NK Rosneft' PAO

LSE:ROSN

Earnings Call Transcript 2018-Q4

[Pavel Sergeyevich Fedorov, First Vice President for Economics & Finance]

Good afternoon, ladies and gentlemen. Thank you very much for your participation in this conference dedicated to our performance results in 2018. My name is Pavel Fedorov. And today, covering different streams, we have senior executive of the company, and we'll have Eric Liron, who is the First Vice President and in charge of Upstream; Vlada Rusakova, who is the VP and in charge of the gas business; Alexander Krastilevskiy, who is in charge of the financial stream, which is the refining, petrochemicals, commerce and logistics; and then Alexey, who is the senior geologist of the company, and the whole set of people who are responsible for different businesses who are present here and who are ready to comment and respond to your questions. Before the start of these presentations, I would like to note that 2018 [ admittedly ] became a very important milestone because, considering the middle of the year softening of the OPEC past agreements, Rosneft was able to very quickly grow its production, which exceeded its expectation before the introduction of limitations on the dip of 2016, which was the setting point to define OPEC quotas. The average daily production of hydrocarbons based on the [indiscernible] is [ 5.8 billion ] barrels a day. Speaking about oil equivalents, the company was able to provide for the average of [lots in] daily incremental oil and gas worth 180,000 barrels of incremental growth in Russia in 2018. More than half of it was Rosneft's share.We continued in 2018 to continuously implement the strategy to maximize our free cash flow and improve the operational results of the business and maximize synergy. Thanks to [orbital] we were able in 2018 to maintain capital spending in rubles at the level of 2017. And in the reporting year, as a result of these, Rosneft was able to generate about [ $518 billion ] of free cash flow, which is more than 4x that of 2017 level.There's also value of the long-term trades prepayments, and the net benefit went down since beginning of the year by more than $14 billion. The net debt-to-EBITDA ratio went down from 2.1, which was 1 year ago, down to 1.2x, which is below the financial leverage that many of the peers demonstrate.As you might know, as part of the work that the company done last year, we similarly made a number of principally strategic decisions pertaining to the strategy of raising level of social responsibility of the business, including the to [cues] to the UN development goals for [ 2017 and 2018] and to provide for [indiscernible] current considerations, the company is actively working all the targets which are relevant to the business. And here, I believe, that we'll be able to demonstrate success in a clear way to the investment community. The work we've done to achieve this becomes an ever increasing [ high-flying ] in terms of investment decision, but believe that it will be demonstrated with the results in the next 3 quarters. Today, we're going to share with you a brief review of the most important financial results as well as answer your questions. Please note that this presentation contains, amongst other things, information about future events and outlooks. And so with your permission, I would like to go with the highlights in terms of the macro results of the year and explain to you what the company has been doing to maximize its performance during the past year. In 2018, the average oil price, the Brent, grew by (indiscernible) in U.S. dollars, by 40% in rubles year-on-year, which produced the positive effect of the financial performance dynamics. At the same time, it is worthwhile noting quite a high price volatility, the maximum levels of which was $88 per barrel in October, and we saw -- it has declined down to $50 towards the end of the fourth quarter. Without a doubt, there's quite an unstable situation, which we spoke about and -- during the previous conference calls, and we witnessed the expectations of such kind currently. Speaking about January and February, the current -- of the current year, we are observing certain recovery in the oil prices. But nevertheless, the business [indiscernible] rate continuing to act on conservative expectations on the basis of which we basically develop our capital investment program. They currently involve being the ruble price for the consolidated company level enabled us to compensate for some negative factors. For the refining and the retail [businesses] of the company, in many ways, these factors have been predetermined by a number of fiscal and regulatory developments in the first waves. That applies to the tax burden going for the refinery, the transportation targets [Brent] with simultaneous control over the domestic price [growth there] the company on its side continues to interact with the Russian government both in terms of implementing the agreements produced [indiscernible] to freeze the retail prices as well as working together to better improve the oil industry regulation.Last year, we put the next step on increasing the efficiency of the company's existing assets. The implementation of [indiscernible] potential in the previously acquired assets and bringing partners into the company project, as well as achieving the objectives of the Rosneft-2022 strategy. [indiscernible] last year, we have commissioned to operation 4 [major] greenfield projects. That one would definitely put into [the classification of] greenfields. We have been actively developing the previously committed operation fields. The result is [share of] new projects, which have commissioned over 2009 till 2018, and the company production [ total ] in the past year was 18%. This all comes back from the fields which have been launched into operation from new project, which is greenfield category in 2016 to 2018, grew last year by 74% compared to the level of 2017, reaching practically 15 million tons.Slightly later, my colleagues, Eric Liron and Vlada Rusakova, will elaborate the results of our work in these areas. And as far as downstream is concerned, we'll continue to work on developing our Russian refining business. As of the end of the last year, the amount of crude investments in this area amounted to more than RUB 870 billion as of the start of the implementation of the project. The program of active investments, we have completed the project towards the end of the year to build and upgrade 23 capital facilities and technical units and complex refining at our facilities. All of this together enabled us to considerably grow the output of motor fuels in Euro-5 class and launching to the market new types of motor fuels, the Pulsar 100, high-octane Euro-6, with improved environmental properties. Soft upgrade in the refineries also enables the company to minimize the effect over its financial performance long term from the IMO 2020 requirements by reducing the output of fuel oil and by growing the output of diesel. In his presentation, Mr. Krastilevsky will give you a few more information about what we've done in downstream.Last year, we continued to develop the foreign assets, amongst which, [Barnard] energy, [soccer], and the project in the Iraqi Kurdistan and in other strategic destinations. As of the point in time when we acquired minority shareholder in Nayara Energy, together with the partners, we continue working together in order to improve the efficiencies of this asset by improving the terms and conditions, whereby the input is always reducing this cost of sales and reducing this asset refinancing. We're also developing the [soccer] project. Bearing in mind, the [sheer] pace of introducing into operation various facilities, we may achieve the plan's level of output before term, which we believe will materially improve the NPV project as opposed to the period's expectations. In order to improve the profitability of our business in Iraqi Kurdistan [indiscernible] into the concession to manage. The export pipeline in the territories of Kurdistan, the participation in this project will enable us to demand energy greater than [both] of the company throughout the whole of the value-added chain, considering a very unique results schedule in the future.Despite the regulatory challenges, in the quarter of the year, Rosneft managed to continued to attract top-class European and international partners into working on high-potential projects in downstream, as far as the premium locations are concerned. We believe that such joint effort assists us in developing our key business. And in a clear way, BP's investment into [indiscernible] gas and the participation of Equinor company in the [indiscernible] are quite indicative. In 2019, we similarly expect to close a number of deals to bring partners into whole set of new projects. Again, we believe that helps us to crystallize the value which investors, as we expect, should see in the stock of the company, which is [currently] not into this level of transparency that the market has. So I believe it's strategic deals in terms of improvement of our operations and governance strategy would raise our value. Further on, I'll now be pleased to pass the microphone to Mr. Liron, who is our First Vice President in charge of Upstream, and he will tell us more about the results of the work done in E&P area.

