Full Year 2013 Novatek OAO Earnings Conference Call (IFRS)
Feb 27, 2014 AM CET
NVTK.MZ - Novatek PAO
Full Year 2013 Novatek OAO Earnings Conference Call (IFRS)
Feb 27, 2014 / 02:00PM GMT
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Corporate Participants
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* Mark Gyetvay
NOVATEK OAO - CFO and Member of Board of Directors
* Leonid Mikhelson
NOVATEK OAO - CEO, Chairman of Management Board and member of Board of Directors
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Conference Call Participants
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* Nick Harwood
Sberbank CIB - Moderator
* Charles Evans Lombe
Egerton Capital - Analyst
* Karen Kostanian
BofA Merrill Lynch - Analyst
* Geydar Mamedov
Goldman Sachs - Analyst
* Alexander Kornilov
Alfa Bank - Analyst
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Presentation
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Operator [1]
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Ladies and gentlemen, this conference is about to begin. Please take note, the conference is being recorded. Thank you.
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Nick Harwood, Sberbank CIB - Moderator [2]
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Ladies and gentlemen, my name is Nick Harwood. And on behalf of Sberbank CIB, I'm delighted to invite you to the NOVATEK 2013 financial results conference call. We are privileged that, today, to speak to you, we have the Chairman of the Management Board, Leonid Viktorovich Mikhelson; and Mark Gyetvay, the CFO.
I'd like to hand over to Mark, at this juncture. Thank you very much.
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Mark Gyetvay, NOVATEK OAO - CFO and Member of Board of Directors [3]
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Thank you, Nick. Ladies and gentlemen, shareholders and colleagues, good evening, and welcome to our fourth quarter, and full-year 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, Chairman of the Management Board, and a Member of the Board of Directors.
The question and answer session will be held simultaneously in both the Russian and English languages. So when we come to that part of the conference call, I will ask you to keep this important point in consideration when asking questions, for the benefit of all conference call participants. 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 our normal practice.
During this conference call, we may make forward -- references 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 at the date of this presentation.
We undertake no obligations 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 December 31, 2012; as well as any of our press earnings releases, and documents throughout the past year, for more descriptions of the risks that may influence our results.
2013 was an important year for NOVATEK, as we began to transition away from being considered purely a domestic gas play, to a more balanced international energy company, with a stronger strategic focus on monetizing our liquid-rich natural gas portfolio of assets, and increasing our proportion of higher-value products on the international markets.
During 2013, we commissioned the Ust-Luga fractionation and trans-shipment complex, on time and within budget; as well as expanded the process and capacity at the Purovsky plant.
The timely completion of these important capital projects paves the way for NOVATEK to begin ramping up our production of unstable gas condensate at our fields; which, correspondingly, maximizes our cash flow generation through value-added petroleum products sold to the international market, at world market prices.
The combination of these two events, the completion of the processing complex, and the subsequent ramp-up of a liquid production, adds a completely new dimension to our business profile, by diversifying our revenue stream, to higher-margin products, strong cash flows per units sold, and increasing export earnings.
To supplement this transition, we completed the year 2013 with a series of key value-accretive M&A transactions that solidifies our move to our producing more liquids from our natural gas production streams.
The value-accretive transactions, combined with our current development plans, is consistent with our strategic objectives, outlined in 2011, of doubling our natural gas output, and tripling our liquid productions by 2020; resulting in a shift towards increasing the proportion of higher value liquids on a barrel of oil equivalent basis.
I believe this important distinction, the transition into higher value export earnings per unit sold, is not yet well understood by the investment community.
Specifically, Yamal development, our 50/50 joint venture between NOVATEK and Gazprom Neft, signed an agreement to purchase Eni's 60% equity stake in Artic Russia BV, for approximately $2.94 billion; which significantly increases the joint venture stake in SeverEnergia from 51% to 80.4%, or our indirect equity stake from 25.5% to 40.2%.
In addition, we signed an assets swap agreement with Rosneft in December, whereby we swapped our 51% equity interest in Sibneftegas, for Rosneft's 40% equity stake in Artic Russia BV.
Following the completion of this asset swap, we increased our effective equity stake in SeverEnergia by another 19.6%, or cumulatively to 59.8%. The transaction with Rosneft was a straight asset swap, and did not include any additional compensation or cash payments to either party.
The development of SeverEnergia, and its related fields, has the potential to significantly increase our proportionate share of natural gas, condensate, and eventually the joint venture's crude oil production.
