Q2 & H1 2014 Novatek OAO Earnings Call (IFRS)
Jul 31, 2014 AM CEST
NVTK.MZ - Novatek PAO
Q2 & H1 2014 Novatek OAO Earnings Call (IFRS)
Jul 31, 2014 / 01:00PM GMT
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Corporate Participants
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* Olga Klimova
Sberbank CIB
* Mark Gyetvay
Novatek OAO - CFO
* Leonid Mikhelson
Novatek OAO - Chairman of the Management Board
* Artem Konchin
Orkritie Capital - Analyst
* Alexander Kornilov
Alfa-Bank - Analyst
* Ildar Davletshin
RenCap - Analyst
* Grinya Mishonkina
UBS - Analyst
* Andrey Gromadin
JP Morgan - Analyst
* Geydar Mamedov
Novatek - Analyst
* Constantine Cherapanov
USB - Analyst
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Conference Call Participants
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* Karen Kostanian
BofA Merrill Lynch - Analyst
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Presentation
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Operator [1]
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Good day and welcome to the Novatek second quarter and first half 2014 results conference call. Today's conference is being recorded. (Operator instructions).
At this time I would like to turn the conference over to Olga Klimova from Sberbank CIB. Please go ahead.
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Olga Klimova, Sberbank CIB [2]
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Thank you. Good morning. Good afternoon all. It's our pleasure on behalf of Sberbank CIB to host this results call for Novatek again. And welcome you all to it and introduce our participants Leonid Mikhelson the Chairman of the Management Board, Mark Gyetvay the Chief Financial Officer and Alexander Palivoda, Head of Investor Relations. Without further ado I'll pass the mic to Mark.
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Mark Gyetvay, Novatek OAO - CFO [3]
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Thank you Olga. Ladies and gentlemen, shareholders and colleagues, good evening and welcome to our second quarter earnings conference call. I'd like to thank everyone for joining us this evening and again extend our sincere gratitude to Sberbank CIB for organizing and hosting the earnings conference call.
Joining me this evening on the conference call will be Mr. Leonid Mikhelson, Chairman of the Management Board and a member of the Board of Directors.
During the question and answer session we will switch to simultaneous translation in the Russian and English languages, so we kindly ask that you take into consideration when asking your questions and allow us sufficient time to translate both the question and the answer for the courtesy of tonight's listeners. There will be sufficient time allocated to the Q and A session to address your questions and discuss current issues.
Before we begin with 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 reference to forward-looking statements by using words such as our 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 risk and uncertainties, and reflect our views as at the date of this presentation.
We undertake no obligation to revise or publicly release the results of any revision 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, 2013 as well as any of our press releases and documents throughout the past year for more descriptions of the risks that may influence our results.
Our second quarter 2014 financial and operational results is again overshadowed by the recent geopolitical events and the latest round of economic sanctions imposed by the United States, the European Union and Canada culminating from the escalating tensions in Eastern Ukraine and surrounding areas. Therefore, I would like to begin tonight's call by discussing the inclusion of Novatek on the sanctions sectoral list on July 16, by the Office of Foreign Asset Control, or OFAC, of the US Treasury Department under Executive Order 13662.
The capital markets reacted negatively to this news event and a subsequent drop in our share price reflects investors' growing concerns over a heightened Russian equity risk. It is unfortunate that we were included in the sanction list issued by the US government and we are quite disappointed for a number of obvious reasons.
We, as managers and employees of Novatek, are extremely proud of what we have accomplished as a company over the past 20 years of operations. We are considered by many to be one of the most transparent companies on the Russian's capital markets and a model for Russian businesses to emulate. We strive to be an open and transparent company in all of our corporate dealings and the inclusion of Novatek on the sanctions list undermines our actions.
Moreover, we have adopted industry best practices in corporate governance and made it a primary goal to be recognized by the investment community as a good corporate citizen, and one of the premier investable companies on the Russian market. Again, the sanctions undermine this recognition.
The Company has received many accolades from industry participants and shareholders alike for the way we have professionally managed our business in a very difficult market environment and the way we have built a sustainable business model that has incorporated the latest operational and processing technologies, as well as adopting environmental best practices, despite the fact that we operate our producing fields and processing facilities in an area of remote and harsh climatic conditions.
Our steady rise as one of the top natural gas companies in the global oil and gas industry was achieved through hard work and perseverance, the flawless execution of our business strategy, as well as a firm commitment by senior management to build a world class energy company in Russia, despite some impending obstacles and challenges and overcoming the skepticism of many investors and analysts.