[Eric Maurice Liron]

Good afternoon, all of you. I would like to highlight some of the most important achievements in Upstream last year. The company's hydrocarbon production in 2018 reached 5.8 million boe per day, an increase of 1.3%, including liquid hydrocarbons, by 2.1% to 4.7 million barrels, thus setting a new industry benchmark. During the term of the OPEC+ agreement, the company made the largest contribution to the volume of production cuts provided by the Russian Federation. After lifting of restrictions in Q4, we've managed to quickly increase production, restoring mature fields and exceeding October 2016 production levels with the new assets.In December, the company saw an increase in the average daily production of oil and gas condensate in Russia by 4.7% compared to December 2017. In 2019, it is expected that the production of liquid hydrocarbons will be 3% to 4.5% higher than 2018, depending on the execution of the conditions of the OPEC+ agreement restrictions in 1H '19.Our key operating indicators over the past years further steady positive trend. Focus on development drilling was maintained at the high level, more than 12 million meters for the Complex of the lateral and high productivity multi-hole wells construction volume increased 3x.In 2018, a new record was set in the industry for daily drilling footage, 56,708 meters. Commissioning of the new horizontal wells increased to 48%, horizontal wells with multistage hydraulic fracking by 51%. The share of in-house [indiscernible] level is maintained at more than 50%.The volume of production of hard-to-recover reserves in 2018 increased by 15% to 18.7 million tons, which is more than 2x higher than in 2014. Over the past year, more than 820 wells were drilled in hard-to-recover deposits. Successful development of [chance] reserves is achieved through broad application of the existing company's reserves and production potential.As a result of providing investment incentives for the [Senatov] field and the upfront redevelopment program, the company managed to implement a program to stabilize production and significantly reduce its decline to 1.1% in 2018 after several years of falling by 3% to 5%.Work on the development of new fields was fully consistent with the approved plans. Total liquid production in 2018 at [indiscernible] fields put on stream in the period of 2016 to '17 amounted to more than 10 million tons, the share of Rosneft only. At the same time, production of the Yurubcheno-Tokhomskoye and [Kondiskoye] fields launched just a year ago was increased by 4x. In accordance with the previously announced plan, in the fourth quarter of fiscal year '18, the company made a phased commissioning of 4 new fields, Phase 2 of [indiscernible] fields.Total average daily production of these assets in December 2018 already reached 118,000 barrels per day. In midterm, the active development of new promising oil and gas projects will increase the company's production. In accordance with the strategy Rosneft-2022, the production from new projects of Rosneft in Russia will be about 20% of the liquid production of the company. Confidently approaching this goal in '19, '20, we intend to continue the development of the already commissioned fields, increasing the realization of their potential, as well as preparation for the launch of the [indiscernible] fields, as well as the fields of the Erginsky cluster.The company takes an integrated approach to the development of foreign projects in active cooperation with its partners. Key production projects include assets from Venezuela, which is characterized by an exceptional resource base, where we do not expect a decline in production in 2019 on joint projects at [indiscernible] despite the emerging trends in the country. We are constantly monitoring the political and economic situation in Venezuela, and we currently assess the instability of the political situation in the region as a temporary phenomenon, that does not have a significant impact on existing projects.The developments of the Zohr project offshore Egypt continues at an accelerated pace, and we plan to reach the level of production of more than 74 million cubic meters of gas as early as this year. The company continues the implementation of the development project in the Iraqi Kurdistan in the Middle East. For this year, it was planned to carry out an exploration program to ensure the subsequent production. Short-term production targets will obviously depend on the timing of the extension of the OPEC+ agreement, while new production capacity will certainly go up, ensuring excellent growth potential for the company among its industry peers. The use of state-of-the-art technologies in project development remains a key strategic priority for Upstream.The following are just a few examples: In 2018, we continued to introduce technology for drilling horizontal wells with increased flanks and number of hydraulic fracturing stages. And Yugansk and [indiscernible] more than 50 wells have increased lengths and more than 380 wells with an increased number of hydraulic fracturing stages were launched. In addition, in Yugansk, there was a horizontal well built in just 13.4 days with a unique combination of production casing column with a depth of 4,700 meters and a horizontal section of more than 1,500 meters long. Horizontal wells batch drilling and the use of mobile rigs is widely replicated. At [tuvas] project transfer horizontal wells were constructed while the greatest line-setting depths was reached in [kosikinski] field at the level of 4,900 meters.For many years, the company has been consistently providing high-level replacement of current production with an increase in reserves. The volume of proven reserves according to SEC classification increased by 4% to more than [41 billion] BOE at the end of last year. The replacement rate of production with proven reserves reached 173%, and the life index for proven hydrocarbon reserves according to the SEC classification is more than 20 years. The success of exploration drilling onshore the Russian Federation was 84%. 230 new deposits and 23 new fields were discovered with 250 million BOE according to the Russian classification. Outstanding results in exploration and reserve addition became possible through a phased introduction of the advanced [downstream] data processing and interpretation technologies. In particular, the method of modeling of fields [Khusring] service, allowing to obtain optimized monitoring systems were implemented. Actions were taken to create our own geophysical service to perform high-tech well logging. The technology of drilling multilateral exploration wells is applied. It reduces the risk of no commercial flooring complex coverage for [indiscernible]Rosneft remains a leader among the largest international oil and gas companies in terms of proven reserves and replacement rate. We strive to maintain a high-quality portfolio of oil and gas assets and improve Rosneft's global position.Now we'll move on to Vlada Rusakova, Vice President for gas business, who will continue this presentation, highlighting key events in her segments.