Moreover, the conclusion of the recent transactions with both Eni and Rosneft not only increased our effective equity stake in SeverEnergia, but also allows us to concentrate our efforts on developing fields rich in liquid hydrocarbons, which complements our long-term strategy, taking into consideration our existing infrastructure, as well as a commission in the Ust-Luga complex, and the expansion of the Purovsky plant.
SeverEnergia holds the exploration and production licenses for the Samburgskiy, Yevo-Yakhinskoye, Yaro-Yakhinskoye, and the North-Chaselskoye license areas via its fully-consolidated subsidiary, Articgas.
And as at December 31, 2013, the proved reserves of SeverEnergia, under the SEC proven reserve methodology, was estimated at 480 billion cubic meters of natural gas, and 90 million tons of liquid hydrocarbons.
We will launch two major fields in 2014, as part of the ongoing development activities at SeverEnergia. The first field, Urengoyskoye, is expected to be commissioned the first production train in April 2014, and the second production train around the October, November period. Whereas the second field, Yaro-Yakhinskoye is expected to be launched some time in the September/October 2014 time period.
As of today, we have completed 35 production wells at the Urengoyskoye field, representing approximately 25% of the field's total well count; and 30 production wells at the Yaro-Yakhinskoye field, representing approximately 68% of the field's total well count.
The two fields represent major contributors to our planned increase in liquid output over the next several years, as the concentration of liquids, measured in grams per 1,000 cubic meters, is much higher than at existing core fields; thus emphasizing the importance of monetizing these liquid assets in a pricing environment where oil-linked products trade at a significant premium, on a calorific basis, relative to natural gas.
We will continue ramping up product at the Samburgskoye field, as part of this field's development plans, with the third-stage development planned to be launched in September 2014. Presently, there are 41 cumulative production wells drilled at the field, representing approximately 51% of the field's total well count.
We anticipate that all three main fields at SeverEnergia will reach initial plateau levels by late 2015, or early 2016. And these three fields represent approximately 80% of the planned production output of SeverEnergia.
The total estimated production per annum is approximately 35 billion cubic meters of natural gas, and 6.5 million tons of gas condensate. These production figures exclude the joint ventures crude oil [potential], which is being evaluated with additional testing.
In terms of crude oil production, we have been working on infrastructure activities, to prepare the Yarudeyskoye field for initial drilling. During 2013, we began constructing the crude oil and gas pipelines, as well as piling works, and backfilling the drilling pads, and the crude oil treatment facility.
In 2014, we plan to drill 15 production wells, and proceed with the construction of the crude oil treatment facility and oil gather lines. One drilling rig has already been delivered to the site, and is currently being erected. And another three drilling rigs will be delivered to the location in early 2014.
The field, scheduled to be launched in 2015, is expected to reach plateau production levels of approximately 3.5 million tons per annum. The expected contribution of this joint venture represents a significant increase in the Company's crude oil output, located above the 65th parallel, subject to zero mineral extraction tax until 2022.
The successful commissioning of the Ust-Luga complex, located on the Baltic Sea, was one of the key highlights of 2013. And the facility allows us to expand our vertically integrated value chain, and increase the sales of higher-value products, as well as diversify our markets, and expand our product range.
With the launch of the Ust-Luga complex, we transitioned away from utilizing the port of Vitino, located on the White Sea, as our main export port for liquid products, which correspondingly reduced the transit distance by approximately 380 kilometers.
The facility includes two stable gas fractionation trains, with a capacity of 3 million tons per annum each; 520,000 cubic meters of storage facilities for feedstock and products; two deep water berths, equipped with loading arms, capable of loading tankers up to 120,000 deadweight tons; administrative buildings and living quarters; amongst various other infrastructure equipment and facilities.
During 2013, the Ust-Luga complex processed [1.873 million] tons of stable gas condensate into [1.831 million] tons of petroleum products, including [1.522 million] tons of light and heavy naphtha; 190,000 tons of jet fuel; and 119,000 tons of heating oil and gas oil.
The movement away from selling stable gas condensate to finished products also reduced our export duties, based on the respective products sold.
Another precursor to the eventual ramp-up of liquid production was the planned expansion works at the Purovsky plant. During 2013 we increased Purovsky's processing capacity by launching two 1.5 million tons gas stabilization trains, or by 3 million tons per annum.
And in early 2014, we commissioned another two 1.5 million ton trains; thus increasing total processing capacity from 5 million tons per annum, to 11 million tons per annum. As a result, we have achieved a balance between our unstable gas condensate production potential, and our processing capacity.
