Full Year 2012 Novatek OAO Earnings(IFRS) Conference Call
Mar 11, 2013 AM CET
NVTK.MZ - Novatek PAO
Full Year 2012 Novatek OAO Earnings(IFRS) Conference Call
Mar 11, 2013 / 02:00PM GMT
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Corporate Participants
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* Mark Gyetvay
Novatek OAO - CFO
* Leonid Mikhelson
Novatek OAO - CEO
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Conference Call Participants
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* Oleg Maximov
Sberbank CIB - Analyst
* Karen Kostanian
Bank of America/Merrill Lynch - Analyst
* Alexander Kornilov
Alfa-Bank - Analyst
* Ronald Smith
Citigroup - Analyst
* Maxim Moshkov
UBS - Analyst
* Ildar Kavis
- Analyst
* Katya Rudina
- Analyst
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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to the Novatek 2012 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Oleg Maximov. Please go ahead.
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Oleg Maximov, Sberbank CIB - Analyst [2]
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Good afternoon and welcome. I am Oleg Maximov from Sberbank and this is Novatek's Full Year 2012 IFRS Results Conference Call. With us today is Mark Gyetvay, chief financial officer and member of the Board of Directors. Mark, please start with your presentation. Thank you.
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Mark Gyetvay, Novatek OAO - CFO [3]
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Thank you, Oleg. Ladies and gentlemen, shareholders, and colleagues, good evening and welcome to our fourth quarter and full year 2012 earnings conference call. I would like to thank everyone for joining us this evening and again extend our sincere gratitude to Sberbank CIB for organizing and hosting our earnings conference call.
Joining me this evening that during the question and answer session will be Mr. Leonid Mikhelson, CEO, chairman of the management committee, and member of the Board of Directors.
Q&A session will be handled simultaneously in the Russian and English languages so when we come to that part of the presentation call I will ask you to keep this important point in consideration when answering questions. There will be sufficient time allotted to answer your important questions.
Before we begin with the specific conference call details, I would like to refer you to our disclaimer statement as is normal practice. During this conference call we may make reference to forward-looking statements by using words such as plans, objectives, goals, strategies, and other similar words which are other than statements of historical facts.
Actual results may differ materially from those implied by such forward-looking statements due to known and unknown risks and uncertainties and reflect our views as of the date of this presentation. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events.
Please refer to our regulatory filings including our annual review for the year ended 31st December 2011, as well as any of our earnings press releases and documents throughout the past year for more description of the risks that may influence our results.
This past year was an extremely difficult year for share price performance perspective as the Company delivered another solid year of financial and operational results, concluded another value accretive acquisition by acquiring a 49% equity stake in Nortgas, met its production guidance for both natural gas and liquids for the year, began trading commercially on the European markets, successfully launched the fourth phase of stage II development at our Yurkharovskoye field, and the initial two production lines at the Tambeyskoye field of SeverEnergia, as well as continued to make steady progress and move in the Yamal LNG project towards FID or final investment decision.
Unfortunately the equity markets continue to focus keenly on current news flows and markets for speculation and correspondingly move away from the Company's strong fundamentals. We witnessed this negative market reaction throughout all of 2012 despite our continued dialogue with investors and analysts. However, despite this fact, we remain steadfast in delivering the financial and operational results as outlined in our strategy day presentation.
Another area of prolonged investor concern has been continued market noise around the gas mineral extraction tax or MET and more recently gas condensate MET. As I mentioned on numerous occasions we are actively involved in these important discussions with the relevant ministerial bodies and believe the outcomes being proposed are not punitive to the independent gas producer's as speculated in the market.
Currently it's our understanding that there will be no change in the gas MET rates already published and any change incorporated by the introduction of a new tax formula will come in effect in 2016.
We continue to be surprised with all this noise around the gas condensate MET rates because we had previously addressed this issue on our last conference call in the Q&A session by stating that there are no present structural discussions to change the present tax system and if you recall the rates have already been adjusted and hence increased during the recent change in the tax calculation methodology from a percentage base to a flat rate or ton produced and disclosed in the tax section of our MDNA.
It is crucial that these points be raised early tonight because we understand the nervousness and uncertainties voiced by our shareholder base and has been customary throughout all our discussions in 2012 and before we prefer to address these issues of concerns in a proactive manner rather than letting these concerns fester and negatively influence your decisions regarding our company, our future prospects, and our equity valuation.
I would like to spend the next minutes discussing some important points that have been voiced lately by our shareholders as well as to dispel some of the negatively biased comments, news, and reports.
First of all, I would like to dispel the rumor of my imminent departure or resignation as CFO of Novatek. I have been involved with the Company for over 10 years and I am fully committed to fulfilling my obligations to the Company and our valued shareholders.
I have set high standards for corporate governance and financial transparency when I began working full-time for Novatek in 2003 and have actively engaged our shareholders throughout this whole period of time through various conferences, direct meetings, and other investor forums.
It has been a really rewarding professional experience to have this opportunity to passionately expand Novatek from its humbling beginnings to now one of the largest gas players in the global oil and gas industry.
I believe we have clearly distinguished ourselves as one of the leading companies in Russia in many important respects and we are committed to continue this high level investor dialogue in the future.
I will be part of the management -- senior management team in my present capacity when Novatek and Yamal LNG make history with the delivery of the first LNG tanker to the international markets. There is much more to accomplish at Novatek as we move forward and deliver on the corporate strategy that we articulated in December of 2011.
In regards to Yamal LNG, we read with an amazement the reports being written on this project without any clear basis to make such statements. Moreover, the consistent speculation on project delays, difficulty in finding equity partners, the circumstances surrounding export liberalization or operating in some climatic Arctic conditions are all intended it to leave one to question the project's viability.
It is important that I dispel some of these baseless statements with facts, not rumors or speculations. There is no delay in the project or in that FID decision process as erroneously reported in the press. Quite the contrary as the project partner's recent field visits attest.
We are proceeding along our path to make a positive project FID decision in the coming months as we conclude the review process of EPC contract proposals to our tender for the main construction of the projects. This fact is well understood by the principal parties involved both Novatek and Total and we have all been proceeding along in accordance with the project's specified timetable.
To make a statement to the contrary on back of our recent Eurobond road show presentation which stated that first production will commence in early 2017 rather than late 2016, is purely semantics and in my opinion irresponsible and misleading reporting.
To set the record straight, we're presently reviewing all of the material submitted to us via the tender process from three bidding consortiums and this internal review was never intended to be completed in haste.
As you can appreciate, this review process is a very important step and a selection process and requires careful review and ongoing discussions with the potential EPC bidders. We're at the final stages of selecting an EPC contractor and we believe that it's favorable to continue negotiating to get the best terms and conditions for the project's overall cost.
As such, we believe we can make an announcement on the selected EPC bidders within the next one or two weeks and conclude the final signing of all contractual documents shortly thereafter.
