NK Rosneft' PAO

LSE:ROSN

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to today's Rosneft Q1 IFRS Results Presentation. I now like to hand over to the management team to begin. Please go ahead.

[Unknown Executive]

[Interpreted] Good evening, dear colleagues, ladies and gentlemen. I'm sorry for a bit of a delay in starting this call. We had to work on some technical issues organizing this conference, but it seems that everything works out all right. On our side and on side of Rosneft, the company -- this conference call is being attended by the key executives. And let me mention few names just to prepare you for potential questions. Eric Liron, First Vice President in charge of E&P; Artem Prigoda, the CFO of the E&P stream; Didier Casimiro, who is Vice President and in charge of refining, petrochemicals, commerce and logistics. This is Otabek Kuchkarovich Karimov who is in charge of the commercial stream; Avril Conroy, who is Vice President and in charge of retail business of the company; Alexey Karavaikin, who's in charge of the investment stream; [ Alexey ] [indiscernible], who is the head of the Strategy Department; Alexander Krastilevskiy, the financial director of the downstream and other company executives. So we're in full team and are ready to present to you the results of the first quarter. So the reporting period that we lived through was relatively contradictory in terms of the main profit drivers. However, its results manifested success. We've been able to strengthen our key financial performance, EBITDA and free cash flow compared to Q1 last year in a material way. The Board of Directors announced the guidelines for the 2018 final dividend. Shareholders may enjoy a record dividend payment in the company's history due to the profit growth and the [ replication ] of the industry highest dividend payment ratios. We shall briefly review the most important operational and financial performance highlights as well as answer your questions. And in terms of the key performance indicators, I would note that this presentation refers to the information about future events and outlooks. Rosneft operations reporting period have been seriously affected by external limitations, as I said, due to the effect of the company is currently operating within the currently effective OPEC+ deal. And also, in the first quarter, we witnessed a whole series of events and decisions by the regulators of the industry and as far as the stabilization of the domestic refined product prices are confirmed in changing the regulatory mode for the domestic market as such. Based on results of the first quarter, we may overall conclude that the management efforts were able to minimize the negative effect from these events and achieve a positive financial performance. Almost -- or after a 2% average hydrocarbon production growth in the previous quarter, the reporting period saw a 0.6% production decline compared to Q4 2018. During those few months last year when the company operated without external pressure, its management was taking the necessary steps to ramp up the output. Rosneft has been able as you can conclude to profoundly overtake its direct competitors. Under the new oil production restrictions, the company is demonstrating an almost 4% average daily hydrocarbon production growth, continuing to invest into its brown and greenfield projects, which over the next few years will enable us to tighten and cement our leadership position in upstream. Well, as far as our results are concerned in the E&P area, let me highlight certain key things. Firstly, the company's brownfield development program is carrying on. In the first quarter of the current year, [indiscernible] demonstrated a stable high level of output. In the reporting period, the production of oil from this asset amounted to 1.3 million barrels a day, which was higher than the first quarter level last year by 1.3%. The high level of production we achieved at other mature assets at Samara, Nyagan and Varyogan. Following the investment stimulus package granted by the Russian government to the [indiscernible] field, we continued to ramp up drilling and adding on new operating wells at this very important project. As a result, this major asset currently moved its production decline rate to below 1%, reversing the trend of the recent years of 3% to 5% annually. Secondly, the company remains a leader of the Russian oil industry in terms of launching new production projects. We are actively during the past quarter invested into the development of the recently launched projects of the Suzun, East-Messoyakha, Yurubcheno-Tokhomskoe, Kondinskoe, Tagulsk, Russkoye, Kuyumbinskoe fields, as well as the second phase of the Srednebotuobinskoye field. The total output of hydrocarbons from this assets and the shareholder of the company reporting period amounted almost 370,000 barrels of oil equivalent a day. We expect that by 2022, the production from the greenfield projects in the company's assets in Russia will amount to about 20% from the total output of the liquid hydrocarbons. To us, this as unconditional strategic focus and priority which was defined by the strategy set forth by the Board of Directors. We have continued in the past quarter to an active phase of the construction of the key operational facilities in the Rospan project. This is the most important field for us. And we expect that in the midterm perspective, the annual output by Rospan would amount to about 21 billion cubic meters of gas, with considerable amounts of liquids, hydrocarbons which are going to be produced there, as well as actively we work over launching this project within the next 3 quarters. We are running ahead of schedule in developing the Zohr field in the Egyptian offshore. The daily level of output by the end of the reporting period reached 64 million cubic meters. And before the end of the current year, we are planning to ramp up this volume up to a design capacity of 64 million cubic meters a day. The amount of refining of oil in the Russian refineries amounted to 24.5 million tons, which approximately corresponds to the level of the first quarter of last year. The company management continues irrespective of some serious and negative changes in the external regulatory environment to work over prioritizing its portfolio in order to be able to achieve the maximum economic effect despite as I said quite a serious external limitations and restrictions and negative developments in this segment. In the first quarter of this