In 2013, Purovsky processed 4.86 million tons of de-ethanized unstable gas condensate, or roughly 20% more than in 2012; resulting in a commercial production of [3,000,712] tons of stable gas condensate; [1.088 million] tons of liquefied petroleum gas, or LPG; and 16,000 tons of methanol produced during the LPG scrubbing process.
The growth in Purovsky's input feedstock mainly reflects production growth at the Samburgskoye field, and the start of delivery of de-ethanized unstable gas condensate from the North Urengoyskoye field, at the end of 2012; and the commissioning of early production at the eastern dome of the field in October 2013.
On December 18, 2013, we and our partners made the final investment decision, or FID, on the Yamal LNG project, at an estimated cost of $26.9 billion; of which approximately $3 billion has already been financed by the shareholders.
Approximately 70% of the LNG planned capital expenditures are now fixed, and we plan to increase the proportion of fixed costs over the next several quarters, through additional negotiations with the EPC contractors and suppliers.
The remaining balance of the project's costs principally relate to construction activities, and field development in the Arctic zone, where we have substantial expertise in these particular areas.
Yamal LNG, another transformative project, is expected to produce 16.5 million tons of LNG via three liquefaction trains of 5.5 million tons each. And the first train is expected to be completed and commissioned by the end of 2016, with the commercial launch of production in early 2017, which is consistent with our project time schedule.
As previously announced, we concluded the sale of a 20% stake in Yamal LNG, to CNPC, which effectively closed in January 2014. The sale of this equity stake is another major milestone for the project, and a landmark transaction for CNPC, as it represents the first large upstream gas project for a Chinese company in Russia.
The entrance of CNPC into Yamal LNG provides direct commercial access to the fast growing energy markets of China, whereby natural gas is expected to play a much larger role in the total primary energy mix in the foreseeable future.
As part of the deal, CNPC made the first, second and third tranche payments to NOVATEK, aggregating approximately $1.21 billion; as well as reimbursing our prior costs in the amount of $95 million; and reimbursing us for a shareholder loan totaling $364 million, for a total aggregate consideration of $1.480 billion.
The transaction also stipulates disproportional finance for the project through contributions to the charter capital of Yamal LNG, as well as direct shareholder loans.
A Heads of Agreement with CPNC was also signed, whereby CPNC, or one of its subsidiaries, will offtake 3 million tons of LNG for a period of 15 years, with the option for supply extensions.
In addition, our agreement with CPNC stipulates that they will work closely with us on arranging significant Chinese bank participation in the overall financing scheme of the Yamal LNG project.
We are currently in discussions with the China Development Bank, the Industrial and Commercial Bank of China, the Bank of China, and the China Construction Bank, for their active participation in the external project financing transactions for Yamal LNG.
We are conducting ongoing negotiations with export credit rating agencies -- or export credit agencies, excuse me, and domestic and international commercial banks, for their participation in the Yamal LNG project financing structure. So at this point of time, I do not have any additional information to report.
I previously mentioned that Yamal Trading, a wholly-owned subsidiary of Yamal LNG, had executed long-term sales and purchase agreements with Gas Natural, as well as the gas trading arms of both Total and NOVATEK. Presently, we have contracted over 70% of the plant's output, and we are confident that the remaining Heads of Agreements will soon be transformed into binding sales and purchase agreements.
NOVATEK presently holds a 60% equity stake in Yamal LNG, with the remaining 40% equity divided equally between Total and CNPC, at 20% each.
We continued to make dialog with other interested parties, but, as of today's conference call, there is no additional news on disposing an additional 9%, or a portion thereof equity stake in the project. We do not feel that the sale of the 9% stake is critical for us at this point, but we would evaluate offers from interested parties, if the price is acceptable to us.
In December, the State Duma of the Russian Federation formally approved an amendment to the existing export law, allowing direct export rights to projects, which have special terms in the production license, stipulating construction of an LNG plant, or usage to produce natural gas for liquefaction. This means that the Yamal LNG project, and our fields located on the Gydan Peninsula, will receive direct export rights.
In addition, during 2013, our fields located on the Gydan Peninsula were granted the same package of tax concessions as Yamal LNG; again, demonstrating significant support by the Russian Government, to facilitate LNG projects as part of their initiative to increase Russia's relative share in the global LNG markets.