During this tender review process the partners have agreed to continue funding the project to ensure the aggressive project timetables are being met and we have recently initiated the tender process for long lead items without delay.
The tender process for long lead items such as LNG tanks, gas turbines, main compressors, power stations to name a few have already begun and a contract to begin drilling operations has already been designed with one of the new Arctic rigs already assembled and ready to commence drilling operations and the second Arctic rig being mobilized and erected and ready to begin drilling in the second quarter of 2013. In fact, we have already commenced the drilling of the first production well this past week at the South-Tambeyskoye field.
Another area of pure conjecture has centered on the difficulty in finding another partner for the Yamal LNG project and hence a confirmation of the project's technical complexity. Again, I would like to set the record straight by strongly stating that this speculation is not an accurate assessment and/or conclusion of the process currently undertaken.
In fact, the dialogue around potential partners has intensified recently, largely due to the perceived technical merits of the project and the industries realization of the significant cost overruns on many of the competing LNG projects.
I had also mentioned on several occasions that we were in ongoing discussions with potential partners for a farm out of an additional stake in the project but that the timeline to complete this process is not solely defined by us and requires potential partners to conclude their due diligence on the project.
This important assertion is still valid. Moreover, our recent trip to Asia which included a Russian Federation delegation led by Alexander Novak, Minister of Energy, again confirms to us the strong potential partner interest in this project and accordingly we will continue to consider these new partner relations and undertake negotiations.
We understand the investor concerns relating to the timing of these potential farm out but we remain confident that we can complete this process in a satisfactorily manner for ourselves as well as our partners.
More specifically, I would like to provide some updates on the project as we have progressed with various work streams over the past year according to our work plans. As you know, the Russian government has designated the Port of Sabetta as a new strategic Arctic port and considers this port crucial for future oil and gas activities in the Arctic region.
To support the project, the Russian government through [Rossmoor] port will provide the financing to build a port complex as well as a dredge the approach channel on the [Hope] River and the loading area.
In recent site visits in early December and more recently over the past few weeks it is clear that the Russian government has made good on its promise to undertake the work activities in conjunction with our proposed timetables and are progressing according to work plans on port construction and dredging operations.
The dredging vessel, [Alexander Don Humboldt], has dredged the access channel from the 29th August to the 15th October or 45 days and has excavated and removed 1.5 million cubic meters of soil and deposited the soil in a temporary holding area until further use. This dredging operation was done and according to work plans for this past year and will begin once again the operating conditions to make these activities feasible.
We can also report that significant progress has already been made on the port construction activities and we can also expect that the module offloading facility will be ready to begin accepting materials later in the fourth quarter of 2013 and modules delivery around the third quarter of 2014. With the completion of the new module offloading facility we will be able to receive the deliveries of materials and modules year-round.
The three LNG trains will be built in a modular fashion to enable construction works to be performed simultaneously in several locations and then bought and assembled on site, thus minimizing hook up, pre-commissioning, and commissioning activities at the site. This work activity is standard practice for this type of Arctic climate and Russian companies including us have dealt with these types of construction activities in the past.
On a previous conference call I also mentioned that we were going to use a proven base liquidation process by air products chemical which process is a base liquefaction technology used on many LNG projects around the world. We also signed a license agreement with BASF for the use of their pre-liquefaction gas treatment technology which one of the most important design solutions for the Yamal LNG project and the acid removal technology used in many of the world's leading LNG plants.
There are a number of technical reviews that have been undertaken by the Russian government in accordance with normal practices and we are pleased to report that we have a satisfactorily completed the majority of these reviews and we believe the project will be fully sanctioned by the end of this month.
Moreover, over the past year, the primary technical feasibility's of the project have already been attained including the design of the ark seven LNG tanker, the construction of the Yamal LNG plant, as well as confirming year round shipping to all key consumer markets.
We are progressing with the market arrangement for future LNG sales with a recent series of trips to both Europe and Asia. After a series of meetings with potential off takers especially with the rapid progress in our discussion with potential Chinese customers, we believe that we will have approximately 80% of the off take agreement prepared and ready for signature subject to the positive change in the export law for LNG.
We see a reasonable possibility that these crucial steps can be completed within the first half of 2013. We also recently completed a series of meetings with export credit agencies around the world and we believe the response of the Yamal LNG project subject to the level of contractor participation and supplier content within their respective countries has been extremely positive.
We have made significant progress throughout 2012 in regards to our ongoing work activities as Yamal LNG as highlighted in my project summary as well as the photos included in the conference call presentation materials.
In our opinion, the comments made about this project are not an accurate assessment of the project results today and more than likely distort the actual facts. The Yamal LNG project has many positive advantages relative to competing the LNG projects around the world such as the South-Tambeyskoye field long-life, low-cost, on-shore, conventional gas reserves that will be used for the feed stock of the LNG plant, a physical location that is accessible to primary consumer markets in both Europe and Asia, and strong Russian governmental support through attractive fiscal terms and a commitment to build a new strategic artic port at Sabetta, to name a few.
We will continue to highlight this project on future conference calls and investor meetings as we move forward with the actual construction phase. Our share price performance continues to be plagued by the market noise surrounding the gas MET deliberations, but as we rightly discussed in various conference calls and investor meetings, we believe that the ultimate outcome from these deliberations will not be punitive to Novatek and the independent gas producers.
Last year the uncertainties surrounding the gas MET discussions put significant downward pressure on our share price performance due to perception of punitive rents being extracted from the independent gas producers.
As previously stated, we felt that the investment community overreacted to this news flow and again, we believe we are facing a similar overreaction to the current discussions on change in the tax policy to the new gas MET formula being presently considered. For the sake of repetition, we are actively involved in these discussions and believe the new gas MET formula will not be punitive to us or the other independent gas producers as currently being discussed.
The Russian government has already approved and published a series of natural gas MET rates for 2013, 2014, and 2015. We have no reason to believe that they, the Russian government, will change the rates already approved and published and that any change in the new tax formula being discussed which considers export rights, transportation, specific regular base and the geographical area of operations will only come into effect around 2016.
Both formulas being proposed by the Ministry of finance and the Ministry of energy contemplate achieving the same results as already published and approved in the federal budget.
We are also facing the same level of market overreaction in regards to the gas MET news flow. For your information, the Russian government recently changed the methodology for calculating this volumetric tax from a flat percentage based to a rate per ton produced and these two new rates are projected to rise over the next three years as fully disclosed in our MDNA. Moreover, there are no present discussions to increase the gas MET -- gas condensate MET excuse me, as currently published and approved.
The Russian government published a directive on the 31st December 2010 which sets gas prices for each region on a quarterly basis using a price formula within a range of minimum and maximum wholesale prices.
The minimum/maximum wholesale gas prices may be revised semiannually and in addition wholesale prices may be recalculated twice a year as of the 1st April in 1st October based on changes in the oil product prices on the European market within a range of plus/minus 3% from the average prices set previously.
