Q1 2013 Novatek OAO Earnings Conference Call (IFRS)
May 15, 2013 AM CEST
NVTK.MZ - Novatek PAO
Q1 2013 Novatek OAO Earnings Conference Call (IFRS)
May 15, 2013 / 01:00PM GMT
==============================
Corporate Participants
==============================
* Mark Gyetvay
Novatek OAO - CFO
* Leonid Mikhelson
Novatek OAO - CEO
==============================
Conference Call Participants
==============================
* Olga Primava
Sberbank CIB - Global Head of Equity Sales, Managing Director
* Geydar Mamedov
Goldman Sachs - Analyst
* Karen Kostanian
Bank of America/Merrill Lynch - Analyst
* Artem Kosenko
JPMorgan - Analyst
* Viacheslav Chillen
Deutsche Bank - Analyst
* Maxim Moshkov
UBS - Analyst
* Alexander Kornilov
Alfa-Bank - Analyst
* Archam Fess
Renaissance Capital - Analyst
* Kalim Aziz
Armajaro Asset Management - Analyst
* Paulo Kushnir
Deutsche Bank - Analyst
* Pablo Surrican
Morgan Stanley - Analyst
==============================
Presentation
------------------------------
Operator [1]
------------------------------
Good day and welcome to the Novatek First Quarter 2013 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to [Olga Primava], global head of equity sales, managing director, Sberbank CIB. Please go ahead.
------------------------------
Olga Primava, Sberbank CIB - Global Head of Equity Sales, Managing Director [2]
------------------------------
Hi. Thank you very much. Hello everybody it's our big pleasure and honor to host this call for Novatek. We do it every quarter. But I guess I am introducing it for a really a blowout in quarterly results, so congratulations. On the call with us, we have Mark Gyetvay, the CFO of Novatek, and Alexander Palivoda, who runs investor relations. And without further ado, I'll pass the mic to Mark.
------------------------------
Mark Gyetvay, Novatek OAO - CFO [3]
------------------------------
Thank you, Olga. Ladies and gentlemen, shareholders, and colleagues; good evening and welcome to our First Quarter 2013 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 during the question-and-answer session will be Mr. Leonid Mikhelson, CEO and chairman of the management committee, and a member of the Board of Directors.
The question-and-answer session will be handled simultaneously in Russian and English languages, so when we come to that part of today's conference call, I will ask to keep this important point in consideration when asking question as there will be sufficient time allotted to answer all of 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 such words 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 the thirty-first of December, 2012 as well as any other earnings press releases and documents throughout the past year for more descriptions of the risks that may influence our results.
We have delivered another stellar set of financial and operational results for the first quarter of 2013, relative to the year-on-year and quarter-on-quarter comparables. Despite this fact, we continued to experience significant volatility in our earning share price, even though we increased our natural gas and liquid production consistent with our annual guidance, reported double-digit earnings growth and generated strong operation cash flow to fully fund our capital expenditure program and remained free cash flow positive.
The Novatek investment case has clearly moved away from business fundamentals and is now squarely focused on external events, market speculations and more recently on comments made by third parties on our Yamal LNG project; effectively discounting what we have conveyed to the investment community.
Although we remain committed to maintain an open and transparent dialog with all investors and analysts and are confident in our ability to execute our long-term strategy, we understand that the overall investment climate in Russia has changed from your perspective and that the investment community has placed a higher risk premium on Russia in general, and specifically on our investment story.
We will address some of these market concerns as best as possible in a manner consistent with our historical practice, as well as encourage you to raise these concerns, risks or issues in our question-and-answer segment.
I would like to begin tonight's discussion on our key Yamal LNG project. Yamal LNG is without question a transformational project for the Company and a project that has received its fair share of market comments and in our opinion, misunderstandings.
We recognize that the size and scale of this project, relative to our historical projects, raises some concerns amongst investors. But we believe we have taken a balanced approach towards risk and rewards to successfully execute this core project.
We selected a strategic partner who we felt had industry capabilities and LNG knowhow to complement our proven experience of operating and delivering gas projects in the Arctic zone. We have successfully achieved fiscal terms to support the economics of this project. We have successfully demonstrated the viability of using the Arctic Ocean's northern sea route as a navigational route to the Asian-Pacific region.
We completed all of our pre-feed, feed and main contractor selection process, according to our project timetables, and we recently commenced drilling of production wells, utilizing brand new drilling rigs, fabricated specifically for this project to name just a few of the milestones achieved to date.
Recently, we also received a positive state expert review opinion by Russia's [Glov Ros] expertise, including the receipt of the state's environmental approval which is similar to receipt of an environmental impact assessment, fully sanctioned the construction of liquid plant in March, demonstrating our full commitment to comply with all regulatory approvals, as well as maintaining our commitment to sustainable development practices in the regions where we operate in.
During the first quarter, we awarded the EPT contract to Technip France and JGC Japan, as the main constructing contractors for the project and we are now fully engaged with both contractors in preparing detailed engineering and technical documentation as well open-book tender materials. We believe this consortium has a required technical experience to deliver this project and they have been involved in a majority of LNG projects constructed globally and they understand our project schedule and believe it is achievable in the timeframes noted.
We have also finalized most of the tender documentation for long-lead items such as gas turbines, cryogenic units, gas compressors and pumps; and we plan to begin placing firm orders shortly.
In addition, we have made significant progress in finalizing the tender process for ship building and shipping arrangements and we anticipate that the first tanker will be ordered this summer.