year, we witnessed a gradual recovery of the oil prices against the continuing geopolitical instability. And at the same time, we should note that average oil price remained at the level which was below the previous quarters which negatively affected the company's revenue. Simultaneously, we saw positive effect of the export duty lag. And in this way, we were able to witness the growing EBITDA in the reporting period due to the fact that the export alternative in the netbacks within the main oil sales channels demonstrated a considerable growth. I would like to separately note the activities undertaken by the management of the company in controlling the cost compared to the similar period last year, which turned out to be much lower than the producer price index dynamics. And compared to the previous quarter were similarly, we were able to note a considerable reduction of the average cost. In a nutshell about our financial performance. As a result of the reduction of the oil price in the first quarter, the revenue went down by 3.4% compared to the fourth quarter of last year, running up to the resulting 2.4 -- RUB 2.1 trillion. At the same time, this didn't deter the company to grow its EBITDA by almost 12%. What we saw the EBITDA grow in compared to fourth quarter of last year, and so the quarterly EBITDA was RUB 589 billion. The EBITDA growth compared to the similar period last year amounted to 42%. As I previously mentioned, as the result of the tax maneuver and a transition to the manual controls and comparatively non-market-based regulation of the domestic and foreign product market in the first quarter 2019, we were able to see the necessary reasons for the refining and retail business assets being devalued to the total amount of RUB 90 billion, which negatively affected the net profits for Rosneft over the past quarter. In terms of the net results, over the first quarter of this year, the net profit attributable to Rosneft shareholders amounted to RUB 131 billion. This is the growth by 20% compared to fourth quarter of last year and 62% year-on-year. In the first quarter of 2019, the capital investment by the company inconsiderably changed compared to the similar period last year. As we have previously stated, the budget endorsed by the Board of Directors in the current year is where we are planning the amount of investment at the level of about RUB 1 trillion -- RUB 1.2 trillion. However, on the other hand, we certainly see that there are changes taking place in the external environment and we shall adjust our plan for capital spending depending upon the oil price dynamics. And we will certainly mind the way our key strategic objectives are being achieved, which is the growth of the hydrocarbon production. And so I do not rule out that the level of capital investment this year may exceed RUB 1.2 trillion. It may run up to RUB 1.3 trillion. Bear in mind, our plans to maximize production within the midterm perspective, including as related to the OPEC+ evolution because today we don't have full clarity as to the quotas which we may enjoy. In terms of the second part of this year, there is no clarity on whether such quote is going to be made available or not and so we put in here a certain delta in order to provide the market with a guidelines of what we're going to do with our investment spending. And as part of the financial performance of the company is concerned, Rosneft is undoubtedly in a positive trend and as far as the net debt-to-EBITDA ratio decline is concerned because today, we have the net debt-to-EBITDA at the level of 1.3x. And compared to the level of the end of the last year, net debt in dollar denomination grew first half because we really like this growth into the growing of the ruble denominated part of the data, as well as the ruble appreciation. As you may know, recently, a new IFRS 16 leases standard was introduced, which changed the structure of the calculation of net debt and produced negative effect over its level in the total amount of RUB 103 billion. At the same time, the company continues to perform well, not only reducing the overall net debt level as well as reducing its short maturity part. As you know, by the end of 2017, it written down to 56%, while today, it is 20% as of the end of the fourth quarter of last year. I would similarly draw attention to the fact that during the reporting period, the company used some part of its cash on the balance in order to repay its short-term debt. The amount of such payments within the reporting period was reduced by almost USD 7 billion. I will separately note the stable decline of the amount of prepayments as well as a positive dynamics in terms of return of prepayments within the contracts which have been concluded over the previous few years. Specifically, the [indiscernible] went down from USD 2.3 billion in the end of last year to the level of USD 1.8 billion. That is a fully schedule repayment within the contracts, which, as I mentioned, goes strictly within this catch out. A year ago, the Board of Directors supported the proposition by the management in order to increase the profitability for the shareholders and the improvement of the investment attraction of the company. We -- as we have reported based on the results of the last year have are completely trained the targets set forth by the Board of Directors. We separately announced that in our press release for the second quarter of the current year, we're also setting ourselves a new ambitious task to reduce [Audio Gap]by more than USD 3 billion, which is the kind of task which we will run as a perspective one to be completed towards the end of the second quarter last year. On April 16, the Board of Directors of the company issued this guideline for the final dividends for 2018 considering the first half year payments. The amount of dividends for 2018 will run up to almost RUB 26 per share. In case this proposition is approved by the shareholders, the dividend per share will grow almost 2.5x compared to a level of last year and by more than 4x compared to our dividend payment which took place in 2016. Such picture in the distribution of profit I hope demonstrate that the company continues to work for the benefit of its shareholders and will strive to achieve the highest results in both in terms of the rate of production, efficiency of its investments and providing for the high level of the financial stability of the business.Thank You for your attention. We are now ready to answer your questions.