This new directive became effective on the 1st January, 2013. As you know, the Russian government has maintained its commitment to raise in domestic tariffs in line with the initial plan formulated in 2003 and with some minor adjustments have stuck to this slow liberalization process over the past decade.
We are not aware of any imminent changes to the overall structure of natural gas pricing as already agreed to with the relevant ministries and we are confident that they are committed to proceed with the proposed 15% annual tariff increases over the next couple of years.
Given the rise in proportion of our natural gas sales to the end consumer market segment, we are more concerned with the balance approach to gas taxation, transportation tariffs, and gas pricing discussions as these factors impact either positively or negatively our net back margins.
In our view, the Russian government understands this issue at hand and has sought our direct input into these important discussions. Throughout the year, I've provided a series of updates on our operation activities. So for tonight's call, I would like to provide some major highlights for 2012.
We increased our SEC proved reserves by 32% to approximately 12.4 million barrels of oil equivalent and our PRMS prove reserves 38% to approximately 15.6 billion barrels of oil equivalent during the year. The increases in both our SEC and PRMS proven reserves were largely attributable to the recent valuable accretive acquisitions as well as successful ongoing exploration development activities at our fields.
We achieved a record reserve replacement ratio for the past year of 842%. Our three year average was 623% and our reserve to production life increased from 25 years to 31 years under the SEC proved reserve case and from 40 years to 55 years under the PRMS proved improbable case.
We maintained our interesting that the leading lifting cost in ruble terms at RUB17.8 per barrel of oil equivalent or approximately $0.58 per BOE also is this represented a 14% year-on-year increase.
We remain confident that Novatek will continue to be one of the lowest cost producers in the global oil and gas industries in terms of finding and development and reserve and replacement costs for the next three year period, covering 2010 to 2012 when the statistical information is published for the oil and gas industry.
Our core natural gas and liquid productions increased by 6.3% and 2% respectively which was reasonably consistent with our production guidance for the year. If we include purchases from our joint ventures and others, our total natural gas liquids production and purchases increased by 10.5% and 9.1% respectively.
The growth rate for natural gas achieved in 2011 of approximately 42% was extraordinary for scale and size of operations and accordingly should not be used as a proxy for future growth rates or relative comparisons because these rates of growth are not sustainable.
We remained free cash flow positive during 2012 of approximately RUB32.3 billion, further attesting to our ability to fund our capital expenditure program from the terminally generated cash flows.
Finally, all of our financial parameters were met this past year excluding the impact of the net gain on disposal with our full year EBITDA and net profit margins at 45.1% and 33% respectively.
I would now like to provide a brief update on some of our key operational projects. At SeverEnergia we successfully launched two production trains on the Tambeyskoye field last year reaching current annualized 2013 production of approximately 4.6 billion cubic meters of natural gas and approximately 700,000 tons of de-ethanized gas condensate.
There were 25 operational wells at the field at year-end 2012. We plan to launch the next field, the Urengoyskoye field, sometime in the second quarter 2014 and have already completed six production wells, construction of an 89 kilometers condensate pipeline which is approximately 90% complete, a 96 kilometers gas pipeline which is approximately 50% complete as well as other miscellaneous work activities.
Other work activities are currently underway at the Yaro-Yakhinskoye field as planned and we expect that field to be formally launched during the second half of 2014. Excluding VAT, total capital expenditures planned at SeverEnergia is approximately RUB40 billions for development and infrastructure and activities and approximately RUB2 billion on exploration type activities in 2013.
As I mentioned on our third-quarter conference call, we plan to expedite the field to development activities at NortGas by moving forward is the work activities on the eastern dome area in 2013 rather than 2014 as originally planned.
We believe we can be in the initial production flows from the eastern dome during the latter part of 2013. Proprietary work activities were started at the North-Urengoyskoye field for the initial expected start of natural gas production on the eastern dome including construction on the well drilling pads, gas gathering lines, and the gas treatment unit.
The launch of the eastern dome is expected to more than double the production of natural gas and triple the production of unstable gas condensate at the field. We will keep you informed of any new developments in regard to our planned operation activities on future conference calls.
Last year we successfully launched a fourth complex of the second phase development activities at the Yurkharovskoye field bringing total sales production to the planned capacity of 36.5 billion cubic meters. We also launched the first stage booster compressor stations for maintaining maximum natural gas production at the field.
During 2013, we plan to spend a on development activities which includes approximately RUB12.3 billion on development activities which includes the drilling of three wells, six sidetrack wells, and additional capital spend on booster compressor stations, and other miscellaneous work activities.
As previously mentioned, we should notice a considerable reduction in capital spend on the Yurkharovskoye field commencing in 2014.
Overall, development of drilling activities at our joint ventures -- including our joint ventures excuse me amounted to 245,000 meters of drilling, representing approximately 133% more than in 2011.
A total of 18 natural gas wells and 24 crude oil wells were completed and launched in 2012, including six new wells at the Yurkharovskoye field with average initial flow rates of 2.2 million cubic meters per day or approximately 78 MCF per day.
During the past year, we also completed a new record well at the Yurkharovskoye field with a total well bore of approximately 7,100 meters including a horizontal section totaling 1,200 meters.
We made some design changes at our Ust-Luga gas fractionation plant based on technical inspections and project documentation which essentially optimized the plants process and technical specifications and based on these project changes required additional time during the initial startup phase. We now expect the plant will be commissioned in the second quarter rather than in the first quarter as additionally envisaged.
Our initial production guidance for 2013 is an increase of natural gas of approximately 7% to 8% and approximately 5% for liquids. As customary, our 2013 production guidance targets are based on our best estimate as of the end of 2012 and are subject to potential revisions based on demand, economic growth activities, and prevailing weather conditions.
With a recent growth in our natural gas production we managed the supply demand balance through the use of underground storage facilities for natural gas and these storage balances tend to fluctuate period-on-period depending on seasonality, availability, and obviously consumer demand.
From an operational perspective, Novatek had a very strong fourth-quarter with our gas production increasing by 15.4% or by roughly 2 billion cubic meters led by continued production growth at the Yurkharovskoye and East-Tarkosalinskoye and fields as well as contributions from our equity share of joint ventures.
Our natural gas production including equity purchases for the 12 months of 2012 totaled 56.5 billion cubic meters representing an increase of 3.6 BCM or 6.8% over the corresponding reported period of which 56% represented organic growth at the Yurkharoskoye field with the launch of the fourth stage of phase 2 in October 2012.
We continue to purchase gas from [SIBUR] a related party and during 2012 we purchased 3.5 billion cubic natural gas from this entity for resale in the domestic market.
For liquids, we increased our quarter-on-quarter production volumes including our shared joint ventures but excluding other purchases by 18.8% whereby 196,000 tons led by production growth at the Yurkharoskoye field whereas our full-year production increased by 341,000 tons or by 8.3% led primarily by increased liquid production, namely crude oil at the East-Tarkosalinskoye field and purchases from joint ventures.