We have made notable progress both operationally and financially in moving forward our large deal, Yamal LNG project, which involves many contractors and subcontractors from around the world, including those from the United States and the European Union, as well as ongoing discussions with many of the world's leading export credit rating agencies, reflecting the truly global nature of this project. Yamal LNG is part of the global solution towards energy security and supply diversification of natural gas. It is considered a landmark project in the oil and gas industry's quest to develop and exploit the vast Arctic hydrocarbon resources and, as such, it should be supported by industry participants and the respective governments.
The inclusion of Novatek on the sectoral sanctions list by OFAC is not warranted. We have no business or economic interests in Ukraine. We refrain from dealing in political matters. And, as you are well aware, all of our natural gas that we produce today is sold exclusively on the Russian domestic market.
Furthermore, none of our liquid hydrocarbon products are sold into the Ukrainian market. We have no direct state ownership on our shareholder base, so it's hard to understand the political or economic rationale for including us on this list because everyone inside of the Company, and, for that matter our investor base, knows that Novatek has been an exemplary company and a good corporate citizen. And the inclusion of Novatek on the list has caused real economic value disruption for our valued shareholders, including many US investment and pension funds since this announcement.
I believe it is imperative that we remain focused on our core business activities and deliver results according to our strategy, as well as to maintain an open and frank dialogue with all stakeholders of Novatek. I would like to state this evening that our fundamental business has not been unduly disrupted by the Company's inclusion on the limited sanctions list. We continue to sell our hydrocarbon products both domestically and internationally without disruption.
We continue to process transactions and receive funds via the international monetary system without significant delay. We have sufficient operational cash flow to fund our capital expenditure program, service our existing debt portfolio and pay dividends according to our dividend policy. We continue to conduct ongoing business operations with our international partners, including US, European and Asian contractors and we openly welcome to work with all of our partners no matter where the origin or source to achieve our strategic aims.
The limited sanctions issued recently by OFAC, by including Novatek on a list, only impacts our ability to attract future debt by US persons of longer than 90 days maturity. I would like to stress that all other work activities is permissible and we continue to work with our partners in a normal, professional and businesslike manner.
It is also important to distinguish that Novatek is not a specifically designated national or SDN under Executive Order 13662 and therefore, the inclusion on the list does not impact our pre-July 16, 2014 debt. Nor does it prohibit US persons from holding or transacting in our debt or equity issuances pre-July 16, 2014. There are no legal requirements for investors to dispose of your equity and/or your debt holdings in Novatek. Nor should there be any questions or requirements concerning our ability to be listed on international exchanges or the inclusion of our stock in the Morgan Stanley composite index.
We will continue to actively participate in all international and domestic IR events and conferences, including those scheduled in the United States, to keep everyone apprised of these matters as well providing our investor base with regulator updates on projects. And as demonstrated tonight, we will continue to be open and frank in our discussions.
We cannot predict the ultimate outcome of the geopolitical events that confront us today. But we are resolved to move forward with our capital expenditure program and continue working with our partners on existing exploration development projects. We remain steadfast to deliver on our long-term strategic goals and objectives.
As customary, I would like to update our shareholders on the operational results for the quarter before providing a brief overview of the financial results for the reporting period. We will then proceed to the question and answer session with Mr. Mikhelson before concluding this evening's call.
During my last conference call I reported that we incurred a fire at the gas de-ethanization unit at SeverEnergia's North-Urengoyskoye field and that we will provide timely updates on the future work activities to restore production. I am pleased to report tonight that within a very short period of time we managed to restart production at the Urengoyskoye field. Production at the field was renewed in the beginning of July as we discussed at our special events conference call on May 30.
As of today, the field is running at approximately 30% of the first stage capacity for natural gas production. We managed to maximize production on the subsurface layers with the highest concentration of gas condensate in hydrocarbon flow which enabled us to achieve 50% of the first stage capacity for gas condensate production at lower gas production rates. If all proceeds as scheduled, we expect the full ramp-up of the original North-Urengoyskoye natural gas and gas condensate production plant to be achieved in the latter part of the fourth quarter. This essentially means that we shall reach full field production in 2015.
In other SeverEnergia related development activities we expect to commence natural gas production at the Yurkharovskoye field during the fourth quarter 2014. And we continue to make substantial progress in completing all of the field's works such as pipeline construction, installation of process equipment and drilling of production wells.
We also plan to launch the third stage of the Samburgskoye field in the fourth quarter 2014 as the installation of the gas treatment facility has been completed and the construction of gas gathering lines is underway. I will provide additional updates on the progress of these two launches during our third quarter results.
During the reporting period we continue to fund 100% of the development activities of the Yaro Yakhinskoe field to ensure the timely launch of this crude oil project during the third quarter 2015. And as at the six month ended the June 30 we have invested approximately RUB10b in capital versus RUB770m in the prior reporting period.
We are approximately 70% complete on the construction of a 350 kilometer oil pipeline to Purpe as well as completing approximately 55% of 150 kilometer gas pipeline to the main trunk line. We plan to commence production drilling later this year to support the expected launch of the field.
