NK Rosneft' PAO

LSE:ROSN

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to today's Rosneft 3Q 2020 IFRS results call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to the management team to begin.

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

Good evening, dear colleagues [Audio Gap] also representing downstream [Audio Gap] and after the presentation [Audio Gap] all of us here taking part in this call. Today, we will present a brief overview of the most important [Audio Gap] in the reporting period, owing to management efforts aimed at further performance improvement [Audio Gap] the restriction [Audio Gap] pandemic and the limitations of crude oil production. Before we start discussing the operational and financial performance, allow me to reemphasize that caring about people, their health and safety is a priority at Rosneft. The pandemic challenges have once more highlighted the importance of both economic and humanitarian well-being of society and further mobilized us to deliver sustainable development projects. In the first 9 months of 2020, our green investments amounted to [Audio Gap] investments in rapid reconstruction of associated petroleum gas utilization facilities as well as improvement of reliability of pipelines. The most significant area of the gas program is reinjection of gas in order to maintain reservoir pressure at Yurubcheno-Tokhomskoye field. Commissioning activity started in August this year. And by year-end, we are planning to put in operation the first phase of the gas reinjection system with a capacity of 0.8 billion cubic meters per annum. These measures will significantly reduce the environmental footprint and drive down greenhouse gas emissions. Persistent efforts [Audio Gap] emissions is another important element of the company's carbon management program. In the reporting period, we successfully tested cutting-edge technologies, including remote laser scanning, infrared cameras and ultrasonic detectors in 3 fireless subsidiaries of the Rosneft Group. In 2021, we are planning to start using new enhanced technologies to detect methane leaks in the key producing subsidiaries. The leak detection and repair system is an integrated part within the management -- within the maintenance processes and are in line with the methane guiding principles that Rosneft joined in 2019. Last time, I already told you that we started working on the carbon management plan through 2035. And in the coming months [Audio Gap] of that work. We're also happy that our efforts are duly recognized. For instance, in this reporting period, Rosneft was among the top 100 companies of Vigeo Eiris, the best emerging markets performance ranking by Moody's Corporation. And to prepare the ranking, Vigeo Eiris assessed performance of 843 companies from 32 industries and 31 countries, taking into account their ESG achievements. In the third quarter, the global oil and gas industry exited an extremely negative price environment and demonstrated a material improvement of financial performance versus what was a very harsh second quarter. Every month of the third quarter delivered a higher level of crude oil price sequentially. The second phase of OPEC+ agreement took effect, and its members were able to ramp up the production, starting August 1. Our company demonstrated a material improvement of financial indicators reflected in its cash flow due to optimization of CapEx, efficient contractor management and management of well stock. And the management will continue to further improve the efficiency across all areas of operations. Eric Liron today will tell you more about achievements in the upstream segment of our operations.

[Eric Liron;Vice President for In-House Services]

