NK Rosneft' PAO

LSE:ROSN

Earnings Call Transcript 2020-Q2

[Operator]

Second Quarter 2020 Results Call. My name is Alicia, and I'll be coordinating your call today. [Operator Instructions] I will now hand over to the management team to begin.

[Didier Casimiro, First VP & Member of Management Board]

Good evening, dear colleagues. Thank you for participating in this conference call dedicated to the results of the company Rosneft's operation in the second quarter 2020. At this call, we have in attendance of all the leaders of the streams and business functions. We have Zeljko Runje, Otabek Karimov, Avril Conroy, Eric Liron and Tyrone Kalpee, Andrey Polyakov, Alexander Romanov, Dmitriy Torba, Artem Prigoda and also [ Alexei Sarin ] and also, remotely with us, we have Oleg Ivanov and others because it's quite a list here, and other senior executives of the company. Today, we will share with you a brief overview of the highlights in terms of the operations and financial performance for Q2 as well as answer your questions. Please note that the following presentation, amongst other things, shall contain information about future events and forecast. The second quarter of 2020, in many ways, became a critical one from the point of view of the COVID-19 impact upon the macroeconomic environment as well as the company's reaction to the new challenges. But before we dive into the discussion of our production and financial performance within the reporting period, I would like to underscore that taking care of the people and their well-being and safety remains and continues to be the top priority of the company. We continue to assess the emerging risks and analyze the results as well as our adherence to the strategic objectives in the area of labor safety, industrial safety as well as the environmental protection. The responsibility that we have and demonstrate ourselves as well as our counterparties have been able to prevent the massive outbreak of the infection as well as support the continuity of the business and high quality of our control over the matters. The company enjoys a single system or response to the pandemic threat. We are regularly testing our employees. We conducted more than 270,000 tests. We have procured more than 16 million of PPEs, including the patient mask respirators, goggles and glasses, protective caps and gloves, and more than 150 shift cams have had in them introduced the pandemic alert status. So a broad comprehensive set of measures from a very strict compliance with sanitary requirements, all the way to the contactless payment services as well as broad awareness of the prevention measures, provide us with the safety at work and our customers and our corporate retail network. The company provides support to various health care institutions in the areas where it operates. Specifically, we have helped various health care institutions in the Khanty-Mansi in Yugra district with PPEs and equipment by procuring mobile computer analyzed for health care institutions in the Krasnoyarsk region, secondary oxygen concentrators for additional installation at the ICU units at the Sakha Republic. So I can proudly state that the notion of social responsibility is not only the core of our corporate culture, but also a simple, civil, proactive position of our employees. In more than 60 subsidiaries we have the volunteer teams, which provide help to local communities in procuring food and the primary staple. In the first half of 2020 we observed some positive trends in the way the heavy-injury statistics went down in the company, strengthening our attention towards implementing a long-term leadership program in the area of industrial safety by incentivizing compliance with requirements for safe driving and golden labor safety rules at absolutely all of our facilities and within each -- in the case of every and each employees amongst our more than 300,000 and within more than 200,000 of our contractors, investing into integrity and reliability of our equipment, making contribution into reducing the number of serious incidents, as basically what is described in English as process safety events 1.2 version. At the same time, the process safety event rates increase, which is defining the integrity at our operations, have gone down almost by 1.5x compared to a similar period last year. In the first half of 2020, in the similar token, we've launched our program to improve the integrity of our pipelines within the period of 2020 to 2025. Within the first 6 months of 2020, the amount of green investments went up to about RUB 17 billion. These resources have been dedicated to the construction and upgrading our various facilities to minimize the environmental impact, including the treatment facilities and the waste treatment factories, more than 1/4 of this demand was dedicated to the projects aimed at utilizing the associated petroleum gas and specifically at the Yurubcheno-Tokhomskoye field and the Krasnoyarsk gas production facility in the East Siberia. In the first half of 2020, the drainage of the polluted waters went down by 0.6% compared to a similar period in the previous year. And as a result of such project, after upgrading our water treatment facilities in the Bashneft-Ufaneftekhim Company in the area of carbon management on top of running the program of improving the energy efficiency and the gas investment program, the company has continued to perform more than 20 activities within various 7 sections of the carbon management plan for 2020. I'm also quite happy to inform you that Rosneft has gone about working over the long-term plan in carbon management 2035. The time frame for which conforms to a recently published Russian Federation