We continue to make good progress in our development and in infrastructure works at the Termokarstovoye field. And, as such, we now plan to launch first production at this field in the early part of 2015 rather than the latter part of the year. Currently, we have completed 14 production wells out of the planned 22 wells to be drilled, as well as completing the construction and testing of both the natural gas and gas condensate pipelines.
Our exploration activities in the second quarter 2014 were relatively limited as compared to the prior year. But we did discover a new gas, crude oil and gas condensate field on the North-Russkiy license area. The new Dorogovskoye field has estimated reserves of approximately 27b cubic meters of natural gas and 7.9m tons of liquids according to the Russian C1 and C2 reserve classification system. And, based on the documentation submitted at the field, officially passed a state geology commission review in July 2014.
As for Yamal LNG, the project shareholders Novatek, Total and CMPC have invested approximately $5.8b as of today. And we have contracted approximately 95% of the LNG sales volume on long-term contractual basis. We have executed a contract with two experienced contractors for the drilling of 124 production wells. And, as of today, drills in completed 18 production wells and prepared four drilling paths for ongoing drilling activities. There are three drilling type rigs in operation as the third drilling rig which was mobilized during the first quarter commenced drilling this month at the field.
We expect to sign another drilling contract some time in 2015 for the drilling of approximately 84 production wells based on the positive results of well tests and an update on the well development plan.
During the second quarter 2014, four new production wells were completed as part of our development drilling plan for the current year.
The full EPC contract has been signed in April 2014 between Yamal LNG and a joint venture consortium comprised of Technip, JGC and Kyoto. The effective date to sign EPC contract was April 1, 2013 which is the actual date the contractors and Yamal LNG commenced work activities such as site preparation, engineering works and procurement under the original Letter of Award. We estimate that the cumulative work progress under the EPC contract is approximately 8.5% as at June 30, 2014.
We continue to build facilities for the base camp at the Sabetta site and as of today, several offices and a 1,000 person pilot camp has been built. We are approximately 50% complete under construction of an additional base camp suitable to accommodate 5,000 people. The LNG plant site preparation is approximately 75% completed, including 100% of the land backfill for train number one.
We commenced the drilling of pilings for the LNG plant foundation and although we are only about 2.5% complete at this stage, we are currently running ahead of planned schedule. Purchase orders for the main equipment comprising turbines, heat exchanges and compressors etc., have been placed and we also selected module yards during the quarter.
Three out of 12 module fabrication packages or subcontracts were placed in the second quarter of 2014. And in July an additional seven module packages were placed with subcontractors. The modules placed so far include all the main technical modules as well as fast track modules. And we continue to make progress in placing equipment in both materials and subcontractor construction packages.
We concluded the EPC contract for the construction of the cryogenic LNG tanks with a consortium comprising Entrepose and Vinci and the detailed design phase is currently being finalized. The piling work for two out of the four LNG tanks is now complete and we began concrete works on the basement of tank number one and have already installed the thermo-stabilizers for the foundation of this tank. We are almost complete on the backfilling for tanks number two -- number three and number four and we expect to shortly commence piling works at these tank sites.
We concluded the EPC contractor for the construction of a 376 megawatt hour plant and completed the work activities to construct a base camp for 400 people. The detailed engineering works for the plant is nearly completed and a purchase order has been placed with Siemens for the manufacturing of gas turbine generators. The power plant at site has already been prepared and the contractor has begun piling works in May.
Work activities for the construction of the Sabetta seaport are currently underway and during the winter navigation period, 24 vessels have unloaded 312,000 tons of materials and supplies versus 250,000 tons planned for the period. We recently commenced summer navigation on July 16 and already 30 barges have unloaded approximately 56,000 tons of cargo. We anticipate that the early phase of the seaport facilities will be fully operable by September 2014, including a port area, warehouses and administrative buildings.
There are currently around 6,000 people and 1,580 construction vehicles at the construction site and at the field. And we estimate that approximately 65% of the airport facilities are completed which is designed to accommodate Boeing 737 planes. We have made very good progress in finalizing the technical, shipping, environmental and marketing due diligence as required to facilitate financing for the project. And we recently held a series of meetings with the ECAs in London as well as ongoing meetings in Beijing with the Chinese financial institutions.
The term sheet for project financing was at a very advanced stage in negotiations up until the inclusion of Novatek on the US sectoral sanctions list. Our legal and financial advisors, as well as the project shareholders, are currently assessing the implications of Novatek on the list and its potential impact on project financing.
As a defined US person I will have to personally refuse myself from participation in this process as defined by the restrictions placed on US persons under Executive Order 13662. None of my other primary roles and responsibilities as CFO of Novatek have been impacted by the sanctions, except for participating in new debt issues with maturity of 90 days or longer.