With the introduction of the zero MET tax regime for crude oil produced above the 65th parallel, we began to invest capital in the development and production of our crude oil layers at both the East-Tarkosalinskoye and Khancheyskoye Fields which accounted for a large portion of liquids growth in 2012.
In terms of sales volumes, we increased our natural growth of sales volume by approximately 2% during the fourth quarter or by 295 million cubic meters as compared to the prior year fourth quarter reporting period. Seasonally adjusted our quarter-on-quarter 2012 sales volumes increased by 13.8 billion cubic meters to 15.7 BCM or by 13.9% reflecting continued strong sales throughout the traditional peak winter period.
Within our total sales mix for natural gas and customer sales represented 69% versus 55% year-on-year for the comparative 12 months ended 31st December with volumes sold for power generation sector accounting approximately 40% of total sales volumes or 58% of our volumes sold to end consumers.
We had a notable year-on-year increase in gas sales volumes to large industrial customers in 2012. During the fourth quarter 2012, our sales mix was 73% end customers and 27% wholesale traders.
Our volumes of natural gas sold to end consumers increased by 32.5% in the fourth quarter as compared to the third quarter 2012 which accounts for the increase in our transportation costs as part of our overall operating expenses for the period.
During the fourth quarter, we withdrew approximately 212 million cubic meters from underground storage whereas in the third quarter we injected 580 million cubic meters of natural gas in the underground storage resulting in an accumulative quarter-on-quarter change of 792 million cubic meters of natural gas.
We ended 2012 with an inventory balance of approximately 1.1 billion cubic meters of natural gas in the underground storage facility representing an increase of natural gas in storage of 370 million cubic meters at the beginning of the year.
Our realized average prices for end consumer sales during the fourth quarter of 2012 increased by 14.2% in comparison to year-on-year, but was marginally lower than those priced realized quarter-on-quarter.
For X field or wholesale traders fields, our average realized price increase year-on-year by 18% but was marginally higher with the prices received for this category of sales quarter-on-quarter.
For the full year of 2012, our end customers and wholesale traders average realized prices increased by 7.5% and 9.1% respectively which was consistent with our price expectations vis-a-vis the general tariff increase effective the 1st July 2012 and the geographical mix of our natural gas sales.
Our average net backs for natural gas sales sold to end consumers excluding trading margins increased by RUB217 per MCM or by 15.2% for the full year 2012 and were marginally higher on a quarter-on-quarter basis due mainly to a 4.2% reduction in our average transport cost.
We continue to achieve a higher margin differential between end consumers and X field net backs excluding trading activities as compared to the prior year which continues the price in dynamic trends achieved prior to the economic crisis although we cannot be certain that these trends will continue, remain consistent, or fluctuate period on period.
As for liquids sales, we sold 1.1 million tons of liquids in the fourth quarter which was relatively consistent with the volumes sold quarter-on-quarter. For the full year 2012, we increased our volumes of liquids sold by 92,000 tons or by 2.2% which represented a combination of production growth at our East-Tarkosalinskoye field and purchase it from our joint ventures with which were offset by corresponding increase of 238,000 tons in volumes of inventory held in storage or in transit.
During the year, our volumes of sales, stable gas condensate in transit and storage fluctuated throughout the year depending on loading schedules and transit routes and ended 2012 with a balance of 461,000 tons representing a year-on-year increase of 233,000 tons from the beginning year and an increase of 216,000 tons versus the third quarter 2012.
Our overall liquid hydrocarbons volumes and inventory aggregated 563,000 tons at period end 2012 versus 325,000 tons year-on-year and 374,000 tons quarter-on-quarter.
For export volumes, stable gas condensate we sold 2.8 million tons realized on an average net back price of $424 per ton in 2012 as compared to 3 million tons realized on an average net back price of $421 per ton in 2011.
During the fourth quarter, we sold 690,000 tons on the export market for an average net back price realization of $419 per ton as compared to 723,000 tons in the third quarter 2012 and an average net back realization of $441 per ton.
The difference per ton quarter-on-quarter was largely attributable to an increase in both in export duties and transport expenses which exceeded the increase in our average contractual price we received.
On a total barrel of oil equivalent basis, we increased our full-year production to 405 million barrels of oil equivalent in 2012 versus 381 million barrels of oil equivalent in the prior reporting period, representing an average hydrocarbon daily production of 1.170 billion barrels per day and a combined increase of 6% year-on-year.
We also increased our capital expenditure year-on-year by approximately 40% to RUB43.6 billion which is slightly lower than our announced capital program for the year. Specifically, the Yurkharoskoye field accounted for approximately 33% or RUB14.1 billion of our invested capital which represented increase of RUB2.7 billion or 23%.
In comparison to the third quarter of 2012, the most significant increase in our capital expenditure program related to crude oil drilling activities at both the East-Tarkosalinskoye and Khancheyskoye fields as well as capital spending at the Yurkharoskoye field and the Purovsky plant.
We increased the amount of spend quarter-on-quarter by approximately RUB805 million or by 7%. Our capital expenditure program for 2013 is expected to be approximately RUB60 billion which is consistent with that originally guided for in 2012 plus the carryover cost from the prior year.
As expected, the most significant changes in our operating expenses for the comparative periods were the relative increase in our transportation expense which is explainable by the overall growth in end customer sales combined with the annual tariff increase as well as taxes other than income which increase year-on-year largely due to volumetric nature of this expense and the increase in the middle extraction tax for natural gas expected the 1st January.
The structure of our operating expenses continues to fluctuate period on period but remained relatively consistent in terms of percentage of total revenues except for a large percentage growth in purchases of hydrocarbons.
Our total operating expenses increased for the full year 2012 in absolute terms from RUB96.8 billion to RUB125.8 billion or roughly by 30% largely driven by significant increases in transport and purchases which accounted for approximately RUB24 billion of the increase or by 83%.
Operating expenses in the fourth quarter 2012 amounted to RUB38 billion versus RUB29.6 billion rubles in the third quarter representing an increase quarter-on-quarter by RUB8.4 billion will or 28.3%.
The growth in our quarter-on-quarter operating expenses is reasonably explainable by increase in transport expenses and hydrocarbon purchases as well as increases in specific charges booked in the fourth quarter for general administration expenses, depreciation, depletion and amortization, and write-offs relating to exploration activities.
In the fourth quarter, we significantly increased our volumes sold to end customers by 32.5% relative to the third quarter thus increasing overall transport costs in the period.
As a result, we incurred a higher transport cost of approximately RUB3 billion or by 28.3% to reflect a higher volume sold to end customers although our average transport tariff rate declined in the quarter due to a slight decrease in the average distance to market.
The more we sell to end consumers, the higher the proportion of transport cost relative to our total operating expenses. It is more instructive to note that despite the increase in our overall transport cost for natural gas, our net back margins were not adversely impacted between the reporting periods.
We increased our volumes of hydrocarbon purchase between the third and fourth quarters by approximately RUB1 billion or by 21.6% comprised in natural gas and gas condensate of RUB408 million and RUB634 million respectively.