[Vlada Vilorikovna Rusakova, VP & Member of Management Board]

[Foreign Language] Thank you very much. Good afternoon, dear colleagues. Considering the result of 2018, the production amounted to 67 billion cubic meters of gas. [These efficiencies] we have reduced the associated petroleum gas production. At the same time, initial gas production compared to last year grew by 2.4%. The biggest growth of the natural gas production of the reporting period to get the [fees of] [Zofner] project. In terms of the utilization of the associated petroleum gas, last year, it was 84.4%. The income from the sale of gas in 2018 grew by 8.8% compared to 2017. The company's share in the domestic market amounted to about 16%.A current point according to the adopted specs of the company, we have focused our efforts into running the project with a high level of return from the capital invested, which enabled us to increase our production of gas and will lead to grow its share in overall hydrocarbon production as well as [positively] grow the EBITDA of the gas business. This year, we're working on launching the Rospan project, which is the biggest project in the company's portfolio. And the first stage of the project will provide for the annual gas output in 21 billion cubic meters a year as well as the production of liquid hydrocarbons in the amount of 6.5 million tons, including the production of propane and butane gases. Another major gas project to the company's portfolio is the development of the Kharampurskoye and Festivalny license acreage located in the Yamalo-Nenets Autonomous District. An active phase in the implementation of this project, we started to give with our partner, BP company, in 2018. The project will provide the annual gas production in the amount of 11 billion cubic meters of gas. We plan to commission the operation in 2020. So overall, we can see that the previously stated target to achieve the amount of output of 100 Bcm is achievable, and we are moving towards it. And we would be ready to answer all of your questions later. But right now, let me pass the floor over to Alexander Krastilevskiy.