Our organic production volumes increased year on year by 2.7% while our combined production figures, including our proportionate share in the production of our joint ventures which increased year on year by a slightly lower 2.1% representing an offset between the volumes disposed at Sibneftegas in December 2013 and the corresponding increase in gas production at Nortgas. If you exclude the natural gas production at Sibneftegas during the second quarter 2013, making the analysis more comparable, our overall natural gas production increased by approximately 12%, which is above our revised production guidance for 2014.
The main growth contribution in our natural gas portfolio came from the successful launch of the eastern dome at the Nortgas field in October 2013, as we increased our purchases from this joint venture from 507m cubic meters to 1.4b cubic meters. Total natural gas sales for the reporting period aggregated 15.5b cubic meters as compared to 14.6bcm year on year and 17.7bcm quarter on quarter.
Natural gas sales are generally impacted by seasonal factors in the second and third quarters, so the drop saw in volume sold quarter on quarter was fully anticipated. Our total volume in natural gas sales increased year on year by approximately 900m cubic meters, or roughly 6.2%, largely driven by organic growth out of core fields, an increase in purchases from a related party, the contributions from Nortgas which were slightly offset by the divestiture of Sibneftegas in December and a reduction in our injection of natural gas into underground storage.
The share of customers in our total sales mix increased from 89% in the second quarter 2013 to 94% in the current reporting period which impacts both margins and transport cost. The change in the composition of our sales mix contribute additional revenues to the Company since the average netback we received for our end customers was approximately 15% greater than the average ex-field or wholesale trader sales per 1,000 cubic meters.
During the quarter we reported total gas sales to end customers of 14.6bcm which was higher than the same category of volume sold year on year by 12.3% are correspondingly lower than our volumes sold quarter on quarter by 12.4% due to the seasonal effect of our natural gas sales. Within our end customer sales profiles power companies and large industrial companies represent roughly 94% of our sales volumes delivered, or approximately 89% of our total gas sales for the quarter.
We continue to optimize our sales of natural gas to specific regions based on contractual obligations and/or the execution of new contracts. We increased our sales volume to the Khanti-Mansiiskiy region by roughly 1.3b cubic meters during the current reporting period as compared to the prior year, but more or less remained relatively consistent with deliveries to other core consuming regions.
The geographical regions representing greater than 10% of our sales volumes included to Perm, Khanti-Mansiiskiy and Chelyabinsk regions as well as the city of Moscow. As a result to the changes in our regional sales mix our average distance to market was approximately 2,000 kilometers representing a decrease in our transport distance of 187 kilometers year on year. But represented a notable increase of 540 kilometers quarter on quarter.
The notable increase in the distance of gas delivered quarter on quarter was mainly attributable to a reduction in deliveries to the Khanti-Mansiiskiy region and a correspondingly large increase in deliveries of natural gas to the city of Moscow.
Our average netback for natural gas sold to end customers increased by RUB442 per 1,000 cubic meters, or by 26.6% as compared to the second quarter 2013 and was slightly higher by RUB44 per 1,000 cubic meters quarter on quarter. Whereas our average ex-field price increased by 16% but remained relatively consistent with the average price we received in the first quarter of 2014. We were pleased with the strong gas pricing we received for both end customers and ex-fields in the current reporting period.
In terms of liquid production, we maintained relative output of liquids from our core fields mainly due to the contribution of crude oil production at the East-Tarkosalinskoye field. However, the majority of the second quarter's positive year on year growth was largely attributable to the increase in output of liquids from our joint ventures, particularly the contribution made by Nortgas after the successful launch of the eastern dome in October.
Overall, our combined liquids production growth was 20.8% year on year and 3.6% quarter on quarter. During the reporting period we sold roughly 1.7m tons of liquid hydrocarbons representing a year on year and quarter on quarter increase of 627,000 tons and 142,000 tons respectively. The increase in our liquid volumes sold was attributable to a combination of factors including the growth of crude oil output from the East-Tarkosalinskoye field, an increase in purchases from our joint ventures, namely Nortgas, and a swing in inventory movements from increasing goods in transit in the prior reporting periods to a reduction in goods in transit during the current reporting period.
We reduced our goods in transit by 85,000 tons in the current reporting period as compared to an increase in our prior reporting period of 291,000 tons, which was mainly due to the operational build-up of inventory prior to the launch of the Ust-Luga complex. The transition to deeper processing capabilities at the Ust-Luga complex continues to make significant contributions to our earnings and cash flow streams through enhanced netback margins by selling refined products rather than raw materials.
Since the formal launch in June 2013 we have been receiving netback enhancements averaging from around $75 to $90 per ton due to the significant change in the composition of liquid products sold from Ust-Luga. It remains difficult to make like kind comparisons between reporting periods.