The increases in gas condensate purchase as a result of our increase purchases from the launch of the second production line at the Tambeyskoye field and the commencement of gas condensate purchases from Nortgas.
We do not see anything unusual with these purchases as they are consistent with our commercial marketing plan and supplement our core production and marketing efforts. We effectively manage and control our G&A expenses as a normal course of business, although these expenses continue to fluctuate period on period in our controllable expense category due primarily to semiannual and annual employee bonus payments, charitable contributions, consultant services, and business travel expense among other line items.
The main increases in our G&A expenses were primarily attributable to the increase in employee compensation and legal auditing consultant expenses which represented an 95% of the total q-on-q increase. All other changes in the G&A expense category were collectively immaterial.
Specifically, the largest increase in employee compensation were attributable bonus payments in the fourth quarter for results achieved over the past year and a significant increase in defined pension plans that changed during 2012.
These two specific line items within the G&A category accounted for the majority of the increase but there was also an increase in the employee headcount of approximately 81 employees. The increase in the defined pension plan is a usually booked in the fourth quarter after assessing all the plans attribute and calculations for the past year.
Bonuses to employees and management are generally paid it based on the first half and full year results and generally comprised the largest increase in employee compensation each year as well as the annual salary indexation for inflation.
In regards to legal, audit, and consulting expenses of the change between the respective quarters were largely attributable to expenses in relation to the acquisition of Nortgas in November and the Company's Eurobond issuance in December. These are generally considered one-off type expenses.
Employee compensation within material services and others increase quarter-on-quarter by RUB255 million which accounted for roughly 77% of the increase in the overall expense category. The increase was similar to that noted within the employee compensation expenses, the G&A, with costs related to defined pension plans generally booked in the fourth quarter increasing by RUB197 million.
There was a minor increase in total headcount by 37 employees quarter-on-quarter as well as a salary indexation of 6% effective the 1st July 2012 but generally speaking pretty consistent period on period.
For [GD&A] charges quarter-on-quarter, the most significant change was the increase in our units of production relating to the increasing capitalization of costs to our dependable base of approximately RUB14.2 billion which was also impacted by the change of reserves at year-end and in the total production increase from 84 million barrels of oil equivalent in the third quarter to 97 million barrels of oil equivalent in the fourth quarter.
The combined effect of all these changes was an increase in our [UOP] rate per BOE of approximately RUB7.3 per barrel of oil equivalent and the corresponding booking of this increase in the fourth quarter.
As for the increase in next duration expenses quarter-on-quarter's we essentially wrote off unsuccessful drill and exploration drilling wells in the fourth quarter in the amount of RUB845 million as well as increased in our non-capitalized geophysical work by RUB218 million over the corresponding quarters.
The write off of the unsuccessful exploratory wells accounted for approximately 61% of the exploration expenses quarter-on-quarter and are consistent with our successful efforts accounting policy.
As a result of the factors enumerated above, EBITDA and net profit margins continue to remain robust in their respective reporting periods achieving levels of 45.1% and 33% respectively, excluding the net gain on disposal for the full year 2012 which is consistent with our overall financial guidance although the actual margins were slightly lower quarter-on-quarter due to the booking of expenses in the fourth quarter as previously noted.
Our balance sheet and liquidity position continue to remain strong throughout the reporting period although we increased our overall debt portfolio this past year by RUB37 billion as a result of the US dollar denominated Eurobond in the amount of $1 billion that we concluded in December 2012 to finance the Nortgas acquisition.
Post balance sheet, we repaid a portion of the 2013 debt ahead of schedule as well as concluded a four year RUB14 billion, Russian ruble denominated Eurobond which was also used to repay a debt due in December.
We remained free cash flow positive during the fourth quarter of 2012 and throughout all of 2012, ending the period with a positive free cash flow at approximately RUB32.3 billion which is lower than the prior year but takes in account a higher capital expenditure program in the current year.
We continue to fund our capital expenditure program through internally generated cash flows and have the ability to meet all our debt obligations and liabilities when they mature or become due for payment.
In conclusion, we ended 2012 by successfully delivering on all of our financial and operational commitments as outlined by our corporate strategy. Our asset platform base is enormous and growing and the Company has clearly distinguished itself as one of the few true growth opportunities in the global oil and gas industry.
We have an exciting portfolio of assets to continue delivering sustainable growth in the future in a cost efficient manner but our risk profile has changed in the eyes of the market.
Unfortunately, over the past year market noise or what I would characterize, aboveground risk has trumped the success we achieved, both financially and operationally and this market noise has increased the investor's perception of our risk profile and had a negative impact on our share price performance relative to our peers.
We understand these new risk concerns and we are actively trying to address them through our participation in various governmental committees and industry workshops. Despite these efforts, there is a clear disconnect between the market speculation and the Company's strong business fundamentals. Although the level of speculation has risen of late, one thing remains consistent, our commitment to deliver above average financial and operational reviews under any market condition.
Since our inception, we have overcome many skeptics when few gave us a remote chance of succeeding, let alone building one of the largest gas companies in the world despite the perceived risk ascribed to our business, our transport assets and our ability to sustain growth.
The cornerstone of the Company's success has been built on project execution, cost control, and on delivering on what we said we would deliver.
We are committed to making Novatek one of the premier oil and gas companies globally, but that requires periodic changes to our historical business model and accepting some of the new industry challenges as we move further north in the Arctic Circle.
The Yamal LNG project is just one of the prime examples of the industry's move to the Arctic region and we are very excited about the role we will play.
I would like to sincerely thank all of our valued shareholders for your continued support over the past year despite the recent markets uncertainties. We have a truly world-class operation at Novatek and our financial and operational growth dynamics, our industry leading performance metrics, and our long-life, low-cost reserve base are second to none, vis-a-vis our global oil and gas competitors.
I would like now to end this portion of the conference call and open the session to questions and answers. Thank you very much.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
Thank you. (Operator Instructions).
We will now take our first question from Oleg Maximov. Please go ahead.
------------------------------
Oleg Maximov, Sberbank CIB - Analyst [2]
------------------------------
Hi, Mark, and thank you for the presentation. Just a couple of questions for me. Did I understand you correctly that you would expect 80% of Yamal LNG volumes to be presold by the first half of this year? And FID is next month and also if you could update us on Ust-Luga, when do you expect first commercial tankers of condensate and how much CapEx is still left to invest in Ust-Luga project? Thank you.
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Mark Gyetvay, Novatek OAO - CFO [3]
------------------------------
(Speaking in Russian)
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [4]
------------------------------
This is Mr. Mikhelson. As Mark Gyetvay mentioned it we are currently going through the stage of negotiations to conclude contracts for the sale of the future LNG and so the 80% mentioned reflects upon our current vision in terms of the readiness of the contracts to be signed.