Energy Strategy. In the second quarter, we became the witnesses of an unprecedented energy price volatility. The COVID-19 pandemic and the related isolation of a great number of consumers has led to a strong decline in the oil demand and refined product demand. However, the new OPEC+ agreement enabled us in this very dire period to begin work to eliminate this disbalance between the supply and demand. And as a result of its implementation, the supply of oil in the global market went down practically by 10 million barrels a day. The decline in production as a result of the oil price decline strengthened this indicator up to 12 million barrels a day. At the outcome, the market moved from the status of a considerable oversupply in the amount of about 21 million barrels a day in April, towards the situation whereby already in June, the market players started going in for these stocks. Along with a gradual demand rebounding, these efforts promoted of considerably speedy oil price recovery to the level which seemed unachievable just 2 or 3 months before then. During this call, we are considering a difficult period, but in terms of the operations and the financial performance of the company, which has been described by unprecedented terms and conditions in the macroeconomic environment, including a very dramatic price fall with the pandemic being in the backdrop and the reduction of the amount of output as the result of the demand decline and the new OPEC+ agreement implementation. But as the oil price were being recovered in the course of the second quarter, the financial reporting of the company demonstrated an upwards-growing dynamics. And because of that reason, I would implore you to be quite mindful of the future period of our operations, both in terms of the partial improvement of the macroeconomics at this point in time as well as based upon our fundamental competitive advantages. Rosneft possesses a high quality of its resource base, differentiated quite broad in terms of the markets as long-term nature of its relationships with its customers and consumers, while the operations and financial activity stand out in terms of the high level of efficiency. The company has gone about reducing its oil production as part of the new OPEC+ deal as of May 2020. And to ensure its commitments, we are using the instruments which have successfully proven themselves during the previous periods of production cuts. The key ones amongst them is an effective well stock management, which includes the reduction of recovery without a long well conservation, a scheduled well idling and the optimization of subsurface operations within the existing well stock. The regulation of the well operations eliminates the need to conserve them for any long period of time as well as to maintain them when idling for a long period of time, including this subsequent bring-back into operation, which is important in terms of being able to retain our recovery potential. Now with the company standing true to its commitments within the new OPEC+ deal, the production of liquid hydrocarbons during the second quarter 2020 amounted to 4.04 million barrels a day, having gone down by 13% to the previous period. Please note that as the introduced restrictions are being eased, we will be in a position to quickly recover part of our output. The daily production in July was 504,000 tonnes, while in the first few days of the current month, it exceeded 536,000 tonnes, having gone up by more than 6%. The production drilling meterage as a result of the first half of the year in 2020, reached a level of 4.8 million meters. As part of the Rosneft 2020 strategy implementation, the company continues to focus upon the construction of high tech, which provides us with a much more effective subsurface development as well as the recovery improvements in Russkoye when compared to the directional drilling methods. Based on the results of the first half of 2020, the number of newly commissioned wells was 1.1 1,000 units. The number of the most effective new horizontal wells went up to 756, having aimed significantly gone down compared to a similar period in the previous year, but at the same time, the share of such wells continues to grow. The growth is 14 incremental percentage points year-on-year, up to 68% from the total number of newly commissioned into operation wells. In the first half of 2020, the number of newly commissioned into operation horizontal wells with the multi-fracking application was 462 with a share growing up to 41% from the total number of the wells commissioned into operation of the reporting period. The average output from a horizontal well during the first half of 2020 amounted to 4,900 tons, which is more than 2.6x greater than the similar performance indicator in the case of directional wells.Against the backdrop of OPEC+ restrictions, the company as well has continued to develop its key assets. We are paying special attention to the development and introduction of new technologies, including the digital isolation, which improves the efficiency of the reserve oil development against the saving of resources. And the company continues to consider its technology leadership, as one of the best drivers behind its competitiveness in the oil market. And here are just a few examples for your attention. In [ Orenburgneft ], we have successfully applied the [indiscernible], which is called [indiscernible] during horizontal [ drilling ], which is enabling us to be the key [indiscernible] create efficiency and reserve where we cut. Those optimize our drilling operations. Starting out of drilling horizontal wells from ([indiscernible] tonnes of oil daily against -- let's play[indiscernible].