In terms of geographical regions we dispatched approximately 959,000 tons of refined petroleum products from the Ust-Luga complex in the second quarter 2014 of which 455,000 tons were shipped to the Asia Pacific region, 376,000 tons were shipped to Europe, 73,000 tons were shipped to the United States and the remaining 55,000 tons to other regions. At quarter end we had 25,000 tons of naphtha in transit to Singapore versus 140,000 tons recorded at goods in transit in the prior reporting period.
Natural gas represented 61% of our total oil and gas revenues and our combined liquids represented the remaining 39%.
On a total barrel of oil equivalent basis our second quarter production increased by 3.2% to approximately 111m barrels of oil equivalent versus 108m barrels of oil equivalent in the prior reporting period, representing an average total of hydrocarbon production per day of approximately 1,221,000 barrels per day.
Our overall operating expenses increased during the quarter consistent with the growth of our business. Specifically, our non-control book expenses comprising transportation and taxes increased by RUB6.8b, of which our transportation expenses increased in line with our growth in end customer sales and our extraction taxes increased to a significant change in mineral extraction tax for natural gas as we have previously reported.
As part of the migration to the new formula based tax calculation effective July 1, 2014 the Russian government has effectively increased our natural gas MET by 51.7% in July and another 17.2% on January 1, 2014. This change essentially increased the tax rate charged to the independent gas producers from RUB265 per 1,000 cubic meters to RUB471 per 1,000 cubic meters in the reporting period. And this rate was in effect until July 1 when the new amendments to the Russian tax code regarding the new methodology for calculating MET for gas becomes effective.
There are no material surprises in our G&A expenses and other reporting categories to highlight except for an increase in our employee headcount of approximately 667 employees post the launch of the Ust-Luga complex and the expansion of the Purovsky plant which contributed to an increase in our G&A expenses relating to compensation as well as materials and supplies.
Overall, I believe we did another effective job controlling our operating expenses which, as a percentage of sales, represented 63% of total revenues versus 68% and 61% in the second quarter 2013 and first quarter 2014 respectively.
Our balance sheet liquidity positions remained strong throughout the reporting period as we decreased our overall net debt portfolio this quarter relative to the year end balances by 27% as a result of a very strong cash position. All three of our credit rating agencies have reiterated our investment grade rating, demonstrating the strong fundamentals of our business and our present liquidity position.
We remained free cash flow positive during the second quarter and ended the quarter with a free cash flow position for the Company of RUB4.1b which is a reversal of a negative free cash flow position in the prior year. We continue to fund our capital expenditure programs 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.
I believe it is also important to highlight the continued volatility in the currency markets and its impact on our dollar denominated debt positions both from a standpoint of debt on Novatek's balance sheet as well as the dollar denominated loans we provide to our joint ventures. During the reporting period we again experienced a pronounced swing in the Russian ruble relative to the US dollar and its positive impact on non-cash foreign exchange movements.
We attempt to normalize these effects on our EBITDA and net profit numbers. But nonetheless, given the recent geopolitical events, it is important to take this into account and we expect further volatility in the currency markets which may have either a positive and/or negative impact on our reported numbers.
Although the recent inclusion of Novatek on the OFAC's sectoral sanctions list overshadowed our positive operational and financial results for the reporting period, I want to again reiterate to everyone this evening that senior management is fully committed to stay in the Company through this difficult geopolitical environment and maintaining our course on all of our capital projects. The financial and operational results we achieved in the current reporting period clearly demonstrate that we have a very sound and robust business model despite the unwelcome noise in the capital markets.
We have sufficient liquidity and operating cash flows to limit our need to access the capital markets for Novatek over the next 18 months. And we are able to fund our capital expenditure program, service all of our short and long-term debt as well as maintaining our present dividend policy. This is a key message to take away from tonight's conference call.
Thank you very much for your continued support and belief in the Novatek investment story. Thank you.
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Questions and Answers
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Operator [1]
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(Operator instructions). Karen Kostanian, BofA Merrill Lynch.
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Karen Kostanian, BofA Merrill Lynch - Analyst [2]
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Good day, gentlemen. Thank you so much for the presentation. I have one question. It's very unfortunate that you have been included on the sanctions list. I agree with that. However, without even the inclusion on the sanctions list access to financing for Russian corporates in the current environment is becoming increasingly difficult.
If I remember correctly you wanted to obtain approximately 70% of your project financing for Yamal LNG which is approximately $19b through, again, project financing. Could you please update us as to how this is going? Has it been increasingly difficult since the geopolitical environment deteriorated? And how confident are you that you will obtain this financing in time, and from what sources to launch the project in the indicated timeline? Thank you.