We mentioned on the last conference call that the Port of Sabetta is being constructed according to our project schedule and will be ready sometime in the second half of 2014 to begin accepting equipment and materials for LNG plant construction and that the airport terminal is expected to be operational by the end of this year.
To date, approximately 77% of the port piling is completed and roughly 75% of the air strip is back-filled. This two infrastructure projects are obviously important along the project's critical path to begin transporting large volumes of materials and supplies before construction activities can commence.
In addition, we have made significant progress in completing the EBC tender process for early works such as the power station and LNG reservoir tanks. A lot of work progress has been made in a relatively short period of time due to the focus and commitment of senior management and the diligent work efforts of all of our team members.
A series of questions have been raised lately regarding the use of ice breakers for our projects, and the government wavering commitment to fund the construction of a new fleet. Therefore, it is important to get some of the facts correct.
Over the past three years, we have used leased tankers, accompanied by nuclear ice breakers to transport stable gas condensate to the Asian-Pacific region to demonstrate the logistical viability of this important commercial route during its navigational period. During these voyages, we did not encounter any significant problems requiring the use of ice breakers. But nonetheless, they are required by federal law.
From purely an ethical perspective, we do not need new ice breakers for the projected as the envisioned LNG tanker fleet will be able to pass through the Northern sea route on their own, and ice breakers for emergency purposes are already available.
However, the government's initiative to build new ice breakers is consistent with the general implementation of the Russian Arctic program, not solely our Yamal LNG project, and the construction and delivery of new LK60 class ice breakers are part of the phase-out initiative.
As a result, we do not see the present issues raised by investors regarding ice breakers as a major risk for the commercial viability of the project.
Another important topic that continues to be discussed is the Russian government's plans to liberalize the LNG markets from the present export restrictions. During the reporting period, we visited China, South Korea and Japan as part of a Russian government delegation led by energy minister, Alexander Novak; to better understand the concerns raised by the important consumer regions on the counterparty risk relating to the export agency arrangement via Gazprom export, as well as getting a better a sense of the potential of demand or off take of LNG from Russia.
As of today, no formal decision has been made in respect to these LNG liberalization discussions. However, we are confident that the Russian government will make a positive decision in respect to excluding LNG from the export law which will facilitate the signing of counterparty agreements with the Asian-Pacific consumers.
As for potential partner discussions, we have previously reported that we are in present negotiations with a couple of potential partners for an equity stake in Yamal LNG. These negotiations are presently ongoing and we will update the investment community once the due diligence process is completed and a binding agreement has been executed.
We understand this is an important issue for many investors and we remain confident that the current negotiations underway are constructive for all parties involved and that significant progress has been made recently to move this process forward in a reasonable time period.
Another topic that continues to concern investors is the present discussions on the pace of Russian's gas tariff growth in the future. It is understandable that many investors are confused by this uncertainty, but we are reasonably confident that the Russian government will increase the gas tariff by 15% on the first of July as originally planned.
Looking ahead, we have to take into consideration that tariff growth may be potentially revised after the conclusion of all these discussions. It is too early to provide any clarity on this issue and it is presently a hot topic among many policy makers as a means to stem potential concerns of rising inflation, as well as ongoing lobbying efforts to reduce the burden on potential consumers.
It is important to repeat what I previously mentioned, that we do not like to discuss the gas pricing topic in isolation, but rather frame our discussions regarding the overall changes to gas and transport tariffs as well as gas mineral extraction taxes. We believe this approach to be more constructive and focuses everyone's attention on the key variables.
As you know, we are presently awaiting a final decision on a new gas MET formula which will take into consideration all of these important factors- gas transport tariffs, international oil price and the net back impact of these variables.
We believe the final decision will be made soon on this important topic which should remove one of the key uncertainties plaguing the gas sector. But as of today, the Russian government has already adopted the current proposed gas MET rates into the present budget for the years 2013 through 2015 and we believe these rates will remain in effect, as agreed.
We have finalized all of the pre-commission and testing at the UST-LUGA complex during the first quarter as well as additional works to optimize the plant's performance. And we expect the first tanker to be officially launched for the complex in the second half of June.
The second stage of the complex is expected to be completed by year end, and the combined works will give us a total capacity of 6 million tons per annum with an approximate 20% upside to the main plate capacity on the plant.
The formal commissioning of the UST-LUGA project will essentially change the commercial marketing of our liquid hydrocarbons to include a slate of petroleum projects as well as the expansion of our customer base in various geographical areas.
In the first quarter, we significantly increased our capital spending at the Purovsky processing plant as expansion works began to increase the facility's overall processing capacity from 5 million tons to 11 million tons. The first stage of the expansion, representing 3 million tons, is expected to be completed in the early part of the fourth quarter; whereas the second 3 million tons is expected to be completed in early 2014.
The expansion of the plant's processing capabilities is consistent with their expected growth and liquid output from our core fields, as well as our joint ventures. Ongoing upstream construction activities continued on the eastern dome of NortGas, north Urengoyskoye field and we presently expect to launch first production in the fourth quarter of 2013, almost one year ahead of its originally planned schedule.
At full fuel development, comprising both western and eastern domes, we expect to reach peak production in 2015 of approximately 10.7 billion cubic meters of natural gas and 1.48 million tons of gas condensate.
At Severo-Urengoyskoye, work continued at both the Urengoyskoye and the Yaro Yakhinskoye fields and we expect that these new fields to be formally launched into production toward the end of the first half of 2014.