Good day. Our company is in full compliance with the decision to restrain crude oil production under the new OPEC+ agreement that took effect in May 2020. We systematically used the tools that ensure efficient management of well stock, such as limiting the flow rates with our suspension of wells, intermittent operations of wells or cycling, optimization of the well work program for the active portfolio. These designated production management measures make it possible to manage the production capability in a flexible way and quickly ramp up production. After the ease of these restrictions, when Phase 2 took effect in August this year, our company rapidly brought back some of the volumes, increasing the average daily output in early August by more than 6% compared to July. Production of liquids in the reporting period amounted to 3.91 million barrels per day, down by 3.2% compared to the previous quarter, given that in April, the output level was higher prior to the new OPEC+ agreement. The strategic goal to ramp up construction of the most efficient and high-tech wells remains intact. Out of 1,800 newly commissioned wells, 70% are horizontal. A year ago, this level was at 56%. The share of multi-stage frac horizontal wells went up to 43%, whereas last year was at 34%. Production per horizontal well is more than 2.5x the level of a directional well. The use of complex high-tech wells makes it possible to both improve oil recovery from conventional reserves and efficiently develop hard-to-recover reserves in fields with complicated geology. During the pilot development of hard-to-recover reserves in Preobrazhensky horizon of Verkhnechonskoye oil and gas condensate field, we commissioned 2 wells of different design: drain hole completion and horizontal completion with multistage fracking. During the drilling, we used the entire range of logging techniques that allowed us to determine the properties of formation and saturation in real time. Initial flow rates of these wells was 113 and 51 tons, respectively, per day, which is much higher than those during the technology piloting period. Another example of modern technologies application is the development of complex geology Vendian and Riphean deposits as part of the UTM field development.In August, Vendian deposits were accessed by development well with a start-up production rate of 149 tons of oil per day. Later, work was completed to construct a unique well on the Riphean deposits through a multilateral level 5 horizontal well with 4 wellbores. The start-up production rate was 281.5 tons of oil per day, which exceeds many times the new wells' average performance across Russia. Following our previously announced plan, we continued development of the new projects. As part of the implementation of the Erginsky cluster project, we launched a full-scale development at Erginsky license area, a key asset of the cluster. A pressure oil pipeline to Priobskoye field was commissioned in late August 2020 and commercial oil shipments to the Transneft pipeline system were launched. As a result, in the first 9 months of 2020, the overall production company share of liquid hydrocarbons from the new major projects launched since 2016, including Erginsky license area, reached 393,000 barrels per day, which is 3.8% higher than last year. The above projects accounted for 10% of the overall liquid hydrocarbon production in the reporting quarter. As part of the development of the Danilovsky oil and gas production cluster, preparations continue for putting onstream Severo-Danilovsky field in 2020. In order to efficiently use associated petroleum gas, a mobile power unit was commissioned at the field, which is [Audio Gap] development of [Audio Gap]. The production from these fields increased by 38% year-on-year and reached 7.5 million barrels. As for Rospan project, in 3Q 2020, the construction of key facilities was at the final stage. The completion status of the first start-up complex is 96% and no load pre-commissioning operations are ongoing as we speak. The intention is to start the loaded pre-commissioning operations in the very near future. We plan to produce first gas on Rospan in 2020. The designed daily capacity is due to be achieved in 2021. Considerable resources were mobilized for the Kharampurneftegaz project. Active construction and assembly operations are underway at the gas treatment unit. Work continues to construct the gas pipeline and river crossings as well as to prepare for a tie-in with the Gazprom Transgaz pipeline. I'll now pass the word back to Didier Casimiro for discussion of our operation in the refining and marketing segment. Thank you.

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

Thank you very much, Eric. In 3Q 2020, the company's refineries saw an increase in refining throughput mainly explained by recovery in demand for petroleum products and once some limitations associated with the spread of COVID-19 were lifted. Refining throughputs at the Russian refineries increased by 4.8% as compared with the second quarter of 2020 and reached 22.5 million tonnes. The refining throughput at the German refineries was 2.9 million tonnes in 3Q 2020, which is 17.1% higher quarter-on-quarter and 6.1% higher year-on-year. In 3Q 2020, the company continued implementing the programs for refinery development, but also for catalysts in-house production. A wet catalyst unit was commissioned at Yaroslavl Refinery, which is intended for utilizing hydrogen sulfide and producing sulfuric acid in an environmentally friendly manner. As part of import substitution, Ryazan Oil Refining Company loaded its units with an in-house diesel hydrotreatment catalyst and Syzran Refinery launched pilot testing on in-house vacuum gas oil hydrotreatment catalyst.The company's crude oil export channels continue to be highly diversified and secure. In the report -- in the reporting period, crude oil deliveries to the far growth countries amounted to 23.5 million tonnes. 13 million tonnes or 55.3% was supplied to the East, and about 90% of the crude oil was delivered from Russia against contracts with a validity period of 1 year or longer. In 3Q 2020, the retail segment of the company's business demonstrated growth in deliveries of petroleum products, reflecting a recovery in demand. Indeed, in the reporting period, retail sales recovered to the level prior to the introduction of constraints associated with the spread of the coronavirus infection. In 3Q 2020, the retail sales increased by 28% compared with the second quarter and more interesting so, even 14% in comparison with the first quarter. On our financial performance, well, in the reporting period, the company demonstrated an ability to operate successfully, actually, in a challenging environment of crude oil production limitations and relatively low hydrocarbon prices. In the reporting period, sales of crude oil, petroleum and petrochemical products increased by 40%. In the third quarter, a recovery of the ruble-denominated euros average price on a comp basis and of the average export price of petroleum products exceeded 50% compared with the previous period. We were able to demonstrate a high efficiency of hydrocarbons production thanks to the continued cost control. Units production OpEx was RUB 205 or $2.80 per barrel of oil equivalent in the third quarter of 2020. This is a 3.4% reduction in dollar terms compared to the second quarter of 2020. In the third quarter of 2020, the EBITDA was RUB 366 billion, USD 5 billion, which is more than a twofold increase in ruble terms compared with the second quarter of 2020. And the company continued to cut its interest expenses. Over the first 9 months of the current year, they reduced by 24% in dollar terms compared to the same period last year. In the third quarter of 2020, mainly driven by a negative effect of noncash items, the company generated a negative net income attributable to shareholders of RUB 64 billion as compared with a net income of RUB 43 billion in the second quarter of 2020. And the same effect also led to a negative net income in the 9 months of the current year. The company reduced its investments by more than 20% in 2020 by more than [ RUB 200 billion ] versus the initial plan in accordance with earlier announcement. Russian upstream segments accounts for the bulk of the reduction, which is mainly due to the optimization of ground field investments. Unit upstream CapEx was $5.4 per barrel of oil equivalent in the 9 months of 2020, equal to a 10% reduction year-on-year. Over the first 9 months of the current year, Rosneft generated free cash flow of RUB 352 billion or USD 5.4 billion enabling us not only to fully meet our obligations to shareholders on the 2019 dividend payment, but also to continue reducing our debt. Year-to-date, the amount of financial debt and trading liabilities fell by USD 5.7 billion. At the end of 3Q, the amount of cash and cash equivalents plus available credit lines was 80% higher than the short-term portion of the financial debt, which in its term has further reduced to 17%. And already in the 4Q 2020, we expect to receive additional liquidity denominated in foreign currency, in line with previously concluded agreements. In the near future, the company will submit to the Board of Directors also a proposal to extend the buyback program until the end of 2021. So in summary, in the reporting period, the company demonstrated its ability to successfully run a business in a challenging macroeconomic environment, further reduce debt and actually retain a high level of financial stability. The management will continue its efforts to further increase the efficiency in all areas of the company's operations with an aim of creating further additional value to our shareholders. Thank you very much for your attention. And we can now proceed with our Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Karen Kostanian of Bank of America.