During the third quarter conference call, I provided a significant update of the various ongoing activities at the Yamal LNG project, so I will not repeat myself this evening on the same point.
But I would like to mention that there are presently around 4,400 workers on site. And with the formal announcement of the winter navigation season, 11 vessels arrived at the material offloading facility at Sabetta, to offload around 50,000 tons of construction materials and supplies.
In addition, the third drilling rig has been fabricated at Uralmash, and was recently shipped to Sabetta. We will begin erecting this drilling rig in March. And the current plan is to commence production drilling with this new rig in August. To date, we have completed the drilling and the testing of 11 production wells.
We will continue to provide updates on the Yamal LNG project throughout the year.
As at December 31, 2013, our SEC proved reserves totaled 12.537 billion barrels of oil equivalent, representing a 1.2% increase in our proved reserves, as compared to year-end 2012; proved natural gas reserves totaled 1.7 trillion cubic meters; and reserves of liquid hydrocarbons were estimated at approximately 134 million tons.
In the current reporting year, we added 582 million barrels of oil equivalent, inclusive of 2013 production, and achieved the reserve replacement rate of 132%.
At yearend 2013 our reserves to production life or RP ratio equaled 29 years. The dynamics and structure of our reserves among other factors were influenced by several transactions concluded in 2013, the sale of the 20% stake in Yamal LNG; the purchase of a mineral license for the East-Tazovskoye field; as well as the increase in our share of SeverEnergia from 25.5% to 59.8%, including the asset swap with Rosneft.
The combined effect of these transactions resulted in an increase in our proved liquid reserves by 23 million tons and an offsetting decline in our proved gas reserves by 39 billion cubic meters.
If we exclude the effect of these transactions, our organic replacement rate was 144% and was largely due to successful exploration works and production drilling at our fields.
Under the PRMS reserve reporting standard, NOVATEK's total proved and probable reserves based on our equity ownership in our respective fields, aggregated approximately 21.1 billion barrels of oil equivalent, which included 3.1 trillion cubic meters of natural gas and 314 million tons of liquid hydrocarbons, and represents an increase of 730 million barrels of oil equivalent as compared to yearend 2012.
We commissioned a series of new fields in the fourth quarter 2013 including the launch of the Urengoyskoye and Dobrovolskoye fields within the Olimpiyskiy license area and the Eastern Dome of the North Urengoyskoye field developed by Nortgas.
25 production wells have been completed at the Eastern Dome and the field's infrastructure includes a gas treatment plant, with annual capacity of 6 million cubic meters, gas gathering networks and a gas and gas condensate pipeline to the Western Dome of the field.
With the official launch of the Eastern Dome in October, the Nortgas joint venture is expected to achieve peak natural gas production of more than 10 billion cubic meters and 1.4 million tons of gas condensate in 2014.
In 2013, total gross production of natural gas amounted to approximately 62 billion cubic meters, representing 91% of our total production output on a barrel of oil equivalent basis.
Gross natural production increased by 4.9 billion cubic meters or by 8.5% as compared to 2012 and was within our full-year production guidance with the Valanginian layers, or wet gas, representing 76% of our total gas production.
In terms of liquid hydrocarbons, gross production totaled 4.77 million tons, of which 84% was unstable de-ethanized gas condensate and 16% consisted of crude oil.
Our gross production of liquids increased by 11% or by 487,000 tons as compared to 2012 and our crude oil increased by 46% to 755,000 tons. The growth in gas condensate production was largely driven by ongoing development activities at our fields and the initial launch of the Eastern Dome at the North Urengoyskoye field, while the notable increase in the production of crude oil was largely the result of development drilling at our East Tarkosalinskoye field.
Looking ahead in 2014, we are forecasting sustainable growth in our natural gas production of 7% to 8% over 2013 levels, whereas our forecasted growth in liquid hydrocarbons is estimated to be at a record level of 1.4 to 1.5 times higher in absolute terms than in the past year.
The liquids growth will be driven by the new launches at the Urengoyskoye and Yaro-Yakhinskiy fields at SeverEnergia, and ongoing development drilling in the crude oil layers at our East Tarkosalinskoye field.
We are prepared for this considerable growth of gas condensate production with the completion of the Ust-Luga complex and the Purovsky expansion, as mentioned previously. Thus, we have built a vertically-integrated value chain to maximize our margins from gas condensate.
The forecasted growth in our combined liquids hydrocarbons is expected to increase the proportional share of our liquids and our overall hydrocarbon production on a barrel of oil equivalent basis from 9% to approximately 12%.