At the end of the first quarter, we completed nine wells at the Urengoyskoye field, of which three were completed during the reporting period. We also completed the construction of an 89-kilometer condensate pipeline and more than 50% complete on the construction of a 96-kilometer gas pipeline.
We also commenced the drilling of the first horizontal well, targeting the [Atrimol] formation with a horizontal section of approximately 700 meters and we are presently waiting on the well test results from this formation.
We completed 28 production wells during the first quarter, of which eight wells were completed at Tarkosaleneseftegas, three wells completed at [Yaharoskoye] Neftegas, 13 wells completed at [Sevinivira] and four wells completed at NortGas. We also contained ongoing exploration activities at the [Utinay] field and the [Samborskoye, Urhoskoye]and East Tarkosalinskoye license areas by running and processing 353 kilometers of 2D seismic and 1,320 square kilometers of 3D seismic as well as the exploration drilling of approximately 7,785 meters.
During the quarter, our wholly-owned subsidiary, Novatek Tarkosaleneseftegas, won an auction for the exploration and production license for the East Tazovskoye field with a successful bid of RUB 3.19 billion. The new license is located in the Yamalo-Nenet autonomous region, in close proximity to our North Russkoye field, a license also which is held by the subsidiary. And as of January 1, 2012, our comparable reserves under the reserve classification C1 plus C2, aggregated approximately 65.3 billion cubic liters of natural gas and 13.4 million tons of liquid hydrocarbons.
From an operational perspective, we continued to demonstrate robust production growth in natural gas of 9.8% year on year, and 4.8% quarter on quarter; led by organic production growth at the Yahorskoye and East Tarkosalinskoye fields, as well as positive growth contributions from our equity share of natural gas production from our joint ventures.
We continue purchase gas from [SUBOR], a related party. And during the first quarter, we purchased approximately 2.1 bcm of natural gas from this entity for resale in the domestic Russian market.
One of the primary changes during the reporting period was the change in the delivery point of purchases from SUBOR. Previously we had purchased natural gas in the region where the gas was delivered, thus incurring transportation costs as part of the overall purchase price and SUBOR directly paid to transport the cost. We now purchase the natural gas at X plant and directly pay for the transport costs to market.
For liquids, we increased our year-on-year production volumes, including our share of purchases from joint ventures, by 9.3%; driven largely by production growth of crude oil from the East Tarkosalinskoye field, the launch of the two stages of production at the [Samborskoye] field, and production contributions from our recent acquisition of a 49% equity stake in NortGas.
Our production for natural gas and liquids in April of 2013, as currently reported by CDU Tech, increased year-on-year by 9.5% and 12.2% respectively. And we remain committed to our initial production guidance for the year of 7% to 8% for natural gas and 9% for liquids.
We will review our full-year guidance in the second half of the year to determine if any changes to these forecasts are warranted.
In terms of sales volumes, we significantly increased our proportion of natural gas sales and customers to approximately 90% from roughly 76% and 73% in the first and fourth quarters, respectively.
This change was largely driven by new gas sales contacts concluded in 2012, as well as the acquisition of an 82% equity stake in Gazprom mezhregiongas Kostroma in December.
During the quarter, we reported total gas sales to end customers of 16.6 billion cubic meters which represented an increase of 37% year on year and 44% quarter on quarter. Within end customer sales, power companies and large industrial customers represented roughly 87% of the total sales volume delivered or approximately 77% of our total sales for gas for the quarter.
Total natural gas for the reporting period aggregated 18.7 bcm, representing a year-on-year and quarter-on-quarter growth of 16.8% and 18% respectively.
We had a change in the regional mix of our gas deliveries as a result of these new contracts. We increased our sales volumes quarter on quarter by approximately 2.3 bcm, to the city of Moscow and the Moscow region; as well as an increase in our sales volumes to the Kostroma region by 1.1 bcm during the reporting period.
Geographical regions representing greater than 10% of our sales volumes included Chelyabinsk, Kostroma and Moscow regions, as well as the city of Moscow.
As a result of the changes in our regional sales mix, we had a notable increase in the advance distance to market of approximately 2,335 kilometers, representing an increase of 533 kilometers, year on year and 411 kilometers quarter on quarter.
As expected, we reported a significant increase in our transportation expense for natural gas during the current quarter, relative to the first and fourth quarters of 2012, primarily due to the higher proportion of end customer sales, the increase in average distance to market, the change in the purchase arrangements with SUBOR, and a transport tariff growth of 7% effective the first of July.
Our average net backs for natural gas sold to end customers increased by RUB255 per thousand cubic meters, or by 17.5% as compared to the first quarter of 2012, and were relatively flat quarter on quarter; whereas as our X sale price increased by 21% year on year and roughly 4% quarter on quarter.
We were reasonably pleased with the strong gas pricing we received for both end customer and X sale sales in the reporting period. But we reported some margin differential erosions between the net backs received from end customers and the price at the well head due to the increased transport costs resulting from longer distance to market.
During the reporting period, we sold 1.6 million tons of liquid hydrocarbons, representing a significant increase over the comparable periods. The increase was driven mainly by a reduction of stable gas volumes in transit of 302,000 tons as well as an increase in crude oil production and the commencement of purchasing stable gas condensates from our joint ventures.
The significant reduction in goods in transit for stable gas condensates represented an aggregate inventory change of approximately 426,000 tons year on year, and 494,000 tons quarter on quarter.