[Karen Kostanian]

I have 2 questions. My first question, we noticed a bit of a jump in CapEx this quarter. Where would you expect your CapEx [Technical Difficulty] to be in this year? Could you provide some sort of guidance? And my second question is on Vostok Oil. When do you plan to finalize the development part or start to work on the field?

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

Thank you very much, Karen, for your question. Let me first pass the word here to [ Alexey ] on capital.

[Unknown Executive]

[Interpreted] Karen, thank you very much for your question. This year, we will give you a guidance, which will be in the range from RUB 800 billion to RUB 850 billion.

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

[Interpreted] Karen, on Vostok Oil, obviously, the company -- this is a very important project for the company as you well know. And equally, I would say very important project for the country. In the very near future, we will be actually going into approval modes within the company for this project. And we will be able to say more about that in the near future.

[Operator]

Our next question comes from Ronald Smith of BCS.

[Ronald Paul Smith, Senior Oil and Gas Analyst]

A couple of things. First, does management have any guidance on the effective impact of the new oil tax changes on EBITDA? And in particular, will Rosneft investment -- this is a question pretty much for Eric. Will Rosneft's investment levels at highly depleted fields, where you've, what, 1.1 million barrels a day of output, materially change under the tax changes, given that you've lost explicit tax breaks there instead of moving over to NDD for the excess profits tax?

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

Thank you for the question, Ron. I will now pass word here to Artem Prigoda.

[Artem Vladimirovich Prigoda, Head of the Department]

Ron, thank you very much for your question. Principally speaking, it is true that the government has come forward with a well-balanced decision under the current circumstances in the world and in Russia specifically, in the first place, having focused attention of the production companies upon the development of new oil-bearing provinces. So in the first place, we have been affected in terms of seeing our exemptions go in terms of the depleted fields and respectively, that means the reduction of the free cash flow like the case is for the rest of the companies. But very interestingly, we have this optionality of switching to NDD. And then as far as the depleting fields are concerned, switching over to the NDD makes the kind of fields, which principally have been at the level of loss-making, generating profit yet. And as far as the cash flow is concerned, we're losing but overall the amount of investments, which supports the level of profitability in view of the OPEC+ limitations, would enable us to maintain practically the same level. And as far as its effect upon EBITDA is concerned, principally speaking, on the other side of the scale, we have such option as the Priobskoye field and additional stimulus to develop the Vostok Oil, which in itself, makes this whole thing quite neutral as far as we're concerned.

