NK Rosneft' PAO

LSE:ROSN

Earnings Call Transcript 2018-Q2

[Operator]

Welcome, ladies and gentlemen, to the Rosneft Q2 IFRS Results 2018 Conference Call. I'll now hand over to the management team to begin.

[P. Federov, First Vice President]

Good evening, dear ladies and gentlemen. At our today's teleconference dedicated to the Rosneft's performance results over the H1, we will share with you our main performance results. We'll respond to your questions. My name is Pavel Fedorov. Together with me, we have Eric Liron, who is the First Vice President, in-charge of the E&P; Didier Casimiro, the Vice President, who's in-charge of Refining, Petrochemicals, the Commercial work and Logistics; and other top managers.Let me draw your attention to the presentation, contains as is usually the case, information about the future events and outlooks. So we are offering all of the usual liabilities and restrictions.In Q2 this year, there was a relatively favorable pricing environment in terms of the global refined products and oil. The ruble exchange rate over the same period went down, which led to the growing oil price for Brent oil by over [ 20% ] to the level of RUB 4,600 per barrel.Potentially, this kind of an environment will last for short period of time. And so we will be watching over the way the market may evolve over the next few months, bearing in mind a number of external Northern market factors, which usually influence the price, the NMEX.[ Registration ]in the domestic market in the Russian Federation remains tense against the price discounts in the domestic market for product compared to the export netbacks remaining, as of which definitely continued to produce pressure upon the level of profitability of the Russian refining business.Considering the quarter results, the average daily hydrocarbon in the production was [ 107 ] million barrels of oil equivalent. The amount of production of the liquid hydrocarbons grew by 8 -- 0.8%, up to 4.6 million barrels a day.The expectations of the OPEC-plus cuts -- restrictions being eased. The company, in that fashion, undertook certain a preparation, getting ready for the [ recurring ] rates. Having been given the necessary regulatory approvals, very actively increased the level of its production. As a result, by the beginning of July, we're able to fully recover our production up to the levels preceding the cuts.The company, as you may know, continues to actively develop new fields, which were launched in 2017, [indiscernible] in Kondinskoe, the total output from them in the first half year amounted to 1.5 million tons. Additionally to that, if we take a look at the whole spectrum of our projects, the implementation of all of the rest of the investment projects is going quite -- we are planning to launch this year. In this way, Rosneft, on its part, continues to grow its production according to plan, which has been set forth within its production program, as well as taking into account external limitations such as OPEC-plus cuts. Together with our partner, Sino and BP we continue to implement the Sakhalin project where, at this point in time, there are already 4 comprehensive gas treatment units, which in the shortest time period, will enable us to grow at a maximum capacity for the preparation of gas up to 49.5 million cubic meters of gas a day. During Q2, the total amount of refining, including the overseas assets of the company, reached 28 million tons including the 25 million tons, which -- that we have in the Russian refining. In this way, we demonstrate our rubles to grow by 1.5% quarter-on-quarter. Taking into account the completion of the big tax maneuver today, we are undertaking comprehensive [indiscernible] project analysis in terms of the investment of the modernization of refining and then to achieve the maximum give back considering the external financial environment. As you know, the key parameters were set forth as a result of the first accessible reading of the Draft Act in the Russian economy, but a number of key indicators remain open in order to further close them over the next few months.Now a few words about the financial performance of the company during Q2. A very external environment and work undertaken to improve the efficiency of the work of the company contributed to achieving a relatively high financial results. The revenue grew by 20% quarter-on-quarter. Having exceeded the level of RUB 2 trillion, which is quite understandable, it primarily haven't because of the ruble price for all growing. The continuous control over the costs and the export duty time lag enabled us to improve our EBITDA in Q2 almost by up to -- by 1.5x, up to RUB 65 billion.I will separately note the higher results of the net profit and the free cash flow, which exceeded the respective levels of the 2017 full year. Similarly, the company, during Q2, in a very confident way, were able to exceed its main peers