For liquid pricing and net backs, we experienced a general decrease for the majority of our products sold, both internationally and domestically; due mainly to a decrease in the benchmark crude oil prices and other reference prices for our products sold, as well as general increases in transport costs and export duties.
On a total barrel of oil equivalent basis, we increased our first quarter production to approximately 114 million barrels of oil equivalent, versus 104 million barrels of oil equivalent in the prior reporting period; representing an average total hydrocarbon production per day of approximately 1,262,000 barrels per day for a combined increase of 11% year on year.
We continued to effectively manage our overall operating expenses during the quarter. And the significant increase, period on period, of RUB19.5 billion or 62% was primarily due to an increase in our transportation expenses, as already discussed and the purchases of natural gas and liquid hydrocarbons.
There were no material surprises in our G&A expenses to highlight except for the commencement of compensatory social payments, based on the start of work activities at the [Utinay] and [Geophysica] fields as well as minor adjustments to the methods of the bonus accruals for key management.
Our balance sheet and liquidity position continued to remain strong throughout the reporting period, as we managed to decrease our overall debt portfolio this quarter, relative to the year-end balance by RUB6.4 billion due to the repayment of two loans ahead of their respective maturity schedules which was offset by the issuance of a Russian ruble denominated euro bond in February.
We remained free cash flow positive during the first quarter of [2012], and ended the quarter with a free cash flow position for the Company of RUB14.3 billion, which is lower than the prior year, but takes into account a significantly higher capital expenditure program for the current year.
We continued to fund our capital expenditure program through internally generated cash flow and have the ability to meet all of our current obligations and liabilities when they mature, or payment becomes due.
In conclusion, Novatek ended the first quarter of 2013 with another set of record financial and operational results, as well as delivering robust production growth, consistent with our corporate strategy. Our business model is sound, despite the external noise in the market and we understand the concerns and issues raised by the investment community over the uncertainties in gas tariff growth, and the present discussions regarding mineral extraction taxes.
We also understand that you would like us to promptly complete the sale of an additional stake in Yamal LNG to another strategic partner, but this takes time to conclude and we are proceeding diligently with our current negotiations.
More importantly, we are investing capital and moving forward with the project without delays, and with the recent award under the EPC contract to Technip and JGC, we should be concluding the tender process and finalizing the project's capital program and project timetable in the nearest future.
It has been a frustrating period for all of us to witness a falling share price when the Company has delivered double-digit EBITDA and earnings growth, strong production growth, value-accretive acquisitions, and continues to remain one of the lowest-cost producers in the global oil and gas industry.
Despite this fact, we remain keenly focused on delivering future growth as outlined in our business strategy. And equally important, we are committed to sound corporate governance and financial transparency and we can ensure all of our investors that our economic interests are fully aligned to create sustainable shareholder value.
I would like to end this portion of the conference and now open the session to questions and answers. Thank you very much.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
Thank you, sir. (Operator Instructions) And we can take our first question from Geydar Mamedov of Goldman Sachs. Please go ahead.
------------------------------
Geydar Mamedov, Goldman Sachs - Analyst [2]
------------------------------
Hello, Mark. This is Geydar Mamedov from Goldman Sachs. I have one question on Yamal LNG, if I may. Thank you for updating us on the progress. But I think one of the questions that are still remaining and where the investors generally are interested is- earlier I think we were expecting the first presale contracts on the sale of the volumes to European and to Asian consumers to be announced in the first half of the year. Should we still expect that there will be announcement of the first contracts in the first half of the year? This is the first thing in regards to Yamal LNG.
And secondly, I wanted to understand whether you think that FID for the project is still realistic in the second or the third quarter of this year? Or realistically we should be looking at the end of this year or the beginning of the next year in terms of the FID for the project? Thank you.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [3]
------------------------------
(interpreted) And so there should be a certain consistency and an understanding of the way the LGN project is taking place. We were saying that we might not have good confidence in terms of the ultimate portfolio as to where we're going to starting our future LNG projects. We were saying that we see as our priority the Asian Pacific market, but we are going to also diversify our shipments to certain parts of the European market as well as to the Asian Pacific.
As Mark told you, that we have finished our EBC tendering process and we currently are going through the open book tender and currently want to say that we have completed the tendering for all of these long-lead items. And we have also received some very good prices for these deliveries, as well as we expected. And most importantly, the timing which is necessary in all of the contract performance that we are accepting, specifically for the project completion; so currently going through this OBT stage, we do work with the future manufacturers of the modules. It will definitely take some for us to be able to receive from them the well-prepared pricing as well as their understanding of the time frame. We have already received preliminary offers and so I do expect that this work will be finished by us in the course of the next three to four months so that in these delivery contracts, or the LNG delivery, we would have very specific dates written in, and after that we'll be in a position to make the announcement about the contracts signed. Thank you.
Next question, please.
------------------------------
Operator [4]
------------------------------
Our next question comes from Karen Kostanian of Bank of America. Please go ahead.
------------------------------
Karen Kostanian, Bank of America/Merrill Lynch - Analyst [5]
------------------------------
Thank you very much; Mark, thank you very much for the presentation. I just wanted to clarify one question. Now in your presentation you said that the gas price increases- you're fairly certain that the gas prices will increase domestically in Russia by 15% in July. But 2014 and 2015 are under considerable discussion from the government members. I just wanted to clarify that that's true and also I wanted to clarify another thing.