[Operator]

Ladies and gentlemen, we apologize for the connection issues, we're trying to resolve them. So please stay on the line whilst we do that. Thank you. [Technical Difficulty]We do apologize for the inconvenience. Please accept our apologies. We will resume the conference call from where it was disconnected.Management team, please go ahead.

[Didier Casimiro, First VP & Member of Management Board]

[Foreign Language] [Interpreted] Well then, colleagues, let us resume then. So in accordance with the previously announced plans, the company continues to do its work to further develop major projects. The total output of liquid hydrocarbons from the new major projects, which have been launched from 2016, and the share of the company's output in the first half of 2020 amounted to 9.7 million tonnes, which is 9% more than the level of first half year in 2019. So the share in the total output of the liquid hydrocarbons during the reporting quarter ran up to already 9.3%.In the current year, we are planning to launch 3 new projects, which is Erginsky license acreage, the Severo-Danilovskoye, which is North-Danilovskoye area, and Rospan is part of the preparation to launch our Erginsky license area. We are currently doing the production drilling at 11 drilling pads. We're also building infrastructure, the infield pipelines and the power supply lines. We're finishing to build the high-pressure pipeline to transport oil to the Priobskoye field and from there onto the Transneft trunk system. We are doing the preparatory work to test our pipeline system at these sections, which have already been completed.For the development of the North-Danilovskoye field, the Danilovskoye gas production cluster, that's where it is. We are planning to drill 95 wells, most of which are going to be horizontal ones. The drilling is being done with the use of modern technologies and the state-of-the-art equipment. Already 10 wells have been drilled there and the year-round road was built, which connects the field with the upper Chonskoye across that. We also continue to build the drilling pads and various infrastructure facilities and the pipeline all the way to the upper charter area. The launching of the next stage of the production and the gas and condensate treatment is planned towards the end of December 2020. So the key facility here is going to be the comprehensive gas and gas condensate treatment and preparation facility. Ultimately, it's allowing us to achieve the design capacity, which would help us to increase the commercial amount of product by 8 million tonnes of oil equivalent compared to the current year level as well as achieve an additional profit in terms of the EBITDA in the amount of more than RUB 100 billion per year.According to the plans, we also continue to do our production drilling and preparatory and the installation work and the Lodochnoye and the North-Komsomolskoye fields as part of the experimental development whereby during the first half of 2020, we have increased by 65% in terms of the level of the first half year in 2019 and, over the period, has amounted to 5.1 million barrels.The average OpExes for the production of hydrocarbons in E&P segments in Q2 2020 and the first half year of 2020 in dollar denomination remained at a minimum level of USD 2.90 per barrel of oil equivalent. The reduction of CapExes in E&P in the second quarter and the first half year 2020 was conditioned by the optimization of the company's investment program, which reflected the negative environment in the global market and the various restrictions as part of the oil output in OPEC+, where the average E&P cost went up to $5.2 of barrel of oil equivalent.The environment in the domestic gas market continues to demonstrate great resilience compared to the international gas market. In the European and Asia Pacific market, the gas spot prices as of the beginning of the year remained at low levels, at about $9.10 per 100 -- 1,000 cubic meters, which is 30% below what it was in 2019. Now bearing in mind the export duty and the transportation all the way to European consumers, the domestic market premium currently is about $50 per 1,000 cubic meters.With the overall gas production decline in Russia over the first half year of 2020 being at the 9.6%, our company reduced its production only by 4%. The gas business makes a tangible contribution into the company's financial performance due to very low investment risk and the existence of a long-term portfolio of contracts, which enables us to enjoy a very stable -- and the cash flow from the gas business, which is independent from the external market environment.During the second quarter of 2020, we organized a continuous operation of the refining procedures of the company, as part of the high alert-readiness status, the availability of refined product in compliance with the current demand in the domestic market. In response to the decline of demand for refined product because of the pandemic, we optimized our installations-loading, delaying them to earlier periods in terms of our scheduled refinery maintenance work. The margin of refining in the Russian refinery during the second quarter went down by 17.2% compared to the same level in the Q1 amounting to 21.5 million tonnes. As for the results of the second quarter 2020, the refining margin at our Russian refineries went down to negative $3.35 per barrel compared to a positive margin which was $1.89 per barrel in Q1 2020.The decline of this particular indicator has been brought about by a negative impact from macro parameters in the reporting period. They were quite diverse and such as an advancing pace of the oil price recoveries against the backdrop of slower growth for refined product as well as the declining refining amounts as well as going into the red, which is the dampening markup of the -- that we had in terms of the duty excise.In the second quarter, company continued to grow its production and expand the sales geography for its low, sulfur bunker fuel. With their respective introduction since the beginning of this year is adherence to IMO requirements apart from the Far East. The company started delivering the fuel to -- bunker fuel to the Black Sea ports, to the Arctic and as well as to the Baltic-Arab port facilities. In the first half of 2020, the domestic and foreign-vessel owners have received in total 747,000 tonnes of bunkering fuel.Over the first half year of 2020, the oil supplies into the far remote amounted to 62 