[Operator]

Our next question comes from Henri Patricot of UBS.

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

I have 2 questions, please. The first one, just following up on the question on CapEx. Thank you for the update for 2020. And I was hoping you could give us some guidance for next year as well, perhaps in the different scenarios, if you're able to ramp up production as planned as of the first of January? Or if there is an extension of the current production quota for 3 or 6 months? Or would that impact your CapEx for next year? And the second thing is thinking about the Vostok Oil project. Could you comment perhaps around the carbon intensity of the project that compares to the current portfolio and perhaps more broadly with your other new projects coming on stream, obviously compared to the current intensity?

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

Thank you very much, Henri, for your questions. Let us first pass the word here to [ Alexey ] on capital.

[Unknown Executive]

Your question, regarding the forecast for the next year, this is still subject to the discussion at our governance bodies and especially given the limitations which we face due to the reductions in production and participation in OPEC+ agreement. But the general guidance would be similar to the one we've given you before, it will be most likely around RUB 1 trillion. Thank you.

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

Thank you, [ Alexey ], and I will now pass the word to [indiscernible] to talk to us about carbon.

[Unknown Executive]

[Interpreted] Yes. I simply would like to draw your attention to the fact that Vostok Oil territory is located in the north of the Krasnoyarsk region, which is the most unique place in terms of the wind generation perspectives in Russian generation comparable to such locations as the north of U.K., the north of Denmark, and so respectively. Moreover, the future of the wind generation does call for a lot of economic efficiency considering all of the vulnerabilities that we are facing in developing the tank park and the tank pool. That would be one of the main sources of energy supplies for this project. Second point is that we have quite a serious experience in establishing the so-called buffer capacities in storing the excessive state of petroleum gas during the initial stages of development when a small amount of liquids is being produced and cuts into the consumption of energy, which is quite moderate. And after the volumes of the liquid production grow, respectively, the need for energy also grows. And during that period of time, we do use that excessive accumulated associated petroleum gas that we have produced or reinjected downward during the initial stages. So altogether, the project for the period of its life cycle, gives us an average intensity of about 12 kilograms of CO2 per barrel of output, which is quite a good indication, considering that according to the Wood Mackenzie, in terms of the new developments, the average indicator was about 50 kilograms per MOU.

[Operator]

Following question comes from Thomas Adolff of Credit Suisse.

[Thomas Yoichi Adolff]

I've got a few questions, please. Firstly, just on Vostok Oil. Perhaps you can comment on whether you plan to farm down before you take FID and how advanced are these negotiations with potentially interested parties? The second question is just specifically to your dividend and buyback policy. Obviously, your dividend is paid on IFRS earnings and on a reported basis, obviously, these are quite negative. So can you confirm, assuming the ruble rate is steady at these levels, that you will not be paying a dividend on 2020 earnings? And related to the buyback, your plant extended into 2021. And obviously, stage 2 had a potential budget of RUB 1.5 billion and you’ve done about RUB 400 million. What are really the criteria to drive that buyback?

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

Thank you very much, Thomas, for your questions. First of all, on your first question, I will need to apologize on this one, but this is obviously a commercially sensitive question, so we are not able to answer that question at this moment. However, on your other questions, which refer to the buyback program, I will pass here the word to Andrey Baranov.

[Andrey Baranov;Director of IR]

Good evening, Thomas. Thank you for your questions. First of all, 2 related questions on both dividends and buybacks. As we have already announced that we are -- the management wants to propose to the Board to extend the buyback program. Also, keep in mind the current 9-month results in terms of net income performance. So, so far, as the full year net income that is at the base of the dividend, it's really -- we are now in the first half of November. So it really will be too early to predict where the final guidance of the fourth quarter net income would be. So yes, you indicated that you're assuming the current flat ruble/dollar rate. But we are experiencing an extreme volatility in FX and unfortunately, this year, for many companies in Russia, not only us, but a lot of others is the major factor of their net income performance. Because of [ fixed ] loss and [indiscernible] we experienced almost every single quarter, Q1, Q2, Q3. So you remember that we started this year with RUB 62 per dollar. And we ended the first quarter with RUB 80, but there was a second quarter improvement in ruble rate. So we think that -- let's wait for -- till the year-end to have net income in place. But anyway, we will -- the management wants to push to continue our buyback program. That proved to be extremely resilient, extremely timely managed. So just remember that we launched this exactly in the time of expected market volatility in March. So I hope that investors will highly appreciate this fact as well. So but again -- once again, remember that in 2021 as we are paying our dividend, not on any rebate, but same annual rebate that I am close to 100% sure that we will have dividends for the first half 2021, [Technical Difficulty] second half of 2021.

