we do ascertain there is some very good upside. And this is a very logical decision to extend this effective partners because HIP Petrohemija and Pancevo refinery has historically been integrated into the single chain. So that sounds well sold-out plan. This is it. Thank you very much for your attention.

[Interpreted] Dear colleagues, ladies and gentlemen, this is Alexei Yankevich back with the review of the financial performance. So as far as our financial performance and quarterly financial performance dynamics is concerned, principally speaking, these figures here speak for themselves quarter-on-quarter. Our EBITDA has grown by 7%, the net profit by 5%. And as far as the annual dynamics is concerned, as previously I commented, growth is there quite material traditionally. We share the fact, analysis of our main financial performance indicators. And over the next slide, we see our operational profit evolution year-on-year. And here, I would like to specifically note that apart from the fact that the main contribution into this came from the external environment and the opportunities that the market made available, but in the similar token, the internal efficiency growth as well as the growing volumes, optimization of our basket refining growth in the premium sales, all these domestic factors also made a considerable contribution providing for the almost RUB 60 billion worth of additional operational growth. In terms of the quarterly dynamics, the internal factors didn't play up that strong. The dynamics here was primarily affected by the price environment as well as the exchange differences and taxation. And as far as the internal factors are concerned, on the one hand, we note considerable growth in upstream simply because of the opportunities to increase output. On the other hand, traditionally in downstream, Q4 is seasonally not looking as good as the third one. So effectively, downstream was able to really perform at a very good level, really having possibly a very good Q3, but comparing Q4 to Q3, Q4 turned out to be not as much -- also a certain impact came from the operational expenses growth in as far as various optimization activities that we were putting together to ensure our growth in 2022. We put our bet on the growing production. But in Q4, we try to do as much as possible so as to bring about our daily production growth, which affected the quarterly dynamics. But all put together, Q4 turned out to be better than Q3 throughout the whole company. Now speaking about the cash flow, here I would like to specifically note that despite a large scale, good investment program being performed. We earned quite a considerable free cash flow, which enabled us to support our dividend activity as well as reduce our borrowing and strengthen our financial stability. The free cash flow came out to about RUB 500 billion, also about RUB 36 billion was M&A activity, acquisition of licenses, RUB 71 billion dividends and RUB 50 billion is what we have reduced our borrowings for our credit portfolio. And in conclusion, I would like to also say a word about investments in our financial status. With regards to investment dynamic, the level of CapEx grew by 6.10% year-on-year. The basic driver behind it were the new projects. You see the biggest growth is related to major project implementation, principally the ones that I've previously described, which is the fringes. This is Western [ Zhagrin ] field and that is also without a doubt, the refining projects being worked through. And towards the very end, our debt structure and net debt-to-EBITDA ratio. Here, again, the figures speak for themselves. By Q4, we have reached one of the lowest markets in terms of our net debt to EBITDA. So the maximum financial stability, which undoubtedly enabled us to come up with a sufficient level of capital in order to implement the long-term projects that I referred to which is about our midterm growth drivers as well as a big cost around which definitely will require sufficient investment. But we are currently feeling ourselves very confident that we will be in a position to fund it and to execute our projects on a timely basis, which will form the base for a considerable output volume growth. So I don't think that I will open up a big secret by unveiling a bit of a new strategy that we're going to have related to the future growth of our business scale. Yes, we are going through a stage of considerable growth. Our psychological milestone was 100 million tonnes. But something we can expect that the company shall remain dynamic and fast pace growing, and there will be certain structural factors at play here. Not everything is going to be happening like it has been before now. We will have a lower M&A activity than compared to what we were going previously. But nevertheless, the company shall continue developing itself dynamically. The company shall carry on increasing its output volume, so we are making a good foundation underneath that. This is it. Thank you very much for your attention, ready to answer questions now.

[Interpreted] [Operator Instructions] First question comes from Ron Smith, BCS.

[Interpreted]. So could you possibly give us a guidance to just form a full impression? How much oil you may be producing within '22, particularly it would be nice to understand what kind of growth you might have until December.

[Interpreted] Ron, thank you very much for the question, but I would like to avoid making assumptions in attempt to model and see what could happen if there were no restrictions. But at least right now, we have a pretty good understanding of the way situation is going to evolve with OPEC quotas. And something that I can tell you is that for this year, we are planning to have our total output to grow by more than 10%, and this is the hydrocarbons. I can definitely confirm this figure to you, will definitely grow by more than 10% year-on-year, which I believe is quite a serious growth. And without any need to try and imagine what it could have been otherwise if we were not to face any restrictions. And additionally, I would like to say that this more than 10% growth practically is going to be one of the biggest growth markets year-on-year throughout our history, if you look at it as an organic growth because used to have periods where we have been growing at a higher pace, record kind of pace, which, to a large extent, were the results of M&As and major asset acquisition. So if we have to look at this kind of an organic growth through the internal resource allocation, through the development of the new fields, greenfields, this 10% growth is going to be indeed a major record in our history.

[Interpreted] Next question comes from Alexander Burgansky.

[Interpreted] I have a few questions with regard to upstream and one question about downstream. With regard to upstream, could you please share with us your plans for the gas production at Novoportovskoye field. In 2022, I noted that in Q4, there was quite a considerable output growth. My second question about upstream, could you possibly give us some guidance about your Slavneft production -- oil production by Slavneft, including and excluding Kuyumba project. And the last question about upstream. You mentioned that the Zima project may reach the level of output of Novoportovskoye. Do you mean in excess of 6 million tonnes. And if positive, within approximately which time line. With regard to downstream, I also have a question about your plans to produce the SAF fuel. What kind of feedstock you plan to employ, to produce this kind of fuel? What are the volumes possibly? And could you say a few words about where you plan to buy this feedstock. Are there any limitations in terms of its availability?

[Interpreted] Alexander, thank you very much for your questions. Yes, and let me try and answer them by order of appearance. Well, the first 2 ones, I suggest that we should send you a detailed information. But for your understanding, the gas production at Novoportovskoye will grow. The pipeline is going to be operational throughout the full year. And we will give you an exact figure and definitely growth will commence. As far as Slavneft oil output is concerned, we would also send you the figure. But certainly, one shouldn't expect any surprises there. With regard to the Zapadno-Zimny field, Zhagrin, yes, that is the figure that you've mentioned. This is the kind of the volume that we're going to demonstrate. But the production peak will approximately take place in 2026 give or take. By that point in time, we plan to achieve the oil output, which will be comparable to the Novo portfolio. And about SAF, it's a bit premature to say anything because as we told you, we are currently trying to rally the market players around these whole issues. It has a lot of potential, but there is not much certainty because we definitely see right now that there is a beat of a disarray terms of the sources of the bio feedstock for SAF. We are looking into each of them, but we're currently going through the assessment stage. So once we get specific understanding, we will definitely share it out with the external stakeholders.