million tonnes, which is 8.6% lower year-on-year. The company -- although continues to diversify its foreign oil supply channels. In the reporting quarter, the input supplies into the far remote areas amounted to 26 million tonnes, out of which eastward, we supplied 15 million tonnes or 58% from the total amount of oil sold into the far remote jurisdictions, which is about a similar level of performance in Q1 2020 by 0.6 percentage points.The company continues to remain the biggest supplier of fired products in the Russian domestic market, where the share of motor fuel supplies based on the results of the first half year of 2020 being at 40% in the domestic market of the Russian Federation, we delivered 94% from the amount produced by the company in terms of the motor fuels in Russia, which is the highest performance result amongst the Russian Federation producers. And so based on the results of the first half year 2020, the company's retail business demonstrated stable performance results.In June 2020, the sale of refined products through our retail channels grew already by 18% compared to May in the current year despite a dynamic recovering demand after the restrictions have been eased, which we originally haven't brought because of the pandemic. The amount of retail sales in the first half of 2020 was about 11% or lower than the similar period of the previous year. The OpExes in the Q2 in terms of the gas production and oil refining turned out into something from very strong pressure, which couldn't bring about further worsening of the financial performance. The revenue from the oil and refined product sale in the petrochemicals in the reporting period went down by 42% or by RUB 806 billion, to a large extent as a result of price, it's falling in Q2. The decline of the average euro's price in rubles was 34% compared to the previous period. The refined product sales price in the foreign markets, the company expects them to wind down by 36% compared to the previous quarter. But at the same time, in the domestic market within the reporting period, it reduced less -- by less than 3%. A significant reduction in revenue became the main driving force behind EBITDA declining during the second quarter, and this indicator went down by almost twice compared to the previous period down to RUB 177 billion.Additional negative driver that is worth paying attention to was a greater reverse excise impact in terms of the fiscal payments that they have to make from RUB 4 billion in the first quarter to RUB 51 billion in the second quarter as a result of the export netback falling down as opposed to the domestic oil market conditions.And in the first quarter, reporting reflected the rebate from the fiscal system, a RUB 13 billion in terms of the oil export duties, which we overpaid in 2019. This particular effect was not reflected in the report. So out of the positive factors, which produced a good effect upon the company's EBITDA in Q2, let me note positive ones such as the lag in export duty to be paid. In the second quarter, the company generated net profit attributable to the company's shareholders in the amount of RUB 43 billion compared to the net loss in the amount of RUB 156 billion in the first quarter 2020.The key reason to find such a considerable improvement in our financial was developing positive exchange rate differences in the amount of RUB 111 billion in the reporting period compared to a negative exchange rate differences in the amount of RUB 177 billion. Amongst other positive factors, which -- it was an effect of change of the fair value of financial assets as well as not having in the reporting period any assets that lost value.Let me draw your attention to a very important trend, which produces, and they are not going positive impact upon the free cash flow and the revenue of the company, which is a reduction in interest expenses in the first half year, which amounted to 21% or RUB 22 billion compared to the respective period last year. Such a dynamic of interest expenses is conditioned by a reduction of our financial debt and our trading obligation as well as the lowering of interest rates. In the period of low interest rates, we expect a considerable strengthening of this effect upon Rosneft's financials in the very near future. In the first half, the free cash flow of the company amounted RUB 206 billion, which is a relatively high indicator, bearing in mind a considerable worsening of the macroeconomic environment, which in all it does even in such complex period of time to continue performing on our strategic objective to reduce our financial debt and our trading commitments. Specifically, in the first half of the year, the company was able to reduce its amount of financial debt and trading prepayments by more than 5% or USD 4.4 billion.Rosneft, being a major Russian oil company, makes the biggest contribution into Russia's adherence to the OPEC+ commitments. And because of that reason, previously, already, the decision that we announced have been made to optimize our investment program for the current year. The amount of the reductions of the company's investments in 2020 would be about RUB 200 billion compared to the original plan. About RUB 180 billion of such reductions falls on E&P segments in Russia, out of which the bigger part falls upon optimization of investments into our mature assets. Despite the macroeconomic environment being not all that fair, our priorities remain unchanged. And that is growing the profitability of the business, improving the efficiency in the current operated assets, the implementation of the key projects on budget and on time, the OPEC+ agreement imposes upon us certain limitations in terms of the amounts of output in the short-term period. However, the current price environment remains so quite favorable for our investments into new projects, thanks to such competitive advantages as our course of the resource base and high efficiency of our performance.The uniqueness of the Rosneft's investment story is a combination of the future growth of output with a high level of free cash flow in its term, the priority that we follow in capital distribution, reducing our debt burden and repayment of investment to our shareholders. And so we hope that such an approach will be highly appreciated by the financial community and will be duly reflected in the company's market valuation.Thank you for your attention, and we can now switch to the session of questions and answers.