[Operator]

[Operator Instructions] The first question today comes from Karen Kostanian from Bank of America Merrill Lynch.

[Karen Kostanian]

I am Karen Kostanian from Bank of America Merrill Lynch. I've got one question for you. Due to a potential inquiries of investment in terms of there being a separate focus on production, do you consider any acquisitions in Russia or aboard? And is there any specific focus that you may have doing more on the domestic acquisitions or do you consider something else abroad?

[Unknown Executive]

[Interpreted] Karen, thank you very much for your question. We've always been commenting by saying that we're very much focused on the organic growth strategy, which is our topmost priority. You're very familiar with our strategy and very much of its details, which in the first place defines the maximize the returns from our current assets. But at the same time, the company undoubtedly always maintains a dialogue with its potential partners. We are assessing various opportunities in a clear way. We're not commenting on any market speculations and any unfinished negotiations which would be very much in current, but yet again, I shall underscore that the reduction level of our net debt is our current priority. We are defining to ourselves a quite ambitious goals to reduce this level towards the end of the second quarter of this year, and we define it as our key strategic priority. Thank you.

[Operator]

The next question today comes from Ron Smith of Citi.

[Ronald Paul Smith, Director and Senior Russian Oil and Gas Analyst]

Congratulations on the good quarter. Thank you for the presentation. Could we go back to Rospan? You mentioned in your comments that it would be launched in the next few quarters. Maybe I missed something, but the previous guidance, I remember was that it will probably be late in the second quarter, maybe around June of this year. I was curious if that's still actually the target or if there had been delays. And if so, what are they from? Is it either just issues with getting equipment installed or it might have to do with the constraints put on by the OPEC+ agreement?