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [3]
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(Interpreted). Thank you very much for your question. It is indeed a pleasure for me to see that Bank of America joins us in our concern with the fact that the Company was included into the sectoral sanctions list. I may repeat the words which Mark Gyetvay previously stated to a certain extent, meaning to say that we find it hard to understand, what was the criteria which the people were guided by, the ones who included Novatek into the sanctions list. Today, Novatek, together with its partners in the Yamal LNG Project, is analyzing what could be the fact which might be in the countenance of the sectoral sections or with the project execution. And we believe that we will be in a full position to execute all of the commitments which we have so far have taken onto ourselves for the project to be achieved.
There are several points which I would like to draw the attention to for the investment community. The first one being that the Yamal LNG budget did not call for a credit or project funding within 2014 and was to be covered only by the financing made available by the project partners. And we are currently reviewing the possible options that the Company may go, including the excessively negative one, in terms of the way the events may unfold because of the great need that the project has for its future development.
And you are quite correct in noting that the regional plans that the Company had were to bring in, on a borrowing basis, up to 70% of the project funding. Currently, we are looking into a more pessimistic plans and we are capable including -- I mean Novatek, with its biggest share in the project of 60%, to expand the share of shareholder funding so as to make sure that the Company maintains its full schedule and commitment.
And all the partners in the project, in a very concerted way, are acting on the objective within the next month to resolve all of the issues so as to avoid any delay in as far as the schedule implementation is concerned. Thank you.
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Operator [4]
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Artem Konchin, Orkritie Capital.
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Artem Konchin, Orkritie Capital - Analyst [5]
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Hi. Good day everyone and thanks for the presentation. I have a few questions, so I'll pick a couple of the ones that seem to be most important. The question relates to Yamal, actually. Can you update on the fate of the 10% stake that was earmarked for sale? There were reports that the Japanese negotiations either stalled or completely stopped. Are there any other candidates, or are you talking to anyone else?
Also, if you could, on a more technical side, if you could comment on the decline of your liquids output at Yurkharov. We see that the gas production is flat, almost, while the liquids are down more than 8%. So the question is whether we should expect this decline rate in the future and whether this is what we should use for our forecast, particularly for that asset?
And, also, if you have an estimate for the production tax for gas for July, already, the number at PCM would be great? Thank you.
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [6]
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(Interpreted). So there are three questions. I will start by answering the first one. At every conference call I used to comment the possibility of putting up for sale about 10% share in our Yamal LNG project and I have always been saying that this is a possibility, but without any action to speed up this particular outcome. And like I previously stated, the partners in the project are currently analyzing the effect of the sanctions over the future of the project and are also considering certain negative course which events might take without allowing for any delay, of course, which may make the reconsideration of this particular issue also a timely and inappropriate one which means that, in the future, we will release it, this particular.
As far as the second question is concerned, particularly which is the volume of production of the [Yurkharoskoye] field, I should explain that this is a planned reduction of the reservoir pressure related to the lower production of condensate, which is part of the operational plans and which is a normal thing in as far as the (inaudible) gas condensate deposits are concerned. And this is going to be compensated for by the production that took place in Nortgas and then it would also take place in Arcticgas and turning it to gas. And the passages which we have created at the Purovsky plant and Ust-Luga, this is all part of the comprehensive plan which are both on one side of it called for the production increase as well as the allowing for a decrease of production at the Yurkharovskoye field.
As far as the third message was concerned which was specifically about the new system and the new MET formula for the production of natural gas, this formula came into effect as of July 1 this year. You will be able to see the results once we report our third quarter figures. But, in terms of the negative or positive, in fact, it is going to be so immaterial that effectively you may not have to pay any attention to it.
And as far as our tax rate is concerned, the introduction of this formula we are looking at is as a positive development because it becomes much simpler to ask to plan our taxation before a much more extensive period of time. Unlike it used to be the case in the past where in between the two budget system government decisions may take place which would simply [consist of] certain mathematical activities so as to be able to clearly planning. With the introduction of the formula, we no longer have to feel this burden. Thank you.
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Operator [7]
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Alexander Kornilov, Alfa-Bank.
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Alexander Kornilov, Alfa-Bank - Analyst [8]
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Yes, good afternoon gentlemen. This is Alexander Kornilov from Alfa-Bank. Thanks a lot for the presentation. I have only one minor question related to your JVs. Could you please specify your expected CapEx for this year for both SeverEnergia and Yamal LNG respectively? Thank you.
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [9]
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(Interpreted). Specifically, as far as SeverEnergia is concerned, everything is on a planned basis. But, frankly speaking, I don't have the figures in front of me because we usually do not disclose any figures. Why do you ask the question?