[Alexander Krastilevskiy, Adviser to the President]

Thank you. Good afternoon, ladies and gentlemen. Considering the results of 2018, the amount of refining in the Russian parts of the refinery of the company grew by 30% compared to the previous year, which amounted to 103.3 million tons. Considering our foreign assets [demands] [of who finally] grew by [ 2 ]% up to 150 million tons. The company continues to invest in upgrading its refineries. The total amount of investments into them right now is RUB 1.3 trillion. At the current point, we have funded more than 60% of this particular work. According to the company’s strategy, Rosneft-2022, the main number of the projects, and these are: upgrading the different company's refineries in Russian Federation are planned to be completed within the time frame of 2019, 2020, the results of the production of the [line of] projects from the Russian refineries by 2023 would grow to 70%. So over the next few years, the company is going to commission to operation 4 hydrocracking units as [developed at Kuibyshev] to offset Komsomolsk and Archinsk refineries were to complete the installation of hydrocracking at the Bashneft [indiscernible] refinery, the construction of the new capacities of the delayed coking at the Achinsk refinery as well as it can be operating Novokuibyshevsky refinery. The effect from this projects would be increasing the margin -- profit margin as a result of production of the high-margin products as well as reducing the output of fuel oil, which will help us to compensate the potential negative effect from the introduction of the new IMO standards by 2020. Specifically, the increase of the efficiency of the company's refinery by introducing new units will deal away with negative effect from the new regulatory requirements in terms of the sulfur content down to 0. It is necessary to note that the former refineries of Rosneft in Germany and India are already within the line of producing the optimized production of diesel and reducing the output of [majul] waste, which in turn leads to a very positive effect for these group of refineries. As part of Rosneft-2022 strategy, the company continuously improves its high-technology production of the high-tech motor fuel and fuel products. Last year, the Ufa group of refineries and [Saratov] refinery started producing Euro 6 motor fuel while at the Resign Refinery we started producing high-octane gasoline, Pulsar 100, which actually mentioning was awarded the Best Product of the Year. The introduction of the modern innovative divisions in the refineries of the company enabled us to increase the efficiency of the technological processes to raise the level of industrial safety and efficiency of the engineering work as well as to ensure the stability of the equipment we've got and strengthen the quality assurance. As part of the development of the cooperation in the international market with our international partners as far as oil and oil product -- defined product safety is concerned, we've entered into contracts to supply oil, entering into China with ChemChina, with Lotos into Poland, into Germany with TOTAL, Shell and Eni in Turkey with subcontracting as part of the sales over to a foreign private company, also entering into long-term contracts with the largest ongoing partners, with overall value of more than USD 2 billion for the supply of gasoline and diesel. And as far as the expansion of its operations abroad is concerned, the subsidiaries of Rosneft to Rosneft Deutschland as of January 1, 2019, started directly selling refined products [KAR key] is acting not only as one of the major refiners, third in the place in terms of Alfabit, but also the leading wholesale supplier of refined products in this market. Rosneft Deutschland continues to sell all the refined products which are being produced at the German premium refineries, with half of the share Rosneft participation. The client portfolio includes more than 300,000 in Poland, Czech, Swiss and France. The company in 2019 was preparing to start the direct sales, entering into selective contracts to supply products, leasing the fuel terminals and as well as the transportation units. As part of that, in 2018, the company started locking sales of bitumen as well as own Alfabit, which is a polymer-based product, in Germany. Throughout that, Rosneft also supplied more products worth -- to more than 130 offtakers in Germany. Last year, we similarly continued developing the previously acquired assets as part of the M&A work done in other countries. Nayara Energy, specifically, demonstrates EBITDA valued at a little over USD 1 billion. It is expected that this particular value should grow in the next few years as a result, as previously mentioned, of adopting new IMO standards. Currently, the stage-by-stage refinery program is being put together, and the first stage calls for organizing the production of petrochemical products as well as to enter the Indian petrochemical market. Well, this is it with my part. Let me pass the microphone over back to Mr. Fedorov to cover the financial performance of the company.

[Pavel Sergeyevich Fedorov, First Vice President for Economics & Finance]

Yes, thank you, Alexander Alexandrovich. Dear colleagues as already noted by my esteemed colleagues, the recovery, production improvement of the outside environment as well as the varied work done by the management team to improve the position of the company were conducive to achieving overall high financial performance results. In 2018, the revenue of the company grew by 37%, amounting to RUB 8.2 trillion. The EBITDA in the reporting year grew almost 1.5x up to RUB 2.1 trillion. With the growth of the margin, EBITDA up to 25%. Despite us recording a number of cases where value was lost and because of the change of the regulatory environment in the Russian markets, specifically in the refining business, the net profit of the company attributable to shareholders last year exceeded the level of -- in 2017 almost 2.5x, being at RUB 549 million -- RUB 549 billion. The growth of the net profit apart from the operational income, conditioned by the exchange rate difference, as well as the one-off income from the acquisition of the share in a joint venture from the Rospan field with the foreign partner and the fair value assessment. In 2018, the shareholders of the company were paid RUB 225 billion in dividends, including RUB 155 billion for the first half of last year, which amounts to 50% of the net profit under IFRS and which corresponds to a new dividend policy level. The successful annual results, we believe, similarly will provide for higher level of the year-end dividend payments, considerably rising the profitability for the shareholders of the company. Thanks for the continuous work done by the management to optimize its debt portfolio, not only the net debt to EBITDA were down, similarly, the structure of the portfolio changed and its share in terms of the short-term partners, the beginning of the year, in overall debt portfolio of 1 down -- 2.5x down to 22% from 55%. We continue to work in compliance of the strategy approved by the Board of Directors to increase our cash flow and optimize our debt burden, with a focus on our organic business for the purpose of achieving the best possible results simultaneously. With that, I would like for the Head of the IR Department, Mr. Andrey Baranov, to share with us a couple of comments in terms of what is going on in the external market. And after that, we will start our Q&A. Thank you very much.