in terms of its basic financial performances. And it seems to me that it would be worthwhile separately noting on the comparative assessment of the work done by the company. Because as you know, if we take a look at the P/E ratio for Rosneft today, then based on the actual net profit demonstrated over the past 12 months, we are having the market valuation, which is more than 2x lower than the multipliers set forth and announced by our competitors.For example, if you take a look at the last 12 months' results, our P/E is 9x. If you take a look at the P/E over the past 6 months, it's less than 7x. So quite evidently, this is the result that all of the global companies are having at a much higher level. And so we see that, that is definitely the backbone of the investment statement done by the Rosneft together with the growth that we are able to demonstrate. So today, in accordance with the Rosneft Strategy 2022, we are following our organic strategic growth from the assets, which we acquired during the low oil price environments. In May, we announced a set of measures to increase our shareholder return and raise our investment attraction. And we are in a position to confirm that we are definitely going within the top framework that we announced to the market and moving forward in order to achieve our objectives. Specifically, Q2 this year is where -- at 12 months, we were able to reduce the amount of our net financial debt in dollar denomination.And if we are to take a look at the short-term debt indications, that was reduced since the beginning of the year by almost 3x, 2.7x to be more exact, the net debt-to-EBITDA ratio went down by quarter down to the level of 1.5x. During second half of the year, we're going to continue the work undertaken previously, taking into account the targets that we are trying to fulfill. Let me remind you, this is to reduce the aggregate debt burden and the level of the prepayment in terms of the trading commitments by amount of at least RUB 500 billion, which is about USD 8 billion towards the end of the year.Previously, we had also announced our plans for capital investments. As you may recall, we provided you with a guidance before, the OPEC cuts were being changed for approximately worth RUB 800 billion. Today, we act within this particular range. But I don't want to rule out that if the cuts are suspended, which will lead to a very dramatic output increase, we will be in a position to see a slightly bigger CapEx particularly in E&P related to the recovery of our production levels and then it goes to achieve robust economic outcome for our shareholders.Also, and by part, I would like to mention that very recently, the Board of Directors approved the parameters and the structure of the acquisition of the GDR, of Rosneft in the other markets. So this particular program is already in a practical phase. I would separately note that this program is setting forth that within the next 2.5 years, the company will buy back up to USD 2.5 billion worth of its own GDRs and shares in the open market. And this is the effort which is going to be undertaken by an independent agent on behalf of the company. Select a dimensionally global -- leading global banks, so that we, together, have an understanding that the implementation of this particular program has a very probabilistic nature. I mean, the amount that we actually bought shares will depend upon the external market condition and environment and the price of the shares and whenever there will be a gap identified between -- the one that is decided by the Board of Directors between the fundamental valuation of the company and its market valuation by an independent bank agents will act as an acquirer of the shares in the market and will utilize the ensuing opportunities. So that we understand the approximate guidance here within the current market environment and taking into account the P&E ratio and the external environment, looks like if it were today, such acquisitions wouldn't be undertaken. Now against the conditions, which we may recall from April 10 and 11, we would definitely be in a position to see the work done by an external bank agent. So this work is going to be ongoing. And so with the help of such an agent of ours, we will be looking for such a little gap between the fundamental and the market valuation, which enables the company to achieve the maximum efficiency of -- on behalf of its shareholders. And so we're hopeful that with these initiatives being carried forward, we would be able to improve the shareholder role in the company and make it grow further because if you may recall, since the beginning of this year, the price of our shares grew by more than 10%. And so we hope that this is not yet the kind of a limit considering the kind of potential that Rosneft is able to demonstrate. Thank you very much for your attention. We're now ready to start the Q&A session.