Why is this important to understand from an investor's perspective? Firstly, we have a large historical difference in oil-linked pricing relative natural gas on a calorific parity basis. For example, the standard calorific parity conversion is 6 to 1 or more conservatively, 10 to 1.
This means that if natural gas is priced at, say, $5 per MMBtu, then the equivalent parity price for crude oil implies the price is either $30 per barrel or $50 per barrel, depending on the conversion factor used. We have not been in a crude oil pricing market that implies a 20 to 1 to 25 to 1 ratio over the past year.
In NOVATEK's case, we're an average of around $3.10 per MBtu based on the Russian ruble exchange rate to the US dollar and, if we assume a $100 per barrel of oil price, which is presently below the average Brent for 2013, this implies a ratio of 32 to 1. Therefore, the more liquids rich gas we produce as part of our production stream, the higher cash flows we receive on a per unit basis.
Secondly, if we analyze our liquid hydrocarbons' contribution, we can see that its contribution to our EBITDA is generally higher than natural gas by 6 to 8 times on a per unit basis. Our liquids represented approximately 40% of our EBITDA on roughly 9% of our combined volumes on a barrel of oil equivalent basis in 2013.
Therefore, with the forecasted increase on our liquid output to approximately 12% in 2014, we expect that liquids will contribute to higher EBITDA growth during the year.
And finally, the higher the proportion of liquid volume sold on the export markets relative to the natural gas volumes we sell on the domestic market, both on an oil equivalent basis, means that an increasing proportion of our revenues and cash flows, hence our transitioning business profile, should be re-rated from the current market's perception of a Russian country risk and be accorded a higher market valuation.
The Russian Government achieved its stated aim of increasing the regulated price tariff by 15% in 2013 through a series of price adjustments throughout the year and the fourth quarter results were a beneficiary of this 15% increase. We expect the domestic price to remain flat at the August/September 2013 levels or implying a year-on-year growth of between 7% and 8% versus 2013 price levels.
Looking ahead, we are modeling domestic gas tariff increases at inflation beginning July 1, 2015 and 2016. Beyond that period, the Ministry of Economy is proposing tariff growth in line with inflation.
The new MET formula approved by the State Duma on September 20 is expected to come into effect on July 1, 2014. And, as previously stated, we believe the end result of these discussions were consistent with our expectations and lobbying efforts.
In September, the government also approved a plan to reduce the marginal export duties for crude oil and refined products in 2014 to 2016 and, based on this new plan and the proposed rates, we expect to achieve notable savings by 2016 based on our forecasted production volumes.
We experienced unseasonably warm winter weather, which negatively impacted demand for natural gas during the winter peak season. This uncontrollable situation is not the first time we had experienced warmer weather, but it did have a negative impact on our daily gas output and required us to maintain a higher volume of natural gas in underground storage facilities. Although the fourth quarter was warmer than normal, we did achieve our stated production guidance for 2013.
We delivered another set of strong financial operational results in the fourth quarter and full-year 2013 relative to the year-on-year comparative results, primarily due to increased volumes for both natural gas and liquids and reasonably strong commodity prices for our production sold in reporting period.
We delivered robust natural gas liquids production growth consistent with our annual guidance; reported double-digit earnings growth; and generated strong operating cash flows to fully fund our capital expenditure program.
Specifically, our total revenues, adjusted EBITDA and normalized net profit for the full-year 2013 increased by 41%, 28% and 15%, respectively, clearly demonstrating the Company's ability to deliver solid financial results in a slower market economy, as well as achieving double-digit growth as forecasted.
Our production costs on a barrel of oil equivalent basis, increased year on year by 32% to $10.63 per boe, largely due to a significant increase in our transport costs, resulting from a shift towards more end consumers, as well as increasing distance to market.
Our average netback for natural gas sold to end customers increased by 19% year on year, reflecting the tariff adjustments during the year and the sales to more remote regions of Russia.
We realized higher netbacks on our sales of petroleum products with the successful launch in the Ust-Luga complex relative to sales of stable gas condensate, despite a lower average crude oil market pricing during the year, which was offset by lower export duties on petroleum products versus stable gas condensate.
Our operating expenses increased by approximately 60% year on year, driven largely by substantial increases in our transport and tax obligations, considered non-controllable and volume metric, as well as the large increases in third-party purchases of natural gas and liquids, and a net impairment of some oil and gas properties.