And I guess that it might be important for you to know that for this year, in as far as Arcticgas and SeverEnergia is concerned, we are planning to have two launches at the Urengoy field. And, as Mark Gyetvay has stated, in terms of the liquidation of the aftermath of the fire, in the first phase of the deposit will be completely relaunched later in the year, which would practically coincide with the launching of the second stage. And also, all of this year, we have planned the launching of the Yaro-Yakhin field as well as the third stage launching for the Samburgskiy field as well. Thank you.
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Alexander Kornilov, Alfa-Bank - Analyst [10]
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Thank you. Just to add from my side. Actually, the reason why I am asking that question, because SeverEnergia is increasingly becoming the important part of your investment case, right. So we are trying to gather as much information as possible as analysts who cover your Company. That's my opinion. Thank you.
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [11]
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(Interpreted). Well thank you very much for the interest. I should only add that SeverEnergia and Arcticgas has assets that have always been viewed by us as high revenue earners. As you are aware, that Novatek is the kind of company which is doing its best to control its capital spending, specifically dedicated to the volumes of production, which traditionally have been previously, as far as the gas segment is concerned, on the lower side of things.
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Alexander Kornilov, Alfa-Bank - Analyst [12]
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Okay. Thank you.
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Operator [13]
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Ildar Davletshin, RenCap.
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Ildar Davletshin, RenCap - Analyst [14]
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Good evening, gentlemen. I have three questions. So one on the gas margin side domestically. What is your mid-term expectation for the trajectory on the tariff side, mineral extraction tax and transportation tariff? Primarily I am interested if you see the risk of a potential squeeze in profitability as mineral extraction tax is going faster as well as transportation while tariffs might remain frozen or you are confident that the formula for the mineral extraction tax will remain in place.
And two other short questions. One on the dividend policy. Any plans to change it, review it, given that the free cash flow profile is improving dramatically for your Company?
And last question on the ship building project in the Far East. It seems like you are becoming a partner. Could you just provide a bit more color in terms of potential investments in that project and your participation? Thank you.
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [15]
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(Interpreted). As far as the first question is concerned, I should say that it might be correct to consider, and we are considering, various options whereby the domestic gas prices might grow, but following inflation and maybe a little bit ahead of it. If something gives us confidence to think that the transportation tariff is not going to grow, I understand which might turn out to be greater.
And pending -- and with the introduction of the MET formula and bearing in mind what I've just described in respect to the transportation tariff and the domestic gas prices, one may expect a different level of revenue growth from the domestic gas sales. But at the same time we do not expect that this kind of revenue level from the domestic gas sales will decrease.
In as far as the second question is concerned about the Company's dividend policy, we recently have adopted a more transparent approach to it for the sake of our shareholders, having connected it to the reporting prepared by the head company, Novatek itself, in as far as the IFRS standards are concerned whereby 30% is going to be dedicated to dividend payments. And we do not intend to change this dividend policy.
Actually, I must admit that I was expecting at this conference call to hear a question about the situation because of the sanction to this, doesn't Novatek consider a reduction of its dividend payments? Myself, being one of the many shareholders, I would like to tell you that we will not consider such a way to go, even despite this negative environment. The dividends will be continued paid according to the plans of the Company policy as is.
And as far as our possible investments into the shipyards are concerned, or the construction of the marine equipment, I cannot give you any comment because it is too premature and I don't have information to share out. But I can assure you of one thing, Novatek will never contribute to projects which economically are unviable or against the strategy.
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Operator [16]
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[Grinya Mishonkina] from UBS.
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Grinya Mishonkina, UBS - Analyst [17]
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Hi. Thank you for the presentation. I have several questions. Could you please provide your overall CapEx guidance for full-year 2014 and full-year 2015?
Could you please comment whether you plan to buy back any of your Eurobonds and the approximate amount?
Have you made any adjustments to your strategy in the light of these sanctions?
And could you please comment on the alternative sources of funding and how much, in terms of credit lines, you have with Russian banks? Thank you.
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [18]
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(Interpreted). What was the third question please? Will you repeat it?
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Grinya Mishonkina, UBS - Analyst [19]
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So, the third question was have you made any adjustments to your strategy in the light of the new sanctions?
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [20]
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(Interpreted). I am familiar just with one set of sanctions, I am sorry to say that.
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Grinya Mishonkina, UBS - Analyst [21]
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Yes, so I'm referring to the sanctions that were recently imposed, the same sanctions, yes.
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [22]
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(Interpreted). As far as the point about capital investments are concerned, I should say that, in as far as our reporting and the presentation of our plans, they do contain sufficient information in as far as bankers, investors and analysts are concerned. And we also used to say previously that notwithstanding our major project, which you are very well familiar with, the level of capital investments will remain at the level of the previous year,
Similarly, I do not see any grounds for the Company to consider buying back its Eurobonds, so I don't understand why you think that the Company should be considering this.