[Operator]

Our next question comes from Andrey Zakharov of Raiffeisen Bank.

[Andrey Zakharov;Raiffeisen Bank;Analyst]

[Interpreted] A quick question about the operational expenses, dynamics in third quarter. To the extent I see in absolute terms, the amount of OpEx in upstream has gone down not significantly. While in refining, costs have grown overall throughout the group, and the OpEx went down by RUB 35 billion. Could you please comment what is the reason to it? Is it the dynamics, which is the effect from the other OpEx? And what should we expect in terms of this particular line items' performance in the future?

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

[Interpreted] Yes, thank you very much for your question. And as far as the upstream OpEx is concerned, yes, indeed, we have done a lot of work because you yourself may know that we have a very dramatic one-off reduction of out, which is part of OPEC+ arrangements. At the same time, we have to go for extraordinary decisions in optimizing our expenditures in order to maintain our leadership position in the industry in terms of the average indicators. So consequently, I should say that we've managed to do that through the 9 months towards the end of which we were able to maintain our average cost at the same level. This is one thing. Secondly, on a gross kind of an estimation, we're not only able to reduce our average cost, but on the growth side of things, we're also able to reduce them. So quarter-on-quarter, they are obviously lower because less of oil, so in terms of the average, we're able to maintain this plateau. And as far as the downstream is concerned, the situation there is less manageable in the short-term because there are more of the average fixed costs. So there is still work for us to be done there. And so we, as management, are targeting it and so here, we will have a slightly more deferred effect. Thank you.

[Operator]

Our next question comes from Olga Danilenko of Prosperity.

[Olga Danilenko, Director of Oil and Gas]

[Interpreted] I would like to ask a bit of a more specific question about Vostok Oil. Could you please tell us this tax exemption. So tax benefit is going to be effective until 2021. Do I understand correctly that the application of this particular exemption is possible only once you start investing into this project, that this is a bit of a similar of an investment contract? My second question is about the portfolio management for the current period inside Rosneft. Following the macro conditions changing on the basis of your macro forecast, are you quite happy with all of the assets that you have in your portfolio? Or do you see some of individual assets in some countries or sectors with some regional specificities that you believe are currently not really optimally complying with your portfolio? So what are you going to do about these assets in any foreseeable future?

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

[Interpreted] Thank you very much, Olga. So as far as your first question is concerned, I will pass the microphone over to Artem Prigoda.

[Artem Vladimirovich Prigoda, Head of the Department]

[Interpreted] Yes, Olga. Thank you very much for the question. Principally speaking, our investment contract is something that we are going to sign. And as far as the Priobskoye is concerned, we are currently working closely with Ministry of Finance of Russia in order to have it signed before the end of the year so as to start working under that particular contract starting from January 2021. And as far as the Vostok Oil company is concerned here, so the situation looks slightly differently. We don't need an investment contract here because everything is written quite in a straightforward way in the law. So under that law, we are entitled to present to the Amity, deduction all the costs incurred as of January 1, which are going to be done for the Vostok Oil, and we already have such plans.

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

[Interpreted] Thank you very much, Artem. And as far as the second question is concerned, Olga, you may understand that this is very commercially sensitive issue. The only thing that I can tell you is that in English, we call it, upgrading the portfolio, but always, this is the kind of a topic that we are on top of. Thank you.

[Operator]

Our next question comes from Ronald Smith of BCS.

[Ronald Paul Smith, Senior Oil and Gas Analyst]

I'm sorry, my question was just answered.

[Operator]

We have no further questions on the line, so I'll hand back to the management team.

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

Well, I wanted to thank Ronald anyway. I mean, your question has been answered. You also had a question. So thank you very much then after all these questions and answers. I want to thank, obviously, all our investors that were with us today on this call. A big thank you also for the management team that came out in a big group here to answer the questions from our colleagues. I want to wish everybody a very good weekend and a good start of the next week. Thank you very much. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.