Regarding that you wanted us to look at the gas prices in the basket with the MET and transportation costs, but are you fairly certain that the MET increases, up to 2015, will remain in place and then the formula will change from 2015 or the MET increases in 2014 and 2015 will also be reconsidered from your perspective? Thank you.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [6]
------------------------------
(interpreted) So also as Mark Gyetvay mentioned in his presentation, and I believe this was the most important thing which you missed in what he said was that we expect and we believe that the formula (inaudible) is definitely going to be adopted which will cover the taxation of the gas industry. And it could take into account the tariff growth for the regulated prices, the growth of the transportation tariffs and maybe other components which are related to various peculiarities and the locations of the fields under development and to be developed.
So currently there is a discussion going on about the price growth for gas in 2014 and 2015 and so I expect that there are not going to be changes of positions in made within 2013. And I also believe that not such a big growth which was written into the 15% for 2014 or 2015 and this lobbying by the industrial groups for the reduction of this rate would mean detriment to Russia, rather than the benefit to Russia; because the 15% increase I view as it would be correct to keep it but of course you should understand that it doesn't depend upon Novatek only.
So during the introduction of the formula we expected to be adopted this year; we are no longer going to be so strongly dependent upon any [one] factor which is decided for the industry. You will know that in the taxes of the current energy range is for 2013-2015 and this happens to be based upon the interest of the prices in 2014 and 2015 by 15%.
So if it is, and actually which we don't believe to be correct- I mean it's a decision about the lower [metrics] of the internal gas prices automatically- when the formula is introduced the taxation would go down. But as far as the transportation [business] that the government made a separate decision on it to the extent that the transportation tariff should be raised not above inflation, without taking into account the extension of exemptions for the property and that decision took place this year by .4% for various companies including Gazprom who has on its books this gas transportation system. So the tax came into effect and so this interest will be taking place in subsequent years up to 2019 by .3% per annum.
And so in compliance with this decision which was made by the government back in 2012, the federal tariffs service has estimated the tariff which it has preliminarily published which is 7.65. And so it means is that it should insignificantly be lower according to the decision made, just insignificantly; but it should be small.
So once again I should (inaudible) the most important thing that the government announced is that the formula for taxation taking into account all of these factors, will be adopted this year and this is the most important thing. For the future, Novatek's operation in the domestic gas market, and somehow this formula does give you an answer in terms of what it going to happen beyond the threshold of 2015-2016; the formula will come into effect.
And I should offer my apologies because I missed answering one of the questions which was raised by the previous caller in terms of when I expect-- when the final investment decision is to be made for the Yamal LNG project.
In the first half year or second half year, Novatek feels very confident in doing the Yamal LNG project. This is of course a first grand project of its sort and as such, FID is not held in terms of a very important factor, because the budget has been adopted for Yamal LNG with the timeframe for commissioning it into operation as was stated by the end of 2016. The shareholders are funding this whole budget. It is the incremental part of all of our plans. And so in order to-- before all the (inaudible) is written by FID included contracting, time charters and the (inaudible) process in terms of coming up with the final estimation of the capital investments.
The formal-- the decision is going to be made. But when I told you this, we are going to reach this final contract signing for the Yamal LNG and that will take about three to four months time. I meant to say that that is where we would formally adopt that FID. But once again, I would like emphasize this in no way affects our ability to move forward and to fund this project by Novatek. Thank you.
------------------------------
Operator [7]
------------------------------
We can now take our next question from Artem Kosenko of JPMorgan. Please go ahead.
------------------------------
Artem Kosenko, JPMorgan - Analyst [8]
------------------------------
Yes, good afternoon, gentlemen. My actually concerns the recent reports on the repo transaction that involved a significant stake of Novatek's stock and whether the Company is aware of any covenants that might have been attached to this deal which may have impacted the stock's performance, for example, or the execution of your buyback program. Thank you.
------------------------------
Mark Gyetvay, Novatek OAO - CFO [9]
------------------------------
From our perspective, we do not believe this has any material effect on the current share price of Novatek and I think it's more driven by the external factors of tariff growth, MET taxes and some of the other uncertainties surrounding the Yamal LNG project. I believe that the repo agreement has no effect on the share price today.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [10]
------------------------------
(interpreted) And also Mr. Mikhelson would like to add by saying that this is the first time that he hears about repo transactions being the biggest shareholder of the company. He's saying that no repo transactions are taking place with the stock belonging to him. But nevertheless, thank you very much for this question.
------------------------------
Artem Kosenko, JPMorgan - Analyst [11]
------------------------------
(Inaudible) I think it was in connection to [other] sources; holdings. And if I may ask on your CapEx lines for 2013, if you can reiterate your guidance; what you expect to spend this year. That will be my final question. Thank you.
The question was actually on your CapEx plans for 2013 and the (inaudible) resources was a comment on the previous question on the fact that you were unaware of significant repo deals.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [12]
------------------------------
(interpreted) Well, thank you very much once again for this information this connection to all the resources. We used to say that we are somewhere at the level of the capital spending of the last year, maybe just a little bit more than that; we'll end up having it. Without taking into account the investments which have been made into Yamal LNG. As you know and as Mark stated, we are completing a big (inaudible) project and we'd expect to commission it into operation and have the first tankers built in the second half of June. We are also expanding and almost 90% of these investments are going to made this year into the expansion of our Purovsky gas processing plant which would raise its capacity from 5 million up to 11 million tons with the additional six and so this particular plant in terms of long-term development; we're not going to expand its capacities anymore.