There were no major surprises in our general administrative expenses, as we continued to demonstrate strong cost controls across all of our controllable expense categories.
In terms of capital expenditures, we spent approximately RUB59 billion, which was consistent with our overall guidance of RUB60 billion for 2013, but this represented a 36% increase over the prior year.
Approximately 50% of our capital was spent on development activities at our Yurkharovskoye and East Tarkosalinskoye fields with the remaining capital distributed among various capital projects such as expansion of Purovsky and the construction of the Ust-Luga complex.
Our capital expenditure guidance for 2014 for our core activities is roughly the same as in 2013, at approximately RUB60 billion.
On a total barrel of oil equivalent basis, we increased our full-year production to approximately 439 million barrels of oil equivalent versus 405 million BOE in the prior reporting period, representing an average total hydrocarbon production per day of approximately 1.203 million barrels per day for a combined increase of 8.4% year on year.
Our balance sheet and liquidity position continued to remain strong throughout the reporting period, although we increased our total debt position year on year from approximately RUB133 billion at December 31, 2012 to RUB166 billion at yearend, mainly through the issuance of a Russian ruble-denominated Eurobond and through the use of our syndicated credit line facility.
We were free cash positive during 2013 and ended the year with a free cash flow position for the Company of RUB29 billion, which is lower than the prior year by 9% but takes into account a significantly higher capital expenditure program in the current year.
We will continue to fund our capital expenditure program through internally generated cash flows. And we have the ability to meet all of our debt obligations and liabilities when they mature or become due for payment.
In conclusion, NOVATEK ended the fourth quarter and full-year 2013 with another set of record financial and operational results. During the year, we completed a series of key capital projects that positioned us to continue growing revenues, cash flows and net income on a sustainable basis, and this has been our hallmark of our success over the years.
We ended 2013 with a series of key transactions that strengthens the Company's current asset portfolio, as well as providing a stronger platform to deliver robust production growth, consistent with our corporate strategy.
We closed the transaction with CNPC at an attractive valuation after a long period of negotiations, but the deal brings another strong partner into Yamal LNG; a partner that provides a project with an opportunity to secure a foothold in a nation with attractive gas market dynamics.
There remains a lot of work ahead of us in regards to the Yamal LNG project, but you can clearly see the positive momentum, the Russian Government support and ongoing progress made in terms of construction, infrastructure, drilling and marketing activities.
The Company's transition to a global energy company has already begun and this new direction corresponds to the celebration of NOVATEK's 20th anniversary in 2014. We can see no better way of celebrating this milestone than continuing on our path of growth and transitioning the Company from a purely domestic gas player to one of the largest global energy companies within the next decade.
As always, we are committed to sound corporate governance and financial transparency. And we can assure all of our investors, both present and the future, that our economic interests are fully aligned to create sustainable shareholder value.
I would like to end this portion of the conference call and now open the session to questions and answers. Thank you very much.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Charles Evans Lombe, Egerton Capital.
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Charles Evans Lombe, Egerton Capital - Analyst [2]
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Congratulations. Just a couple of things you've clarified the CapEx profile for the existing fields, the existing operations in 2014 being similar to last year's RUB59 billion. Can you just -- do you have any clarity on what we should be expecting for years 2015 and 2016?
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Mark Gyetvay, NOVATEK OAO - CFO and Member of Board of Directors [3]
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Thank you, Charles. We're expecting it relatively the same, so about RUB60 billion over the next several years.
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Charles Evans Lombe, Egerton Capital - Analyst [4]
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Okay. And once you've -- so with SeverEnergia being probably more or less fully developed by the end of 2015, what are the big CapEx projects beyond 2015, which you're considering at the moment?
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Leonid Mikhelson, NOVATEK OAO - CEO, Chairman of Management Board and member of Board of Directors [5]
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(interpreted) Good afternoon. Leonid Mikhelson will be also adding Mark's answer to this question.
The way Mark stated it in his part of the presentation that approximately 80% of the project production of Arcticgas is supposed to be funded in 2014. I am specifically speaking about the licensed areas under the names of Samburgskoye and [Yaro-Yakhinskoye]. The other two licensed areas are subject to the complete design preparation and will be done so in 2015 and 2017, respectively.
And as you can judge by the profile of our capital expenditures, we have considerably increased the share of our capital expenses, specifically into the liquid hydrocarbons including crude oil.
And looking at the results of the crude production which we achieved in 2013, I could say that within the next three years in between 2014 and 2016, we are planning to raise the crude output by about five/six times.