[Unknown Executive]

[Interpreted] Yes. Ron, thank you for your question. The implementation of Rospan project is going according to our plans. In our presentation based on the results of last year, we have stated that we were forced to put it on hold. I mean the launching of our new major projects, Rospan was on that list, and so understandably, this delay was related to various limitations and quotas imposed upon the company. That is why the schedule for this project was adjusted to the limitation that we have to cope with, and we plan to launch Rospan this year. This is the kind of plan that we are adhering to and we are mentioning the end of the current year as a scheduled deadline for it to be launched. And as I stated, we in many ways cannot respond expediently do some of the OPEC+ decisions. So we believe that an optimal solution that would enable us to maintain ourselves within the current quotas towards the end of June this year and in case they are extended into the second half at the expense of Rospan being commissioned into operation in Q4 this year.

[Operator]

The next question today comes from Igor Kuzmin of Morgan Stanley.

[Igor Kuzmin, Equity Analyst]

I wanted to raise 2 questions. The first one is about the goal that you mentioned, which is reducing the net debt in the second quarter, the USD 3 billion. And I wanted to ask you whether this particular figure includes the reduction of debt related to the return of prepayments as part of the oil deliveries to China or to the traders. And my second question is about your assets in India and in Egypt. Could you possibly comment on the level of EBITDA and cash flow that these assets have achieved in the results of the first quarter?

[Unknown Executive]

[Interpreted] Well, let me allow to begin with your question about Egypt and India. I guess that Artem Prigoda may additionally mention something about our Egyptian asset. All right. Let me begin maybe on the mentioning India because it's just one point, which is about Zohr and about the Vadinar. As far as Indian project is concerned, I would like to say that we are following our plan, but we are looking at about 1.1 as an EBITDA, which means that most important work which is going to be done by the team clearly reconsidering the basket of crudes after the Iranian deliveries and supplies have been put on hold. And I would like to immediately state that it was allowed for us to use the Venezuelan oil because the one that we have from Venezuela delivered to the Indian refineries, they come from the prepayment contract with Rosneft, and that was why the State Department issued its permit for that. And about the Egyptian assets, we will hear from Artem Prigoda.

[Artem Vladimirovich Prigoda, Head of the Department]

[Interpreted] With respect to Zohr, we haven't yet achieved the positive cash flow. That is why to talk about positive EBITDA is something that we cannot speak of, but the production of gas is running ahead of schedule because this year, we are achieving the desired level of output and we expect, depending upon the macro environment, next year 2020 to be in free -- in the positive free cash flow. And so this is an example of a successful execution of project on time and budget and the possibility to produce more than we originally estimated at lesser cost. Very well.

[Unknown Executive]

[Interpreted] And responding to the first part of the question in terms of the net debt reduction, I would like to, to mention a bit of a note that in our press release on a conservative side of things, we've written that the reduction of the net debt next quarter will take place at least by USD 2 billion. So from the point of view of the market guideline, please just go for the range of USD 2 billion to USD 3 billion within the next quarter which is second quarter which will take place primarily through the optimization and rationalization of our investment program and through the operation and organic cash flow which company is going to generate within this quarter. Thank you.

[Operator]

Your next question comes from Alex Comer of JPMorgan.

[Alex Robert John Comer, Research Analyst]

Regarding the refining business, could you take another RUB 90 million write-down here. Just looking at your accounts, you give a figure for the gross distribution margin for petroleum products as an assumption suggested by that [ bang ] rate. Could you just tell exactly what you mean by gross distribution margin? And what was the figure before you make these [ bang ] revisions? It also looks to me like you cut your cost of capital with regard to this impairment by about 100 basis points, which means that the cash flows estimates has to come down by a lot to get to a downgrade. And then also look at your actual refining performance in the first quarter is not too bad. So I'm just wondering what is the thinking here with regard to downgrade in terms of the write-down? And are there going to be any further write-downs ahead bearing in mind as we go into IMO conditions where volume could be poor?