And also commissioning into operation of smaller facilities in order to maintain these kinds of productions in our main fields; thank you.
------------------------------
Artem Kosenko, JPMorgan - Analyst [13]
------------------------------
Thank you very much.
------------------------------
Operator [14]
------------------------------
Our next question comes from [Viacheslav Chillen] of Deutsche Bank. Please go ahead.
------------------------------
Viacheslav Chillen, Deutsche Bank - Analyst [15]
------------------------------
Yes, good afternoon, everyone. I just wanted to check that I believe we've seen the Company go through the destocking through the first quarter which was underpinning your export of liquids and also the growth in revenues and EBITDA. How likely is it to sort of recur again in 2013 or do you believe that the second quarter onwards, the growth would be more of organic nature and we shouldn't be expecting the same height in your top line and EBITDA line as we've seen in the first quarter? That's it. Thank you.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [16]
------------------------------
(interpreted) As you mentioned, this height of the EBITDA is not very much related to the lowering of the stocks that we went through. This was just one of the drivers for that. And to be able to project in terms of what kind of stock levels we are going to have by the end of the first quarter of next year, is something that I want to take unto myself. It will depend upon what kind of market environment there will be; what kind of customs, duties will manifest themselves during a similar period when we will be putting together our tanker shipments. This is what we're trying to do during the most (inaudible) period of time, we'll take into account also the pricing and how much we will respond to the demands in terms of taking gas from the underground storage and what kind of winter we'll go into; it will all depend upon these factors.
So one shouldn't apply the word of height to our EBITDA; I would rather apply this word to the level of our share prices as the organic growth that we announced produced concerns that it will continue as is.
------------------------------
Viacheslav Chillen, Deutsche Bank - Analyst [17]
------------------------------
Thank you so much; thank you.
------------------------------
Operator [18]
------------------------------
Our next question comes from Maxim Moshkov of UBS. Please go ahead.
------------------------------
Maxim Moshkov, UBS - Analyst [19]
------------------------------
Hello. I think for the presentation, I have a couple of questions, particularly on Yamal. Within your current vision of the project, how many I high class tankers do you think need to be built for this project and what do you expect in terms of cost per tanker? And this also involves Yamal; how much capital have you already invested into this project?
And the second question also relates to Yamal. You said that the shareholders would likely support this project before the FID you'll be taking and what is the maximum amount for the shareholders that could likely come from this project before FID stakes? Thank you.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [20]
------------------------------
(interpreted) In terms of the number of the high grade tankers; we view that to be about 14 to 16 tankers. We have received proposals from potential shipyards who are ready to build tankers according to the specifications that have been written into the project. And you might know that we do not envision to have the Yamal LNG project fund the construction of the tankers themselves. But the price offerings that we received do correspond to the metrics that we expected and the ones that were written into the Yamal LNG financial model which would enable us to enjoy exactly the time charter race that we are planning for. Now in terms of the size of capital, I cannot quote to you a very exact figure. Currently an estimate or without considering the value of the assets upon entering into the Yamal LNG project, we view to be at about the level more than $1.5 billion.
Now my vision in terms of the number of shareholders, apart from the currently existing (inaudible) total; my vision is just two. More questions?
------------------------------
Operator [21]
------------------------------
We will now take our next question which comes from Alexander Kornilov of Alfa Bank.
------------------------------
Alexander Kornilov, Alfa-Bank - Analyst [22]
------------------------------
Good afternoon, gentlemen. This is Alexander Kornilov from Alpha Bank. Thank you very much for the presentation. I have a couple of questions, if I may. First of all, my first question is related to the gas MET formula. When do you think, in your view, they're going to see the final clarity, the final decision of that formula; as far as (inaudible) promised that the ultimate decision could have been taken by the end of March but not it's mid May and we still don't see any final clarity on that issue; so if you could provide some considerations on that issue, it would be great.
My second question is related to the domestic gas tariff configuration. Probably we're seeing some sort of changes to the regulatory paradigm. Earlier, the regulators tend to revise the gas tariffs once a year. Now we're seeing some attempts and changes to the approach that they should be on a quarterly basis for revision of tariffs and moreover the gas tariffs should be or are supposed to be linked to the petroleum product prices at Rotterdam exchange with nine-month lag. What's your view on that? How do you take it? Do you think it's giving you more comfort in terms of authorization so you would disagree with that approach- if you could provide some ideas on that, it would also be great. Thank you.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [23]
------------------------------
(interpreted) In terms of the adoption of the formula, that would definitely create greater comfort for the Company to be able to plan its operations. And it will be difficult to respond on behalf of Mr. (inaudible) because one has to demonstrate consideration towards him since he a lot of areas of responsibility in his position in the government. But I do expect that the formula of which it technically already has been put together and I emphasize effectively it has been cleared in between different government agencies and so I hope that during this quarter, it will be submitted into the Russian parliament for the parliament to adopt it ultimately.
Now in terms of the revision of the MET formula, either on a quarterly on an annual basis, I do expect that the formula which has been announced is going to be compliant with the gas prices being raised on an annual basis. But in this case the formula-- gas prices aren't going to be that relevant since we're going to have the formula in place and I remember that back in 2010 there was a government decree that within any particular quarter it would be changed to plus or minus 3% but without all the changes in terms of the government plans to raise gas prices.