As you know, we have specifically intended to do that within as short period of time as possible. These investments, because of the introduction of the zero MET rate for crude, which is beyond the 65th (inaudible), which would be effective until the end of 2020.
And similarly, we would focus our investment efforts within the Yamal LNG project.
And additionally to that, you may know that the Russian Government has issued a decree to increase the LNG production within the region and so we are considering the fields such as Utrenneye and [Gydanskoye] as the potential in (inaudible), as well for the potential ramp-up of future LNG production. Thank you.
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Charles Evans Lombe, Egerton Capital - Analyst [6]
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Can I have one follow-up? Just to -- obviously, the liquid production is going to increase, not just the crude but also the condensates, enormously in coming years.
As I previously understood it, SeverEnergia would sell liquids to yourselves and then you would make a margin on the liquids you bought from SeverEnergia because of the processing at Purovsky and Ust-Luga.
What will the dividend stream be that you might expect to get from your stake in SeverEnergia be, based upon your new ownership? Can you give me some idea for once SeverEnergia is developed, what kind of dividends you might be able to get from your proportionate ownership in that field? And I'm not talking now about the additional mark-up you make on the liquids, it's just from your stake in that field.
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Leonid Mikhelson, NOVATEK OAO - CEO, Chairman of Management Board and member of Board of Directors [7]
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(interpreted) Well, you can basically judge for yourself in terms of looking at the full cycle of condensate processing at Purovsky and at Ust-Luga. And you can easily estimate our profitability within this chain.
Additionally, we expect with the launch into production of Termokarstovoye we would also receive additional gas condensate amounts, we are planning for Purovsky gas processing plant to be completely 100% loaded to design capacity by 2015. Thank you.
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Charles Evans Lombe, Egerton Capital - Analyst [8]
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Sorry, I wasn't quite -- is there going to be a dividend stream coming from your ownership in SeverEnergia, which is separate to the kind of processing revenues that you might be making under your traditional off-take arrangements?
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Leonid Mikhelson, NOVATEK OAO - CEO, Chairman of Management Board and member of Board of Directors [9]
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(interpreted) Well, our partner in this arrangement is Gazprom Neft, which is something that we're very much satisfied with. And you might know that this is not the only one that they are managing, because they also manage a 50% stake in Nortgas. And so, we are certainly expecting and planning for a considerable dividend flow towards us from this joint venture with them.
New (inaudible) horizons very highly profitable and, besides the plans and these budgets, which we together with Gazprom Neft are considering within these joint venture operations shows that the cost of production is going to be materially less than in NOVATEK itself, which would definitely lead us to enjoy a very good dividend payout. Thank you.
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Charles Evans Lombe, Egerton Capital - Analyst [10]
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And sorry, last question, if I may, and then I'll give space to other people. With your CapEx being kind of stable at this RUB60 billion level for the coming years, but obviously with the profit stream set to increase considerably, given the huge growth in liquids that you're going to see, what are your plans vis-a-vis potential returns of capital to shareholders either through dividends or other means?
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Leonid Mikhelson, NOVATEK OAO - CEO, Chairman of Management Board and member of Board of Directors [11]
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(interpreted) Am I correct to understand that you are asking about the whole of NOVATEK?
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Charles Evans Lombe, Egerton Capital - Analyst [12]
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Yes.
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Leonid Mikhelson, NOVATEK OAO - CEO, Chairman of Management Board and member of Board of Directors [13]
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(interpreted) Well, in terms of the information that has been shared with you as part of today's presentation, you can see the way the production is going to grow. And we are not planning to reduce our profitability now, because of the expected growth of the liquid hydrocarbons and that would definitely point to our profitability growing proportionately. Thank you.
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Operator [14]
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Denis Derushkin, BofA Merrill Lynch.
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Karen Kostanian, BofA Merrill Lynch - Analyst [15]
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This is Karen Kostanian, BofA Merrill Lynch; congratulations on god result. I have a quick question. You guided towards a 7% to 8% volume growth and continuously have guided towards higher gas volume growth in sort of a very sluggish market where we see actually consumption of gas in Russia declining and competition increasing.
With that, I have two questions. Has it been more difficult to place those volumes? Could you guide over the next three years how much of your volumes are actually contracted?
And in the latest contract that you have concluded for those volumes, have you faced a lot of pressure from your consumers for additional price discounts? Thank you.