[Andrey I. Baranov]

Good afternoon, and thank you, Pavel Sergeyevich for giving the floor. I would like to simply briefly quote the recent news which emerged at the very start of this call. I would like to congratulate all of our investor, particularly debt investors, since S&P Global Rating Agency raised the credit rating of Rosneft to BBB- level, which is the lowest investment grade. So now, let us start our Q&A session. Thank you.

[Operator]

[Operator Instructions] The first question comes from Alexander Burgansky from Renaissance Capital.

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

[Foreign Language] I've got 2 questions, if I may. First of all, could you possibly give us a few more details about your production plans for liquid hydrocarbons for 2019? I am looking at your slides, which say that you expect growth production at about 2.54%. If one is to take a look at the real volumes in October, you have now been at 4.7 million barrels a day. And if you deduct from that 90,000 barrels a day, which is the production decline, you'd end up having about 4.6 million barrels a day. So their average output for the last year, you reported 4.57 million barrels a day, does it mean a decline in your output because you are talking about increasing your production. Could you tell us how is it possible under the OPEC+ restrictions. This was my first question. And the second question was about the Yurubcheno-Tokhomskoye field. Is it possible -- do you believe to have certain exemptions from your export duty that you referred to last year or within this new regulatory environment, does it mean that you no longer are going to be [indiscernible]?

[Eric Maurice Liron]

Yes. Thank you very much for your question. With your permission we'd ask Mr. Liron, Vice President for E&P, to say a few words about it. Now as far as I'm concerned, this is something that we spoke about during our last conference. We'll certainly be taking into account various external limitations. Currently, as you might know, there is OPEC+ increment in place and very understandable way the company works with the growth is in the target, that's being defined. But at the same time, there exists quite a few uncertainties in terms of the possible extension of OPEC+ and the way it may affect the third and fourth quarter of the current year. So the guidance that we're sharing with you envisages different scenarios of the OPEC+ either being extended or not, and that defines the interval that you have noted. Now the pace of growth that we have are being defined by a whole number of projects [indiscernible] I would ask Alex to comment on some of them and also answer the second question that you asked.

[Alexander Krastilevskiy, Adviser to the President]

Alexander, thanks for the question. So on the 3.5% to 4% increase is based on no OPEC or no OPEC+ restriction, and that brings us to about [340] million tons at year-end. If we assume the present scenario, which is not a fixed scenario that we're [cutting] maybe this [93,000] barrels by 1st of May, and we restart the production 1st of July, we plan to achieve [237] million tons. So the question -- the big question now, as mentioned by Pavel is, are they going to maintain the cuts through the year? So in this case the increase for the year won't be much smaller. But more than what we have in 2019. Okay, obviously, okay, we expect something in return for the first [indiscernible]. Regarding [UTM], I'll ask Artem to answer on the tax rate.

[Artem Vladimirovich Prigoda, Head of the Department]

I guess ForEx, thank you very much for this question. Principally speaking, we have optionalities here and applications in a number of peers whether to either stay in the current tax regime and growing through [846]. So -- and as far as the [indiscernible] is concerned, we plan to switch it into the exemption status, which would enable us to compensate for our expenses in the previous periods in order to optimize our tax cuts. So -- the tax reductions. So there is a number of fields which we would keep under the current attack regimes. So this remains an optionality as well as certain average kind of consideration whether to transform or to switch the new tax regime or not.

[Operator]

The next question comes from Ekaterina Smyk from Bank of America Merrill Lynch.

[Karen Kostanian]

This is Karen Kostanian from Bank of America. I have 2 may be 1.5 question taking into account the oil price dynamics, what do you think about your CapEx guidance for 2019 at RUB 1.1 trillion? Are you going to somehow change it, reduce it or something like that? While my second question, it is principally speaking also that I can't exactly congratulate you on such a [indiscernible] cash flow. Clearly, in 2018, this cash flow, all of it was aimed at using deleveraging. But what do you think about setting priorities for this cash flow for 2019? I'm going to direct it to deleveraging, maybe you would raise the dividend levels or would go back to your strategic acquisitions in 2018?