------------------------------
Alexander Kornilov, Alfa-Bank - Analyst [24]
------------------------------
Okay, clear enough. Thank you.
------------------------------
Operator [25]
------------------------------
Our next question comes from [Archam Fess] of Renaissance Capital. Please go ahead.
------------------------------
Archam Fess, Renaissance Capital - Analyst [26]
------------------------------
(Inaudible) Renaissance Capital. Good evening, gentlemen. I have a few questions. First, if you could please quantify the rolling CapEx for the years 2013 and 2014, including the Yamal LNG CapEx; and with relation to this, we have seen RUB5.5 billion of loans provided in the first quarter of 2013, so could you please quantify whether this is to fund CapEx or in relation towards this number is referred.
And my second question is on the purchase prices for gas and liquids, given the rise in share of purchases. Should we assume that the purchase prices will move sort of in line with the market trends or do you have some sort of long-term agreements on this front that we should be aware of? Thank you very much.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [27]
------------------------------
(interpreted) So as far as this particular topic is concerned, typically the capital spending is part of the Novatek reporting as well as the capital spending for Yamal LNG. We mentioned just recently, in answering some questions that a more precise figure we will have within the next three to four months. I also refer to the main projects and to the capital expenditure program that Novatek is going to commission into operation within 2013 and that on, the capital spending will be aimed more at maintaining the level as well as commissioning into operations of smaller facilities as well as increasing the production of the liquids hydrocarbons, as well as the increase of the production of oil within the midterm perspective as the result of the introduction of MET exemptions- regional exemptions for the production of oil.
But even taking this into account, we are not taking the LNG project into account. We expect the capital spending to go down within the midterm perspective. As far as the acquisition prices for the liquids hydrocarbons from our joint ventures are concerned and the acquisition of gas certainly, these have been assigned on the long-term basis and they have been assigned taking into account the market trends in terms of the prices of liquids hydrocarbons as well as the increase of the domestic gas prices and with the view of maintaining the current profitability that we are having right now and also with a view to increase the orders that we require for crude oil as well as the gas (inaudible). Thank you.
------------------------------
Archam Fess, Renaissance Capital - Analyst [28]
------------------------------
Thank you very much; that's clear. And if I may just follow up on this figure for RUB5.5 billion on the loans provided because it's quite significant; and so maybe if you have details at hand on who is it provided to. Thank you very much.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [29]
------------------------------
(interpreted) Well, in answer to this question, I should say that one shouldn't be so direct in terms of aligning the borrowing schedule that we are following and the one that is actually taking place and connect it to any particular event, because the financial markets are extremely volatile right now. If you ever paid attention to the way of [CIBOR] this is euro bond in Asia. It was mainly Europe bond issue. It was able to lift up into a very nice environment and thus brought a very beneficial borrowing terms. And so we were looking at the market environment and realizing that the environment is quite all right which could pose an opportunity to us to transform our portfolio into more common-sense kind of a correlation between the currencies in rubles and dollars. And so we decided to make the most of this opportunity in order to enjoy that expensive placement and compensation (inaudible) for the one which we had on (inaudible).
Mark is saying that I possibly do not get your question very correctly and wants to add a few comments as well.
------------------------------
Mark Gyetvay, Novatek OAO - CFO [30]
------------------------------
I think just the point that Mr. Mikhelson just made is really the strategy we have in refinance in our existing portfolio at Novatek to take into consideration different tenders as well the lower cost of finance. The specific question that was just asked on the RUB5.5 billion to loans; that's what it is, it's a loan to Yamal LNG for the funding of the capital expenditure program.
------------------------------
Archam Fess, Renaissance Capital - Analyst [31]
------------------------------
I see. Thank you very much for clarifying. Thank you.
------------------------------
Operator [32]
------------------------------
Our next question comes from Kalim Aziz of Armajaro Asset Management. Please go ahead.
------------------------------
Kalim Aziz, Armajaro Asset Management - Analyst [33]
------------------------------
Thank you very much. Mark, thanks for the presentation. I really appreciate it. I have a couple of questions; there were some headlights that popped out [in the tax] with respect to the gas prices. I don't know where it is originating but apparently, [some facts]. The gas price will be limited to 3% or 5% or much lower than what is anticipated; I know it's not really clear, but can you repeat if there is any formula place so that we all can understand how the gas price changes are to be estimated or predicted for the regulated (inaudible) in the Russian market. Please.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [34]
------------------------------
(interpreted) Well I must confess that this is the first time that I hear about there being any sort of a formula for domestic gas prices. And the Russian government is making its decisions in setting the domestic regulated gas prices based upon the macroeconomics and taking into account the state of the Russian economy. Despite we never comment on these statements or any headlines that have been published by different media channels without any specific reference as to the source, because it is more appropriate to comment upon existing government decrees the Russian laws. And the fact that the investment community applies these headlines or un-sourced comments to describe the--
------------------------------
Kalim Aziz, Armajaro Asset Management - Analyst [35]
------------------------------
If I may rephrase the question; there is the gas price increase is set by the government with a 10% or 15% or whatever increase they want to on an annual basis. What I understand is the formula is-- the rate is implemented is that they take the net back price of gas at the border and apply a coefficient to get a quarterly price of gas. So I want to understand if this stands true because there was a suggestion that the gas price, (inaudible) price is down 3% quarter on quarter. First quarter- it was over the second quarter. I just want to get some clarification of how it is implemented.