We right now are finishing to consider, there are tender bids which we have received from different consortia for the construction of the LNG plant, the final review of the best possible offerings. We anticipate to spend additional few weeks to consider them so as to achieve the best possible terms and so the final periods that we are planning will be reflected in these contracts. So this is one approach.
And the second approach I'm sure that you might note that the Russian government right now is considering changes in the legislation with respect to the gas exports in as far as granting exemptions to the producers for the producers themselves to sell LNG and so the signing of the contracts which I've mentioned above we relate to this process of consideration and we are hopeful that the matter will be resolved positively following which we will start signing contracts.
We also have conducted a very good series of negotiations both with the leading majors in the market as well as with very specific off takers and we as a result feel preference for the Asia-Pacific market Indian and Chinese market and so during the second quarter I hope that we will be able to achieve the signing of the final basic terms and also finalize the conditions and terms of the timing and conditions and pricing.
Now as far as the Ust-Luga is concerned as was mentioned by Mark Gyetvay, during the pre-commissioning stage we've been able to improve the design conditions for the overall Ust-Luga project as a result of which a slight postponement took place as far as launching of the project is concerned which we plan to do during the second quarter.
To us this is in no way a problem and it doesn't introduce any major adjustments to the schedule and the plans which we have for 2013 and so we expect that the project will be launched in the second quarter.
------------------------------
Oleg Maximov, Sberbank CIB - Analyst [5]
------------------------------
Thank you very much.
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Operator [6]
------------------------------
Thank you. We will now take our next question from Karen Kostanian. Please go ahead.
------------------------------
Karen Kostanian, Bank of America/Merrill Lynch - Analyst [7]
------------------------------
Gentlemen, thank you very much for the presentation. I have two questions. The first question is you guided towards during your strategy presentation a couple of years back you guided towards 68 BCM by 2015. A given that the new market realities in Russia and also in Europe, do you think you will stick to that guidance of 68 BCM delivered in the Russian market by 2015?
And also, Mark, you mentioned that you are comfortable with it the gas price increases -- tariff increases in Russia by 15%. What do you think that does to your pricing? Do you also expected given that gas from a loan has about 40 BCM 250 BCM of spare capacity today that your pricing will also increase in line with the tariffs or you do anticipate that the price increases are going to be slower than the tariff growth? Thank you.
------------------------------
Mark Gyetvay, Novatek OAO - CFO [8]
------------------------------
(Speaking in Russian)
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [9]
------------------------------
These are two questions interrelated and I would like to offer you just one answer to both of these questions.
Yes, indeed, do we do confirm our ability to sell this particularly, Mark you mentioned 6 billion to 8 billion cubic meters a year. We know that the gas balance as is customary is done in a three-year format and it is being submitted in the second quarter of the preceding year so right now we are completing work over the cash balance for the period of the 2014 to 2016. We see clearly all of the opportunities and possibilities.
You note that we slightly changed our strategy and apart from direct shipments to major end consumers we've reached the regional market first in (inaudible) we've reached the customer market as of this year and in the future we are planning to go into other regions where we will have a big share of supplies and we don't have any doubts whatsoever in our ability to raise our output in terms of all of this gas being in demand by our consumers.
This year we'll see the 15th anniversary since Novatek started shipping its first gas back in December 1998 and last year we reached about 57 billion cubic meters of production and with respect to our profitability and in view of the government plan to raise the gas regulated prices annually by 15%, one ought to take into account that every year with the increase of our share of end consumers in our portfolio we see only the effect coming from the transportation targets, in terms of the effect over the profitability.
But the transportation target is growing much slower than the regulated gas prices and so we believe that this is the kind of spread which will remain and that would help us to maintain the kind of profitability that we are planning for the future. Thank you.
------------------------------
Unidentified Company Represented [10]
------------------------------
I would just like to add a couple comments to what Mr. Mikhelson just stated. It's important to note that when we prepared our strategy presentation for December 2011 we took into consideration all the producers in a particular area and their reserve base and based on that analysis as we also did in 2005 at the time of IPO, we came to the realization that given the current state of our production profile, given our geographic location of our field, we are very confident that we are going to be able to deliver these volumes as noted in the strategy presentation.
And the second part of that discussion I would just like to add we have stated many, many times before that it's important when you look at the fact on gas price that you don't look at it in only isolation.
As I mentioned in my prepared text, we look at it under gas pricing, transport tariffs, and MET because what we're ultimately trying to do is ensure that the net backs do not contract rather expand, so I think we've been very good in managing those expectations.
And Mr. Mikhelson said and we believe that the overall transport costs will rise at a lower rate.
If you look at our production cost and we have a presentation that captures the nine-month numbers, and we'll update it for full-year results but you can actually see that transportation costs represent about 60% of our production costs. And that alone is by far the larger than any of our competitors in the global oil and gas industry and so it clearly has a direct impact on any of the volumetric movements as you can see between the third and fourth quarter the actual transportation expense went up.
So looking at the transportation expenses and ensuring that the rate of increase is lower than a rate of tariff increase for gas prices will continue to expand margins for us and I believe that's the direction they're headed for. Thank you.
------------------------------
Unidentified Company Representative [11]
------------------------------
(Speaking in Russian)
------------------------------
Operator [12]
------------------------------
We will now take our next question from Alexander Kornilov. Please go ahead.
------------------------------
Alexander Kornilov, Alfa-Bank - Analyst [13]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Speaker [14]
------------------------------
The question was the effective tax rate in Q4 was 14%. Could you explain why was it so slow?
And the second question, could you disclose the average acquisition price for gas from SIBUR and SeverEnergia?
------------------------------
Unidentified Company Representative [15]
------------------------------
Okay, on the first point, you have to remember that we have a tax policy in Russia that provided us with a reduction in our profit tax for projects in the [Umal] region. We took advantage of that this past quarter on projects that we had undertaken at the East-Tarkosalinskoye.
There is a list of projects that are basically priority projects and we took advantage of that tax concession by reduced profit tax of 4.5%. So the effective tax rate for those particular projects was 15.5% rather than the 20% and that's why the overall rate for the particular quarter, the fourth quarter was lower than the 20% historically.
I'm going to pass the second part of the question on to Mr. Leonid Mikhelson.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [16]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [17]
------------------------------
(Speaking in Russian)
And so as far as the SeverEnergia question is concerned, I should say that SeverEnergia is selling gas to Gazprom which is the situation most comfortable for all of these parties involved as you might know because together with Gazprom net we have the controlling share stock of 51% whereby 49% belongs to our tenant partners, ENI (inaudible). So these sales are related to (inaudible) sales from (inaudible). They are market-based prices and all of the participants of the project including Novatek are very much satisfied with these prices.
------------------------------
Alexander Kornilov, Alfa-Bank - Analyst [18]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [19]
------------------------------
This additional question is the tax discount of the 4.5%. Is it a one off event or is it something that you will be enjoying also in the subsequent years?
Now with respect to SIBUR, could you also specify what is the average acquisition price for gas that you acquire from SIBUR?