[Pavel Sergeyevich Fedorov, First Vice President for Economics & Finance]

Karen, thank you very much for your question. As you know, we have the strategy endorsed by the board in Rosneft 2020 which focuses on organic growth and improving the efficiency of the operation of the current assets. And so as part of this, we plan to work for the future. There are no change in [the dividend ] indiscernible]. Speaking about capital spending, the phenomena that we see in 2019 and partially in 2020, we will see growing our capital expenditures up to the market, [Mr. Section] in his speech to investors quoted: "these figures 1.1 and 3, they are related to the completing stage of a number of major projects and specifically within the [ DNP ]area, which we believe, and were [indiscernible] that that, represent some of the most globally competitive project that the global industry can only imagine in therms of the cost, in terms of the efficiencies, in terms of the return on investments. These are truly some of the best projects in the world. So in many ways, that will work to determine the advancing highs of the company's revenue growing within the 2019, 2020 time span. In many ways, that will predetermine a certain growth in delivering our capital investments. So while one can say 25% as opposed to the level of 2018, but as I stated previously, and as far as the details are concerned whether we're convinced in the effectiveness of such investments and that is something that we're going to build on, especially around -- well, clearly this vision of the cash flow as far as concerned we do have to service our debts, and we again, with the new initiative of the board of investors we have the dividend policy from which it's part of the [indiscernible] [1.5%] we'll be paying out to our shareholders.

[Operator]

Our next question comes from the line of Ron Smith from Citibank.

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

The question I have -- first one has to do with refining. You've stated during the call that you have 4 Hydro crackers you'll be launching in the coming years. When would we expect the first of those major projects to be launched? And for like product out there to begin climbing noticeably. That's the first question. Second question will be for Eric Liron. I know that the Rospan was launched basically in December and I remember from previous conversation that Rospan now, the next stage should launch sometime perhaps in the late second quarter. Could you give us an update on the ramp up speed you expect to post in fields in the course of 2019? And will they be effected by OPEC+? In other words will you ramp them up regardless of the OPEC+ agreements adjusting other fields as necessary or will they potentially be delayed if the OPEC+ reductions remain in place [and other]?

[Eric Maurice Liron]

Ron, thank you very much. Speaking about the new projects, without [indiscernible] we are considering the current requirements but for being [indiscernible] in the company in terms of the comprehensive output reduction and in case that involves a certain delay in launching some of the projects, not quite clearly that the board would affect the new project as well. So we previously have commented by saying that -- there is a lack of certainty in as far as the OPEC+ future is concerned and it's a factor of our 2019 period. And I believe that as a minimum in order to achieve the goals that we set ourselves for the first half of the year, we will witness a postponement of some of our project for a few months. With respect to individual fields, speaking about month by month launches, we're not ready to comment on the details because we're currently very seriously going over this with Minister of Energy in terms of the facts from OPEC+ projects, but as far as the goals are concerned which within this or that year, we would set ourselves for the green fields, remain unchanged. Rospan will come out this year, and the same kind of comment done in May applied to Rospan and [indiscernible] was saying about it. But speaking about the sequence for this year, that remains unchanged. In terms of the individual months, there may occur certain changes related to the ability to achieve a certain OPEC+ target that the Ministry of Russia gives us.

[Pyotr Ivanovich Lazarev, Financial Director & Member of Management Board]

About Rospan, we're still on track with what we said last year. The key is here though we are now obviously linked to the [indiscernible] -- for the time being, we have increased production and we are continuing to ramp up and it will be a little bit independent from Rospan for some time, but the time is still to commission the Rospan condensate for this year. To answer your question on operators, we stand today, there are no plans to choke the production of Russkoye because of OPEC+. Thank you.

[Alexander Krastilevskiy, Adviser to the President]

If I may add just with respect to the [indiscernible] question, in terms of the current construction plans, we plan to commission to operation in 2020, '21, and already in 2020, we will see a very substantive growth in the ARPUs of the like products by about 5%, 6% incremental on top of the current level. So that will be 64.5%, 65% and respectively raise this level to 70%, which primarily will give us, in terms of a current or projects full operation of 400 [millions].

[Operator]

The next question comes from Igor Kuzmin from Morgan Stanley.

[Igor Kuzmin, Equity Analyst]

Can I ask you about there being any guideline in terms of figures to reduce your debt within 2019 as -- I mean comparing to the results that you've reached within 2018, please?

[Pavel Sergeyevich Fedorov, First Vice President for Economics & Finance]

Igor, we announced a limited operational guidance, in as far as the whatever [indiscernible] we share the limited financial guidance which applies to a level of capital investments, while the rest overall depends upon the external environment, and that is why we refrain from fully giving an answer to the question that you ask. Meaning to say that this is the guidance we're not able to share with you, but like I commented previously, we remain within the board approved strategy and our main focus in terms of our cash flow is going to be directed to reducing overall debt level of the company.

[Igor Kuzmin, Equity Analyst]

And in this case, could you specify, if I understand correctly, RUB 1.2 trillion, RUB 1.3 trillion from the point of view of investments in 2019, and is affected if I understood correctly, this is still a valid figure?

[Eric Maurice Liron]

Yes.

[Igor Kuzmin, Equity Analyst]

And the second point, do you plan any - - [indiscernible] sales, divestitures from[indiscernible] if you can announce anything about that?