I understand you can't what the gas price would be, but at least how it is implemented so we get a better idea to just ignore the nonsense which appears in the headlines.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [36]
------------------------------
(interpreted) Thank you for this more specific question and I will try to give you an explanation. It began in 2006 when the Russian government started to decide or deciding that the period upon which we should reach the equal carriage situation.
To begin with, the milestone, so to say was to be 2011 that the government announced that it's going to be 2014, so currently the government is looking at another period of time within which legal parity is going to be reached.
And so consequently the federal parse of it, looking at the current prices which otherwise would have maintained this equal parity is the issuing of the proximate schedule of price increases that is believed to be the one that would take the country to this period of time when equal parity is supposed to be reached.
But nevertheless, as I previously mentioned, the most important driver which is taking into account within what is the usual case, the three-year budget for the country, is the macroeconomics and the macroeconomic environment needs to be taken into account
------------------------------
Kalim Aziz, Armajaro Asset Management - Analyst [37]
------------------------------
Thank you.
------------------------------
Operator [38]
------------------------------
Our next question comes from [Paulo Kushnir] of Deutsche Bank. Please go ahead.
------------------------------
Paulo Kushnir, Deutsche Bank - Analyst [39]
------------------------------
Thank you. Two questions if I may; first of all there were reports that LNG export liberalization may be conditional. In other words, the Russian government does not want Russian gas producers to be competing in international markets. And as a consequence, Novatek may be unable to supply gas to Europe where gas from supplies (inaudible). Can you please comment on that? Do you see a possibility that there will be certain market limitations or limitations of the markets where Novatek will not be able to deliver its gas?
And the second question; when do you expect the Russian documents in particular federal tariff service to provide compensation for a 3% tariff bid action which took place in April and for a proposed 3% reduction of tariff which is now planned for July? Thank you.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [40]
------------------------------
(interpreted) So in terms any sort of limitations or restrictions which might be imposed upon the overall process of liberalization of LNG exports, the government definitely would arrive at, but I hardly think that this would be of the nature that you refer to right now, meaning an entry to any sort of an external market so as to avoid competition between the Russian producers. Please note that during 2012, more than 30% of LNG sold and this figure, if I am certain and right, last was over 6 million tons which was sold into the spot market; meaning to say that more than 30% of LNG last year was sold without any connection to long-term contracts or to any specific markets.
And to the European share within these spot deliveries was quite considerable. So we [stated] and I said that this decision will be made, but it will be based more upon various macroeconomic conditions and not the limitations- a word I would rather avoid; so it would take into account various factors which might affect the developments of national resources in terms of LNG and the export-ability of that. But it would take into account Russian conditions, mostly.
Now the second question; wait a minute.
And now with reference to your second question and we partially commented on it in our previous answers. According the decree which was issued back in 2010, the federal tariff service has the right to change the quarterly prices which have been regulated by the federal tariff service. So it's plus or minus 3%. And what is notable, is we adopt (inaudible) without touching or changing the increases which become the (inaudible). So what we expect is that during the second half of the year, the decrease which took place in April will be compensated for during the second half of the year.
------------------------------
Operator [41]
------------------------------
Our last question comes from [Pablo Surrican] of Morgan Stanley. Please go ahead.
------------------------------
Pablo Surrican, Morgan Stanley - Analyst [42]
------------------------------
Gentlemen, thanks a lot for the presentation. I've just got one brief question about the buyback program which requires a question. And I just wanted to ask if you plan to extend this because most of the money has not been spent yet, based on your weekly update. Thank you.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [43]
------------------------------
(interpreted) We are engaged in buyback activities in smaller amounts and one could say practically every time-- whenever, according to the market rules, we have the right to do so.
The amount spent so far is less than half of these figures announced for the buyback but we are planning to carry on.
------------------------------
Pablo Surrican, Morgan Stanley - Analyst [44]
------------------------------
Thank you very much for the answer.
------------------------------
Operator [45]
------------------------------
We have no further questions. I will now hand back to the host for any closing or additional remarks.
------------------------------
Leonid Mikhelson, Novatek OAO - CEO [46]
------------------------------
(interpreted) Thanks everyone for connecting to our conference call. Particularly I would like to comment that most of the questions that have now been raised driven by very key professional interest in work done by Novatek. Thank you very much for that.
The management of the Company, in a very dedicated manner, is working hard to make all of the obligations and commitments and statements that the company has made to come true.
And in view of the current market volatility, and based upon various negative market outlooks which refer to negative macroeconomics and quite often we hear various comments or various analysis of the way the gas market is going to evolve further and so I would call upon the investors to be cautious in the way you receive this news and to be more releasing in terms of what the future has in store for us.
And taking into account the amount of gas that we acquire, one may say that Novatek enjoys a very significant share in the domestic market and so the government, whenever considering there are issues to the gas industry in Russia, also invites Novatek to hold their discussions as well as to prepare in future decisions. So we are actively involved in this process for which we are very grateful to the Russian government, and so I once again would like to say that what is more important is the decision already made, rather than an expectation or a comment or a prognostic statement by various publications.
And so being so keenly involved in the discussion and the preparation of these various decisions, we are in a position to predict our future operations in the manner which is most economically viable and beneficial to the future of Novatek.
Once again, thank you very much for your participation.
------------------------------
Operator [47]
------------------------------
That will conclude today's conference call. Thank you for your participation ladies and gentlemen; you may now disconnect.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------