------------------------------
Unidentified Company Representative [20]
------------------------------
Okay in terms of the first question on the tax, I believe we used approximately about 90% of the allocable amount for as in relation to this tax concession in the Umal region, but we believe is their our discussions currently being had at the tax ministry to talk about potentially extending this program. But right now, that has not been finalized. So right now I believe we've utilized about 90% of the available tax concession for our properties in that area.
------------------------------
Alexander Kornilov, Alfa-Bank - Analyst [21]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [22]
------------------------------
(Speaking in Russian)
And as far as SIBUR is concerned, Novatek is interested in being able to have a bigger part of the domestic gas market and finds it attractive and economical to buy gas from other producers in order to resell it. Certainly we do not have the kind of margin we may have when we sell our long gas but also with respect to reselling gas we do enjoy a slight margin on commercial terms for reselling it further on.
------------------------------
Alexander Kornilov, Alfa-Bank - Analyst [23]
------------------------------
(Speaking in Russian)
------------------------------
Operator [24]
------------------------------
Thank you. We will now take our next question from Ron Smith. Please go ahead.
------------------------------
Ronald Smith, Citigroup - Analyst [25]
------------------------------
Good evening gentlemen. Thank you for the call. I have two questions. First, Mark, you mentioned something maybe I just misheard during the course of the call, but you said you been able to confirm year-round delivery to all major customers. Can I take from that you're going to be able to deliver year-round through Asia? For some reason I was thinking you were going to have a few months of the year where you couldn't. Maybe I just misunderstood or misheard.
And second, could you please repeat your liquids production guidance for 2013 including SeverEnergia? Thanks.
------------------------------
Unidentified Company Representative [26]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [27]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [28]
------------------------------
It's actually protected a liquid production for 2013 is at 5%.
------------------------------
Ronald Smith, Citigroup - Analyst [29]
------------------------------
Thanks gentlemen. I am afraid my first question didn't get completely translated.
------------------------------
Unidentified Company Representative [30]
------------------------------
Sorry. Hold on a second, please. Let me translate this one first. Okay?
So in terms of our plans of the LNG sale in between different markets, Mark specifically mentioned what we are planning in terms of the capacities which is going to be 16.5 million tons which is at an advanced stage of contracting which covers about 80%.
And so at this point in time, we would rather not specify percentagewise in between different targeted markets. In my comments I stated that we have a preference for the Asia Pacific markets generally speaking.
And the second question which was about the overall volume of liquids for our production and 2013 including SeverEnergia, it's like Mark mentioned. We have a plan to increase this volume by about 5% and as far as we can recall.
(Speaking in Russian)
------------------------------
Unidentified Company Representative [31]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [32]
------------------------------
And further on the second question, Mr. Mikhelson wants to add something. By the end of last year we acquired Nortgas and so currently we are finishing, putting together our investment program which should be endorsed for 2013.
That we plan to do in March and as was stated we are working to bring ahead the commissioning into production of the Eastern dome and we plan to do that sooner than what is planned in 2013 and so consequently, the percentage of overall liquid production in 2013 might turn out to be a bit bigger because of the earlier commissioning into production of the Eastern dome.
------------------------------
Ronald Smith, Citigroup - Analyst [33]
------------------------------
If I could jump back in, I'm sorry. I think my first question wasn't very clear. What I was asking was -- I'm afraid I've misunderstood Mark. Did he say that LNG deliveries will be able to be conducted year-round to all major markets from Yamal LNG? Because I had been under the impression that the northern route would be closed for a few months per year.
------------------------------
Unidentified Company Representative [34]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [35]
------------------------------
You are quite right because making a reference to the northern sea route we definitely don't plan on it working all 12 months through. So consequently the shipment that we are planning to undertake toward the Asia Pacific markets during the period when the northern route is not going to be navigable are going to be done through trench shipment arrangements.
With respect to which we have already conducted all of the necessary commercial negotiations for our LNG to be trench shipped during these months and because of this premium nature of the Asia Pacific market compared to the European and North American one, that particular arrangement would guarantee very good profitability on an average annual basis for Yamal LNG project.
------------------------------
Operator [36]
------------------------------
Thank you. We will not take our next question from Max Moshkov. Please go ahead.
------------------------------
Maxim Moshkov, UBS - Analyst [37]
------------------------------
Yes thank you. I just have three questions. First, could you please update us on the production plan for Novatek four 2013 and the CapEx plan for Novatek. And also production plans for the key equity holding Sibneftegas, SeverEnergia and Nortgas?
My second question is actually how we see the split between end-users and X field sales for this year, for 2013? And the last question is how much unstable gas condensate did Novatek purchase from Nortgas and SeverEnergia separately in the fourth quarter of last year? Thank you.
------------------------------
Unidentified Company Representative [38]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [39]
------------------------------
At the end of that we are announcing down six questions so we would rather make the answer also separate because it would be difficult to give you one answer to all of them.
------------------------------
Maxim Moshkov, UBS - Analyst [40]
------------------------------
Should I ask separately question by question?
------------------------------
Unidentified Company Representative [41]
------------------------------
Yes please.
------------------------------
Maxim Moshkov, UBS - Analyst [42]
------------------------------
The first question was about production and CapEx plans for Novatek and (inaudible) and for Sibneftegas, SeverEnergi and Nortgas.
------------------------------
Unidentified Company Representative [43]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [44]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [45]
------------------------------
So in terms of the Nortgas CapEx program it hasn't yet been finally approved. It is being considered right now and it will be endorsed in March but what is important for an analyst to know is that Nortgas has a separate loan line, a credit line made available and so the majority of what is necessary to be funded will be covered by this particular credit line.
If it is not sufficient, we are currently in preliminary negotiations with the bank in order to extend it and so any funding which will be necessary above what we currently believe necessary will be covered by this credit line directly to Nortgas.
With respect to SeverEnergia Mark similarly mentioned this particular figure in his presentation which is about RUB40 billion and in this case a consortia or Russian bank has made the project finance available without recourse to the shareholders and this credit line will be also enough to cover necessary investments so as to deliver all of the weight to the design capacity all of the fields under SeverEnergia.
Now with respect to investment program and CapEx for Novatek standalone, they are somewhat at the level of last year and all of the major investment targets have been described by Mark in his presentation. If I remember the translation correctly, I feel to add on top of what Mark mentioned that this year will also plan to expand the capacities of our (inaudible) gas purchasing plant to process gas condensate from 5 million tons towards the end of the year up to 11 million tons.
------------------------------
Maxim Moshkov, UBS - Analyst [46]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [47]
------------------------------
If at all possible, could you also mention the Sibneftegas CapEx and for every entity, your production plans for --
------------------------------
Unidentified Company Representative [48]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [49]
------------------------------
(interpreted) In terms of the established manner of communication with the investment community, we've always strived to disclose to analysts and investors all of our plans and that we are making and report on all of this specific achievements and figures, and so I believe that all through the years where we've worked together we seem to think that the satisfaction was bilateral and mutual.