[Eric Maurice Liron]

Igor, we continue working over reducing the non-core assets profile of the company. This is an ongoing work. It is the work which follows a schedule and there is nothing which could materially affect your meddling, whatsoever. Alongside with that and this is something that I mentioned in my part of the presentation is continuously having negotiations. And at this point in time, no final agreement have yet been reached for the whole number of international investors considering the resource base in the company's portfolio and assets that it contains. We have many investors calling upon us who undoubtedly recognize the effective or potential that the company has and the number of production projects, there are requests to be fact to become [indiscernible]partners. We do consider such requests, but no final agreements have yet been reached for this point in time. So this is an upward work in case we're offered a premium offering in terms of the NPVs or the project we'll definitely consider that, because we do believe that there is a certain value in having minority partners in such projects because that crystallizes the shareholder value, and operational practices being transferred to better whatever we do. So there are no specific plans currently available but in terms of a premium offering that might happen but we're not in a position to give it any specific answer just yet.

[Operator]

The next question today comes from [ Andre Gromadan ] from Sberbank.

[Unknown Analyst]

I have listed down here quite a lot of questions from myself, but I would like to narrow it down to a couple and one request. So my question #1, USD 1.1 billion of prepayment in the second half of 2018. Who was it paid to? And upon what terms and conditions? And my second question, the volume of liquid funds started growing on the books of the company, exceeding USD 20 billion. What is the reason behind it? And could you possibly tell us what is the purpose -- specific application of this fund because the short-term debt is going down? And at the same time, there are not any particular M&A plans entertained. And by way of my request could you bring back your disclosure of the domestic refined product, the markets in your MD&A, because level is fine since [indiscernible] and it's just hard to understand what is the reason for it because the domestic market has been frozen, so it's very difficult to conduct an analysis of it. Thank you.

[Eric Maurice Liron]

Yes. Thank you, Andrzej, very much for your questions. Well on that part, with your permission, [indiscernible] will be heading and Alexander Krastilevskiy will answer your question with respect to the downstream. And then as far as the liquid assets are concerned, then our plans for payment, Alexander [indiscernible] will answer. Thank you.

[Alexander Krastilevskiy, Adviser to the President]

Yes, thank you very much for your question. Yes, indeed it has somehow -- we accumulate a lot. So the second half of year that you're referring to, it was related to a continuation of our activities in [indiscernible] were we conduct. Last year there were prepayments likewise by the subsequent trading battles. But as of January 1 this year, there came to fact the concession. And so [indiscernible] and some money part of it which have been paid before the first half of 2018, and then completed in within 2018, as part of a concession payment which the company entered into with regionally [ Kurdistan ]government for 20 years, plus 5 years adoption. So these payments, in terms of investment payments will be coming back to the company in the quarterly operations. That is as far as prepayments are concerned which occurred. Now the remaining balance and coupled with a balance approximately about 3 million barrels a month, respectively, so Kurdish oil is going to be shipped to the[indiscernible] Port with the subsequent tradables was into the Korean market, including our German refineries. So as of today, we expect to be -- we earn a higher margin when some of the work we're doing during 2018 we're adopting about USD 46 million as in the fact of reselling these volume and respectively we have enjoyed the additional income from these investments, this is as far as the prepayments are concerned. Now the second part was about the liquid assets in our portfolio.

[Alexander Krastilevskiy, Adviser to the President]

Alexander Krastilevskiy. Yes, as far as the breadth of the liquid assets, the books of the company closed year-over-year, it is because in January we have -- I planned the majority payment of short-term debts which were done successfully so we were preparing ourselves for these payments which already have taken place now and the rest of our obligations are being serviced according to schedule.

[Operator]

The next question is from Ildar Khaziev from HSBC.

[Ildar Khaziev, Analyst]

I've got a question about your buyback program because in August, you were saying that the plans do call to buy these shares in case there is a discrepancy between the market value and the fair value deemed by the company like in April in terms of the current pricing in August, prices didn't change, and the factors taking place. Now my question is this. In case before the end of the next year, the share price remains unchanged, do we need to understand that that buyback won't be happening? My second question about CapEx for this year, could you approximately disclose the structure of your CapEx in between the segments? And the third question, could you please disclose for us the [indiscernible] valuation separately on oil and separately on gas on the end of last year?

[Pavel Sergeyevich Fedorov, First Vice President for Economics & Finance]

Yes, thank you very much for your questions. You are speaking about the buyback program, then our guidance remains exactly like it was during the previous call in case the macro environment and the share price remains. And on the macro environment would mean the dollars per barrel and the U.S. dollar ruble exchange rate and the price which was on [paper] last year, then the company would have initiated a buyback. Under the current macro conditions and against the current share price this is one of the worst [indiscernible] and that buyback is not taking place and depending upon the dynamics. So these [three indicators], not just one, we will either see or not see the company shares being bought back in the course of 2019. In case of an extraordinary event or events and market being balanced, there is a chance that this program will be restarted. But again, it will depend upon what the dollar oil price is, the dollar-ruble exchange rate is, and what the share price is demonstrated by the market. That is answering first question. And as far as our results are concerned under [indiscernible] in terms of [indiscernible], please, [indiscernible], [if you].