And as Mark Gyetvay previously stated in his presentation about the Company's operational activities, it's a capital investment program in debt services, the Company feels very confident and meaning to say that the fact of inclusion into the sanctions of these doesn't -- despite that, we do not see anything to change our minds.
The schedule of repayments, in terms of the borrowings that the Company originally scheduled, was done on a very well thought out basis. So it gives us a good level of confidence and doesn't create any reasons for us to think about any adjustment measures. Thank you.
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Grinya Mishonkina, UBS - Analyst [23]
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For sure.
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Operator [24]
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Andrey Gromadin, JP Morgan.
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Andrey Gromadin, JP Morgan - Analyst [25]
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(Interpreted). The question is -- the first one is about Yamal LNG. Previously in the call you had stated that the project finance was already finalized for this year, but I didn't hear the confirmation of this being ultimately done. Could you please confirm whether by the end of this year or beginning of next year to what extent the Company will be in a position to allocate funds into this project?
The second question was about the sanctions. The sectoral sanctions currently being imposed also include the importation interruption of technologies and equipment. The LNG technologies so far are going to make part of this effort, but there are certain mentionings of various options to go, although not specifically. But if that takes place, is there any plan B that the Company has that it may utilize in case the LNG technologies are included into the restrictions?
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [26]
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(Interpreted). Like I stated previously, we and our partners are currently analyzing the factor of the adopted sectoral sanctions and we consider various options as well as the negative development of events in terms of raising funding, including the one that may be delayed until a certain later stage in time, so as to make funds available for the project. And in all such scenarios, we envisage specifically financing the project and the project execution in full conformity with the schedule. And the shareholders are capable of making their own funding available into the project in case they deem it necessary to delay borrowing from the outside.
As far as the second question is concerned, as far as all of the main items and as far as the equipment is concerned, and the procurement on the side of our contractors have been awarded and are currently being manufactured by our partner producers.
On the statement made by the European Union in as far as the sanctions were announced being separately underscored that the technology, if considered for sanctions, should not be imposed upon the gas industry. But despite that, we certainly had a discussion between ourselves and we do have a plan B. Thank you.
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Operator [27]
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Thank you. (Operator Instructions). Geydar Mamedov, Novatek.
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Geydar Mamedov, Novatek - Analyst [28]
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(Interpreted). The question was that recently certain news was out to the effect that Novatek might become a shareholder in the Far Eastern ship building center. So the question is, is it true and, if so, would it impose any commitments on the Company to finance the development of this Far Eastern ship building center?
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [29]
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(Interpreted). I would -- I might reiterate what I previously stated when answering this question. Yes, indeed, Novatek has signed such a Memorandum of Intent, but I would like also to say that there are nothing to comment. There is nothing to comment. And that is the subject of consideration and that might not concern only the Far Eastern ship building center. We're looking at different possibilities in the future. But I should also state that Novatek would not enter into any project which is economic and unviable. And so one, we are looking at the same time at the subsequent stages of the development of the LNG project in the area of Yamal and [Didung] inlet. Thank you.
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Operator [30]
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Constantine Cherapanov, USB.
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Constantine Cherapanov, USB - Analyst [31]
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(Interpreted). So, the question is a quick one about the export naphtha duties. We know that the Company is currently trying to achieve a reduction of the export duties for naphtha and there is a discussion taking place about the tax maneuver with the Russian government. Could you please share with us what is the current stage of the discussion between the government and Novatek in as far as the naphtha duty is concerned?
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [32]
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(Interpreted). Once again, thank you for the question. Yes, indeed, we have submitted our proposals and our ideas to the government and they currently have been revised, renewed. And you have very correctly stated that this particular issue cannot be considered by the government separately from the tax maneuver. And as part of such a comprehensive review, our ideas are also going to be considered and we are expecting a much more favorable schedule of the reduction of the export duties for naphtha as opposed to what currently is the level. Thank you.
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Operator [33]
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There is no further question.
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Leonid Mikhelson, Novatek OAO - Chairman of the Management Board [34]
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(Interpreted). If there are no further questions, I would like to express my gratitude to all who participated in today's conference call and I did enjoy hearing as part of the first set of questions that the investment community is expressing its support for Novatek.
And what is indeed notable is that, in terms of our mid-term program of the Company development, as applied to its current fields without considering Yamal LNG, we are in a position to enjoy a strengthening of our financial position. And, as I have stated previously, the Company is reviewing and reconsidering its long-term development strategy. So the Company is fully capable, despite being included into the sectoral sanctions list, to offer a very positive, in the eyes of the investment community, development plan which is underpinned by the very significant improvement of its financial and operational performance result.
And so in the light of this, the task of the management of the Company in the first place is to understand and see all the possible risks which may arise in front of the Company so as to be able to mitigate any possible outcome. Thank you very much.
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Operator [35]
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Thank you. That should conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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Editor [36]
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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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