[Unknown Executive]

[indiscernible]

[Unknown Executive]

[Interpreted] Yes. Thank you very much for your question. Look, by answering about this principle decision to write off as I've explained, it is primarily related to the external environment and the regulators making decisions to extend the freeze of the prices in the domestic market and continuing the big tax maneuver. In an understandable way, we have several factors at play. For example, this RUB 90 million includes in itself, a very good example is VNHK project, which, as we know, was a profitable one within the then existing taxation system. And today, because of the big tax maneuver, it's not profitable, and as such, it was excluded from the company's investment program. The same relates to a number of projects in upgrading various installations and assessing the future profitability of our key refineries which was done by our auditors together with our in-house teams. So the decision about [indiscernible] and everybody heard about the agreements which have extended currently for the 3 months period to regulate domestic prices. We do not see as a 0 value, I mean, in terms of the possibility of such agreements being extended further into the year. So in terms of the conservative approach to our balance, we made a decision after consulting our auditors to do these write-offs. Now in terms of the specific figures, I would suggest that you should probably take it off-line and have a conversation with Andrey Baranov, our IR manager. We are ready to share with you more details as well as with other shareholders in a more detailed dialogue so as not to really lose the trail of clear thinking about it.

[Operator]

The next question comes from Ildar Khaziev from HSBC.

[Ildar Khaziev, Analyst]

And could you give us a guideline about the way the foreign projects do influence the consolidated upstream EBITDA?

[Unknown Executive]

[Interpreted] We will have Artem Prigoda who is the upstream CFO comment on this.

[Artem Vladimirovich Prigoda, Head of the Department]

Dear colleagues, in terms of the upstream EBITDA influence is not more than 5% really.

[Operator]

The next question comes from Arthur Meridian from VTB Capital.

[Ekaterina Rodina, Senior Oil & Gas Analyst and Equities Analyst]

[Interpreted] This is Ekaterina Rodina. Thank you very much for the presentation. I got a question. In your report, there is RUB 31 billion as a reverse excise. Could you please comment whether I understand correctly that this is 100% reverse excise which is a rebate for the oil effectively something that previously used to be a refining subsidy to last until 2019 or does it also include the dampening figure? And if it is included in it, could you separately identify what it is? And if it's not, could you point as to where it is and quote it to us.

[Unknown Executive]

[Interpreted] Alexander Krastilevskiy is here from downstream.

[Alexander Krastilevskiy, Adviser to the President]

[Interpreted] Thank you very much. The figure that you are quoting, RUB 31 billion, is the sum and the amount of the reverse excise, which is a part of the customs duty reduction, and the 2 dampening effects of the diesel and gasoline -- motor gasoline. Diesel negative and for the gasoline and positive RUB 118 billion for diesel. So both of these components are part of the excise because the way that is the taxation system is tuned and they do end up being in the refining P&L.

[Operator]

The last question today comes from Mitch Jennings of Sova Capital.

[Mitchell Jennings, Research Analyst]

Just one question. On this contaminated oil, this is looking forward a bit, maybe you'll answer it. But on the contaminated oil story that's going on, have you guys started to look at how this will impact your results for the second quarter, if at all?

[Unknown Executive]

[Interpreted] Yes, Mitch, thank you very much indeed for your question. Yes, without doubt, we are trying to understand what kind of ramifications it might have for the company, but it's premature to try and come up with any conclusion. Because we're not the only ones I'm sure, but are going to try and come up with some conclusions from it. So I believe that for the purpose of our first quarter performance conference call, it's too early for us to comment. I think that in the next few weeks, we will have more clarity in this. Dear colleagues. Once again, thank you very much indeed for the opportunity to discuss with you the results of Rosneft's first quarter performance. We will continue doing our business. And any questions you might have, Andrey Baranov, Pavel Kushnir the people in charge of our IR department are always at your beck and call. Thank you very much.