[Operator]

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

[Karen Kostanian]

I have 2 questions. The first, we've seen quite a good production increase over the past 2 months. Could you tell us by this point in time, how much of free capacities you still have? For example, tomorrow, there won't be any OPEC-plus cuts. And my second question, it's about the technology guidances, which you gave us last year. Because I remember you were talking about quite a considerable increase in terms of the quality of your production and the ratio growing from the application of new technologies, I believe, it was written in the Rosneft-2022 Strategy. Are there any changes for the [indiscernible] right now? And by what margin will you be able to reduce your CapEx and OpEx within the next 3 to 4 years as a result of these initiatives?

[P. Federov, First Vice President]

Thank you very much, Karen. I understand your question. I would allow Eric Liron and Artem Prigoda to respond to your question because, indeed, there are certain improvements and there are certain targets that we'd be in position to share with you.

[Artem Vladimirovich Prigoda, Head of the Department]

Yes. Good day, Karen. Okay. To answer the first question, our spare capacity is still the same as we discussed when we went to Kuyumba -- sorry, the YuTM. So we have the possibility of increasing [indiscernible] already 120,000 barrels per day. And that's a level compared to the October 2016 benchmark. And for the time being, we're waiting for further decision from the ministry. And if we uncap the production, we had a potential by the end of Q3 to reach 200,000 barrels per day extra and by end of year, 250,000 barrels per day. Regarding...

[Karen Kostanian]

This is on top...

[Artem Vladimirovich Prigoda, Head of the Department]

Go ahead.

[Karen Kostanian]

This is on top of the 120,000 that you already increased?

[Artem Vladimirovich Prigoda, Head of the Department]

No, on top of the 120,000, we can increase or we can basically double it by year-end. So 250,000 minus 120,000. Regarding question #2, on the technology, okay. As discussed previously, yes, we have changed the compliance of the technology, and we're developing ourselves internally with our research center some improvements to existing technologies plus we're generating new patterns, and most of them are in the domain of downhole completion to help us get the maximum production out of horizontal wells and horizontal sections in various conditions. And that includes also parts recovered reserves. So this would lead -- equivalent barrels produced at the reduction of CapEx of about RUB 180 billion.

[Operator]

Our next question today comes from Ron Smith calling from Citi.

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

I got a couple of questions for you. First, when will the next stages -- or stage of Rospan and [ Russkoye ] Fairfield's be launched? Is that around year-end or should we expect those sometime next year? And then on the downstream, I'm just curious if you could give us any timelines for the completion of major hydrocracker projects such as the Tuapse, Novokuibyshev, Achinsk, Syrzan, and the delayed cokers at Komsomolsk and [indiscernible]. I have seen various reports over the years that they could be completed by 2019, 2020, but it seems to me those are not necessarily reliable. Any information would be helpful.

[P. Federov, First Vice President]

Ron, thanks for your question. [Foreign Language] We will have the management of our gas stream answer this question and Didier Casimiro from Refining, respectively.

[Unknown Executive]

Good afternoon, Ron, [indiscernible]. With respect to Rospan, I would like to tell you that the construction is going according to plan. Towards the end of the year, we will come into the phase where it will be testing and refining. Because currently, we're an active construction at the comprehensive gas treatment unit. We are installing the ovens to heat the [ media. ] So we do anticorrosion work at the railway terminal at [indiscernible] Station. We are also installing the [indiscernible] reservoirs and the pooling terminal equipment. We are laying down various rail connections. We have also completed the launching equipment at the automation, communication, fire systems. And we still expect to be all right with achieving our capacities in 2019.

[Unknown Executive]

So regarding [indiscernible] was created by year-end, meaning this year. Obviously, this will depend on what happens on the OPEC front, be it OPEC, OPEC-plus, OPEC-plus-plus, OPEC-minus, minus-minus, whatever, okay? But there are things, as they stand today, by the end of November, we'll ramp up significant with the production or scale.

[Didier Casimiro]

Didier Casimiro speaking. Yes, with present conditions, unless the Ministry some new strong recommendations regarding restrictions on productions.