And today we have mentioned all of the figures that we have in our plan to increase our production and to increase the capital expenditures into specific projects but as far as the specific figures are concerned you will see them in the report which will cover production and CapEx separately.
------------------------------
Maxim Moshkov, UBS - Analyst [50]
------------------------------
Thank you for this. May we go to the second question, it's about how do you see the end -- the split between end users and X fields gas sales for 2013 in the percentage field.
------------------------------
Unidentified Company Representative [51]
------------------------------
(Speaking in Russian)
------------------------------
Maxim Moshkov, UBS - Analyst [52]
------------------------------
Okay, that's clear. And the last question was how much unstable gas condensate did Novatek purchase in the fourth quarter of last year separately from Nortgas and from SeverEnergia. Thank you.
------------------------------
Unidentified Company Representative [53]
------------------------------
Excuse me, let him translate the question first.
------------------------------
Maxim Moshkov, UBS - Analyst [54]
------------------------------
Oh sorry.
------------------------------
Unidentified Company Representative [55]
------------------------------
Okay.
------------------------------
Unidentified Company Representative [56]
------------------------------
(interpreted) Mr. Mikhelson is answering the question by saying is that you have been able to see that year in, year out we have been able to increase the share of end users in our portfolio. Exactly the same thing will repeat itself this year.
You've been able to see the reports in terms of us being able to transfer the long-standing trading contracts that we have been working with Gazprom under from Gazprom to one of its subsidiaries which is most (inaudible) which this year would see a further increase of the share of our end-users, meaning to say that this year again there will be a very tangible interest of the end-users in terms of our overall portfolio compared to 2012 in 2013.
------------------------------
Maxim Moshkov, UBS - Analyst [57]
------------------------------
And the third question was how much unstable gas condensate did Novatek purchase last year in the fourth quarter last year separately from Nortgas and SeverEnergia. Thank you.
------------------------------
Unidentified Company Representative [58]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [59]
------------------------------
We purchased all of the unstable gas condensate which was produced by SeverEnergia and Nortgas.
------------------------------
Unidentified Company Representative [60]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [61]
------------------------------
(interpreted) Specifically, the expansion of our (inaudible) gas processing plant from 5 million up to 11 million is based upon our ability to receive all of the output from Nortgas and SeverEnergia in terms of unstable gas condensate to Purvosky gas processing plant.
------------------------------
Operator [62]
------------------------------
Thank you. We will now take our next question from (inaudible). Please go ahead.
------------------------------
Unidentified Participant [63]
------------------------------
Good afternoon, everyone. I just wanted to ask two quick questions please. Would you share with us any guidance for where you see your net leverage at the end of 2013? Has it changed quite maturely at the end of the year versus nine months?
And how much of your short-term debt was repaid or will be repaid in first quarter of this year specifically? Thank you.
------------------------------
Unidentified Company Representative [64]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Participants [65]
------------------------------
No, actually first quarter of 2013.
------------------------------
Unidentified Company Representative [66]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [67]
------------------------------
Okay, I'll answer that question. In relation to the leverage, we have a policy in place of maintaining a onetime debt to EBITDA ratio with some exclusions specifically rated to acquisitions whereby we would then endeavor to get that ratio back down to that period of time of 1.2% to 1% within one to three years. So currently we are at 1.2 times debt to EBITDA. We expect that to sort of migrating back down like I said within the next one or two years.
Your second question is what debts have been repaid. As you know in December we took on approximately $1 billion debt to finance the acquisition of Nortgas and then we subsequently did a ruble denominated euro bond of RUB14 billion in February of 2013.
The RUB14 billion is essentially to repay back a debt that was due in December, a Sberbank loan which we have done already. So what we have done now with the four-year debt we have moved the debt out four years.
Second thing is that we have already -- and that was actually ahead of schedule, repaid back to the Sberbank quite ahead of schedule. And the other thing we did recently we repaid a $200 million loan from Nordea ahead of its maturity schedule in March. So effectively, we refinanced RUB15 billion and placed it into a different bucket in a later year, four years, so that gets it around 2017 and we repaid back $200 million of a debt due in a current period in the first quarter.
------------------------------
Unidentified Company Representative [68]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Participant [69]
------------------------------
Thank you so much. Thanks.
------------------------------
Operator [70]
------------------------------
Thank you. We will now take our next question from [Ildar Kavis]. Please go ahead.
------------------------------
Ildar Kavis, - Analyst [71]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [72]
------------------------------
(interpreted) The question is about the acquisition of the gas from SIBUR. Could you specify what is the geographical basis for the shipment of this gas?
------------------------------
Unidentified Company Representative [73]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [74]
------------------------------
(interpreted) It is difficult and I cannot be very specific in terms of the supply basis because this is in the Novatek overall portfolio and so it is quite complex to be specific with respect to any particular volume within any destination because primarily, if you look through the portfolio the gas that we buy from SIBUR goes through the southern corridor but some share of it is available for the central corridor.
So generally speaking, this portfolio is being distributed amongst our consumers and to the shipment quarter horse that I mentioned.
------------------------------
Ildar Kavis, - Analyst [75]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [76]
------------------------------
The delivery basis from SIBUR to Novatek. That was --
------------------------------
Unidentified Company Representative [77]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Participant [78]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Participant [79]
------------------------------
(interpreted) That's basically where the SIBUR has its gas processing plant starting from the (inaudible) in the South exactly where they process the associated petroleum gas, that is the location, these are the locations where we do the gas acquisition from them.
------------------------------
Operator [80]
------------------------------
Our next question is from [Katya Rudina]. Please go ahead.
------------------------------
Katya Rudina, - Analyst [81]
------------------------------
Actually, my question has already been answered. So I can just thank you for the presentation.
------------------------------
Unidentified Company Representative [82]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [83]
------------------------------
It's exactly one hour of presentation and one hour of Q&A.
------------------------------
Unidentified Company Representative [84]
------------------------------
(Speaking in Russian)
------------------------------
Unidentified Company Representative [85]
------------------------------
(interpreted) In conclusion, Mr. Mikhelson would like to extend his gratitude to all those who participated in this conference call about our IFRS report And in conclusion, Mr. Mikhelson who would like to say a few words about the specifically Yamal LNG project because there are so many issues and so many discussions related to the partial and staged liberalization of the LNG exports from Russia because of the large scale of investment the projects for Novatek and a great importance that it constitutes to the Company, we as the management of Novatek would like to confirm all of the plans and the timing for this project.
We are very confident in it and the further we go into the process of negotiation with all of the contractors and suppliers, we find it extremely important to maintain a very positive type of the project implementation and the stage where we negotiate with the consumers and off takers, meaning the contracts. And so we are not going to reconsider or change the periods within which this project is going to be commissioned into operation, finding it extremely important for the future of the Company. Thank you very much for your attention.
------------------------------
Operator [86]
------------------------------
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
------------------------------
Editor [87]
------------------------------
Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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