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Leonid Mikhelson, NOVATEK OAO - CEO, Chairman of Management Board and member of Board of Directors [16]
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(interpreted) Well, a considerable number of our contracts, as we have shown in our reporting, has been concluded on a long-term basis, and we decided to very intentionally follow the marketing approach which is based upon regional sales, which creates a greater certainty on our part in the future stability of the market, although alongside with that does entail certain negative ramifications.
And what I mean by this, and some of you may raise this question, is the growth of our receivables. But let me immediately answer this unanswered question that the receivables really doesn't pose too much of a headache to us.
We used to state previously that we were going to reconsider our marketing strategy, which we disclosed to you by the end of 2011.
And let me remind us that when we were presenting this information, questions were raised about the Utrenneye and [Geofizicheskoye] fields to the extent of what is the market that the gas from these fields will be sold to. And we responded then by saying that at that point in time we didn't know.
And you've heard today that practically a decision has already been made that the volumes from these fields will be considered for subsequent ramp-up of LNG production. And so, taking into account the volume of gas which we enjoy in terms of sales in the domestic market, in the long-term perspective, we feel very confident in our future. Thank you.
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Operator [17]
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Geydar Mamedov, Goldman Sachs.
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Geydar Mamedov, Goldman Sachs - Analyst [18]
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(interpreted) The question is what are your plans with respect to the fields in the Gydansk peninsula. Like you've recently stated, these fields may constitute a base for the increase of the LNG production by NOVATEK.
Would you say how quickly and in what way you are planning to move upwards with implementation of this project? When should we expect for the project company to be set? When you will start looking for possible partners and when will you be disclosing additional information about the field developments in the Gydansk peninsula, or you may consider them as an additional contribution into Yamal LNG? Will it be a separate project? And, generally speaking, what are your future plans about them?
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Leonid Mikhelson, NOVATEK OAO - CEO, Chairman of Management Board and member of Board of Directors [19]
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(interpreted) I will be able to give you a clear answer only to the second part of your question. These will be considered as a separate project, rather than an extension of the existing Yamal LNG project. We are not going to hurry with making specific decisions.
Specifically, in the case of the Utrenneye field, we have completed approximately 80% of the exploration work and compared to that Geofizicheskoye field is still subject to a considerable exploration effort.
We would like to seriously give a thought to doing additional studies and surveying, so as to make a very well-thought-out decision in terms of the future dedication of these two fields to a possible additional LNG project.
And considering the fact that as of today the amount of investments required for Yamal LNG have been done at the level of about 10%, it would be best for us to wait for much more considerable investments into Yamal LNG. And then in about 1.5/2 years, we'll be in a better position to share with you very specific plans with respect to the Gydansk peninsula fields. Thank you.
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Operator [20]
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Alexander Kornilov, Alfa Bank.
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Alexander Kornilov, Alfa Bank - Analyst [21]
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Congratulations with the good results. Actually, I have a couple of questions. First of all, am I right presuming that you will start consolidating SeverEnergia in your financial statements as of first quarter this year? That's my first question.
And second question is could you please give us some color on the future destiny of the volumes you have purchased from Sibneftegas earlier in the context of your recent deal with Rosneft when, in fact, you ceased to be the shareholder of Sibneftegas? So any color on what are you going to do with those volumes would be great. Thank you.
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Leonid Mikhelson, NOVATEK OAO - CEO, Chairman of Management Board and member of Board of Directors [22]
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(interpreted) The first question about the consolidation of SeverEnergia. Within the overall arrangements for SeverEnergia there is a management contract between the partners and, today, this is Gazprom Neft.
So, today, it's being done on a parity basis, and so once we have consolidated this share of our ownership into our reporting, so it will remain the same, it's just that this share will grow considerably.
And as far as the marketing strategy for Sibneftegas is concerned, if I understood you correctly, I am not in a position to really comment on it
Because of the asset swap arrangement with Rosneft all the contracts have been terminated, which applies both to our supplies of gas to Sibneftegas -- the acquisition of gas from Sibneftegas, as well as our supplies of product to (inaudible). Thank you.
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Operator [23]
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We currently have no further questions in the queue.
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Mark Gyetvay, NOVATEK OAO - CFO and Member of Board of Directors [24]
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Okay, if there's no further questions, I'd like to thank, everybody. And I guess that will end the session today for the conference call. Thank you very much for attending and we look forward to seeing you on various meetings and other conferences, as well as the conference call on the respective quarters.
Thank you very much.
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Operator [25]
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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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Editor [26]
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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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