[Unknown Executive]

[indiscernible] Well, I guess, I would respond in the following way. Considering the Account Draft Act on completing the big tax maneuver, the company is doing quite big announcements all our refining projects in order to yet again, identify each priorities in modernizing all of the existing capacities, definitely bearing in mind the currently achieved economic activities, the kind of priorities that we used to have shall remain and that also will be project with a high-level of readiness as well as the high-economic efficiency projects aimed at the stability of the segment and the specific market parameters in terms of the tax on the regime. So all of the projects, we are maintaining within that particular range, we will be completing not later than 2021. Thank you very much. Next question, please.

[Operator]

Our next question comes from Alexander Kornilov, calling from Aton.

[Alexander Kornilov, Senior Analyst of Energy Sector]

I would also like to join with my colleagues in congratulations for the excellent results. I actually got a couple of questions. First one is about big tax maneuver, which was not mentioned previously. How do you assess its results for the company? Because the Draft Act was passed in the third reading, are you satisfied with that? Do you expect any improvement or at least, not any worsening on the results of your refining operations, my first question. And my second question, in the context of your plans to further raise your output, your ability to increase the output, one of the projects which has seriously suffered as a result of the OPEC-plus cuts was [indiscernible], which was within the Bashneft basket. And so my question is, do you plan at all to raise your output for that different projects? And if so, to what extent you may expect it grow?

[Didier Casimiro]

All right. Once again, good afternoon. Didier Casimiro speaking. As I previously stated, this draft, which was passed, basically, as I said, first of all, makes us analyze everything. But I think I would like to know that based on the results, specifically the work done by Rosneft, the final draft -- I mean, not the Draft Act in terms of the completion of the big tax maneuver, reflected many initiatives that we came out with, for example, aimed at creating a stable and balanced fiscal regime in refining and to be more specific, a very important outcome was that this is the excise deduction from the work reduced by -- refined by refining together with the logistic lag, which amongst other things includes into our auctions for refinery as well as our [indiscernible] petrochemical project facility. But alongside with that, it would be also great to find that -- to know that the establishment of the [indiscernible] adjusted for the fiscal year in the oil industry so as to provide for a stable level of prices for the refined projects under the domestic market definitely remains its actuality. And we shall continue to act together with the Russian government in order to [ fulfill for 2012 ] for the purposes of achieving the most optimum outcome in the interest of the government. Thank you very much for your attention -- and the [indiscernible] throughout the whole country as well.

[Unknown Executive]

Thanks for the question regarding [indiscernible]. So the answer is for the time being, we will stay flat until we get the tax relief. It has been applied 3 years ago. And as soon as we have it, we're ready to start ramping up. We have all the plans in place. We have the equipment, which is nearby and as soon as we get it, we ramp up. But since we've been waiting now 3 years, it could take a few more months.

[Operator]

Our next question comes from Karen Kostanian, calling from Bank of America Merrill Lynch.

[Karen Kostanian]

Yes. sorry, for the follow-up question. I sort of have a bit of a theoretical question here. You had several asset -- upstream assets or the portions of that, that's available for sale back in 2014, 2015. Now with the oil price -- that oil price has increased and you're under regulation by the OPEC-plus in terms of your upstream output, do you still conduct negotiations with potential partners? Are you still interested in selling portions of those assets? And if so, are international partners still interested in -- still in negotiations with you to acquire portions of Rosneft upstream?

[Didier Casimiro]

Okay. Thanks, Karen, for the question. So I won't enter into too many details because it's confidential. But the answer is definitely yes. If you can bring us a carry to take care -- to be able to help us understand the first phases of the greenfields, definitely. Do we have any potential partners who are interested as we speak? Yes. That's all I can say.

[Operator]

Thanks, everyone. With that, we would like to finish the conference call, and wish everybody an enjoyable evening.