[Operator]

[Operator Instructions] The first question comes from Karen Kostanian from Bank of America. Alexander Burgansky from Renaissance Capital.

[Alexander Burgansky, MD and Head of Oil & Gas Research]

Yes. I've got 2 questions related to the second quarter results. First of all, could you please comment on the amount of excise payments, which have been reflected in the international market operations? The excise have grown despite the fact that the amount of sales have considerably gone down, I mean for the refined product as well as the prices for the refined product. Could you please explain the reason as to why the excise line item didn't go down, but went up in the second quarter?And my second question, would you also give us the amount for the dampening payment that was registered in the second quarter?

[Didier Casimiro, First VP & Member of Management Board]

Thank you very much for your question, dear colleagues. As far as these detailed responses are concerned, please allow us to get back to you through our IR representatives.

[Operator]

Question comes from Henri Patricot from UBS.

[Henri Jerome Dieudonne Marie Patricot, Associate Director and Equity Research Analyst]

A couple of questions for me. Some of the gas production in the quarter was down quite substantially. Can you first comment on how much of that was driven by weaker demand in any quarter? And what's the outlook for the rest of the year and looking into 2021? And then secondly, on the capital side, you confirmed the guidance for 2020. Can you give us an indication for next year under the current OPEC+ plans? How much would CapEx go up? And to what extent have you managed to become more efficient around all the CapEx? How much of the cut was around activities for 2020 when it comes back in 2021?

[Didier Casimiro, First VP & Member of Management Board]

Thank you for your question. I propose that the first question of gas is answered by Oleg Ivanov from the gas book.

[Oleg Ivanov, Head of Gas Business Planning]

[Interpreted] Thank you very much, Didier. While you can see that gas production has gone down by 6% of our overall, this value is considerably below the gas production decline rates that you observed throughout the whole Russia. The key fundamental reason behind this decline comes from the decline in the production of the associated petroleum gas as a result of the OPEC+ restrictions as well as demand going down because of the pandemic that took place in Russia.

[Didier Casimiro, First VP & Member of Management Board]

Thank you very much, Oleg. Asking the question, which had to do with OPEC+, obviously, the cut is diminishing in 2021, and therefore, if I understood you right, the question if the CapEx of the company is again going to grow and to which level, which I will ask [ Alexei Sarin ] here also with us to answer you.

[Unknown Executive]

Thank you, Mr. Patricot. Yes. Thank you very much for the question. Our target in terms of our CapEx remains at the following level. It will be approximately the level that we had for the current year before various external restrictions that we had to adhere to, I mean, in terms of COVID-19 and the demand decline. So it will be about RUB 1 trillion, approximately.

[Operator]

Next question comes from Alex Comer from JPMorgan.

[Alex Robert John Comer, Research Analyst]

A couple of quick questions for me. Any detail on prepayment deal with the Chinese? And then also sort of oil-picture question, we've seen a number of international oil companies come out with strategic updates with regard to climate change and BP shareholder like to be killing production by 40% by 2030. From your perspective, did this pulling back by some of your international peers present more opportunity for Russian state volume? Or do you feel that inevitably, at some point, you'll have to address the current strategy of trying to increase volume going forward? I just wondered what your thoughts were on that.

[Didier Casimiro, First VP & Member of Management Board]

Thank you for your questions. So on this last question -- on the first question for China, let me try to answer. So yes, you know that we have long-standing contracts with CBC. Those contracts were signed under prepayment, and we are indeed this year, expecting part of that prepayment. On the second question, as I understand your question was much more one around, are we going to use carbon management plans of competitors to increase our production? I would say that our production is following the strategy of Rosneft 2022. And as far as carbon management, I think you heard earlier today that we also are working on different initiatives and have our plan 2035 coming out by the end of this year.

[Operator]

[Operator Instructions]

[Didier Casimiro, First VP & Member of Management Board]

So then -- I think given the fact that we are not getting any questions, but I understand there are still some technical problems on the lines. Please, any questions that you may have, any comments that you may have, you can address them freely to our Investor Relations department, that is not a problem. And we will then conclude this session for today. Thank you very much for your attention. Thanks. Bye-bye.

[Operator]

Thank you for your patience, ladies and gentlemen. This conference call has now concluded. You may now disconnect your lines.