[Alexander Krastilevskiy, Adviser to the President]

Yes. In fact, we traditionally disclose this information. But in terms of the structure and the share of liquids and the gas, then principally speaking, business speaking, they are quite proportionate to our current output, both in terms of liquids and gas. If you need more elaborate information, we may provide you with it separately. Then please get in touch colleagues with Andrzej [indiscernible] if you need to have this. Well, clearly, there couldn't be any separate disclosure. We simply need to take a look at how to do it properly. But in spite of the capital investments, I would like to ask Mr. [indiscernible], Alex [indiscernible] Vice President who's in charge of our investment stream to comment how the key business segments can be itemized.

[Unknown Executive]

Yes, thank you very much. Now bear in mind the fact that we continuously are trying to focus our investment portfolio, within the areas where the company generates its main value both from the point of view of its current cash flows as well as in terms of the long-term company value, so principally speaking, it is quite traditional that 85% of our investments do go for E&P segment, which also includes oil and gas, but at the same time 50% of these investments are aimed at mature assets which the core of the cash flow of the company have enabled us to commission completion these highly competitive greenfield projects and the greenfield projects and that make it possible to renew and replenish the company barrels with the new barrels with respectfully a more effective longer term in terms of obviously the barrel. And from the point of view of our investments into international projects that you always love to ask about, quite minimal, no, you're accounting for in terms of all of the streams are not more than 10% from the top investment portfolio, we talked about 10%, which is investments into refining, commercial operations and logistics where the main effort is aimed at building new contemporary units at our key refining that our colleagues previously mentioned, which is extremely important considering the company current fiscal system in place.

[Operator]

The next question comes from Andrzej [indiscernible] from Raiffeisen Bank.

[Unknown Analyst]

We have observed a very considerable positive effect of this reduction. So based on your expectation what is it we should expect in 2019? Is there any additional reduction of working capital might take place which will positively affect your net debt?

[Pavel Sergeyevich Fedorov, First Vice President for Economics & Finance]

Yes, Andre thank you very much. I would like Alexander Sokolov who is the head of our treasury, to respond to you in terms of the [indiscernible] of our working capital. In a very discernible way, one should take it that is very much depends upon the price evolution of any fees. Well, in many ways, changes in working capital are sort of better if it were related to an optimization of our trade settlements with our partners and with payments of obligations and debts and so there is additional driver, overall reduction of the oil price which took place in Q4 last year. Further on, the company will adhere to a stable trading policy both from the point of view of its counterparty interaction as well as in terms of its supplier arrangements. So I don't think there will be any significant changes in our working capital position in the immediate future.

[Operator]

Our next question comes from Henri Patricot of UBS.

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

One question left for me. On retirements fund, do you have a step up in the fourth quarter to $800 million for the principal? I was wondering if you can give any guidance for repayments for the start of the year. What should we expect for the first quarter?

[Pyotr Ivanovich Lazarev, Financial Director & Member of Management Board]

Yes. Thank you very much for your question. Just based on context, I would say that the [stat] has gone down to such a level that it ceases to be very material value. So all the payments are strictly following the schedules and already now, we see that -- you can see that before the end of the year, all the debts have been repaid. So generally, in terms of the payments, there will be no delay in terms of schedule. We're currently making nominations for the tankers in February which provide us with full compliance for this capability. In context, I would like to say that the first months when we will see the growing production [indiscernible] because based on the current data January is currently above the December levels right now, and in February, production ideally in terms of the daily levels should reach 1.5 millions a day, and that has a certain guarantee whereby all of the terms and conditions will be met.

[Pavel Sergeyevich Fedorov, First Vice President for Economics & Finance]

Yes, thank you so much for your comments. Do we have a question here?

[Operator]

Our next question comes from Alex Kramer of JPMorgan.

[Alexander Kramer]

Just a quick question. With regard to , are you expecting some synergies to come through here and the profit -- it looks like profit has fallen quite a bit from last year, so I just wondered if there is a reason for that, and what we could expect going forward?

[Eric Maurice Liron]

Could you please explain where did you see the profitability going down? Could you please elaborate upon your questions, so that we could correctly respond to it. Thank you.

[Unknown Executive]

Well, while we are rethinking the way to rephrase your question, I would say that on our side, as we have previously stated in Bashneft and Rosneft synergies gives us firm grounds to stay convinced that the deal itself definitely has a very strong economic rationale and the synergies that we publicly announced, they are being implemented in a planned way. More than half of them have already manifested itself since the middle of last year, and if it is necessary, we will be in the position to provide you with a more detailed update but without doubt that the joint work that we conduct together with Bashneft in optimizing, amongst other things, the sale of its oil and refined products, as well as the implementation of synergies in the transportation of oil and refined products and the operational synergies at the level of governance, this -- all work is being done in a scheduled way. And the figures that we announced previously having reached so. If you want, we can make an additional disclosure to you through Andrey Baranov who is the head of our IR Department. As you may know, colleagues, now we are going to hold a roadshow with a number of our major investors in Europe within the next few days, and so Rosneft representatives, I'm sure will be in a position to and enjoy answering these and other questions.Well, in this case, dear colleagues, no more questions coming. So thank you very much for your participation. And as is always the case, we would gladly respond to any further questions and here, and speak to you soon.