Full Year 2014 Novatek OAO Earnings Call (IFRS)

Mar 02, 2015 AM CET
NVTK.MZ - Novatek PAO
Full Year 2014 Novatek OAO Earnings Call (IFRS)
Mar 02, 2015 / 01:30PM GMT 

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Corporate Participants
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   *  Mark Gyetvay
      Novatek OAO - CFO
   *  Leonid Mikhelson
      Novatek OAO - Chairman of the Management Board

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Conference Call Participants
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   *  Nick Harwood
      Sberbank CIB - Analyst
   *  Max Moshkov
      UBS - Analyst
   *  Eskay Nestronef
      Renaissance Capital - Analyst
   *  Alexander Nazarov
      Gazprombank - Analyst
   *  Grinya Mishonkina
      UBS - Analyst
   *  Artem Konchin
      Orkritie Capital - Analyst
   *  Alexander Rozhetskin
      Unicredit - Analyst
   *  Alan Cambrisy
      - Analyst

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Presentation
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Operator   [1]
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 Good day, and welcome to the Novatek 2014 IFRS results conference call. Today's conference is being recorded.

 At this time, I would like to turn the conference over to Nick Harwood of Sberbank CIB. Please go ahead.

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 Nick Harwood,  Sberbank CIB - Analyst   [2]
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 Good afternoon, everybody, and thank you for joining us. It is with great pleasure that we are hosting this conference call today. I'd like to hand over at this stage to Mark Gyetvay, Group CFO, to lead the call and to further introduce the management team on the call today. Mark, thank you very much for making yourself available.

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 Mark Gyetvay,  Novatek OAO - CFO   [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 2014 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, Chairman of the Management Committee and a member of the Board of Directors. The question-and-answer session we will be handled 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 into consideration when asking questions for the benefit of all conference 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 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 the date of this presentation.

 We undertake no obligation to revise or publicly release results of any revisions to these forward-looking statements in light of new information or future results. Please refer to our regulatory filings, including our annual review for the year ended the 31st of December, 2013, as well as any of our earnings press releases and documents throughout the past year for more descriptions of the risks that may influence our results.

 2014 was a pivotal year for Novatek as we launched several key projects, laying a foundation for future sustainable growth in our core business, continuing the transitional path away from being primarily a domestic gas player to a more balanced international energy company with a stronger strategic focus on monetizing our liquids-rich natural gas portfolio of assets and increasing our proportion of higher-valued refined petroleum products on the international markets.

 The commissioning of Ust-Luga complex and the expansion of the processing capacity at the Purovsky processing plant were two strategic milestones completed in 2013 and 2014 that were requisite projects for increase in production of unstable gas condensate at our field, correspondingly, maximizing our cash flow generation through value-added petroleum products sold to the international markets at world market prices.

 The commissioning of these port and facilities was quickly followed by successful launches of the first and second stages of wet gas production at the Urengoyskoye field and the third production train at the Samburgskoye field, all part of SeverEnergia's joint venture development plans.

 We also launched first-stage production of the North Khancheyskoye field in December and continued ongoing work activities for 2014 to prepare for new production fields to be commissioned throughout 2015.

 At our last formal strategy presentation in late 2011, we clearly articulated a well-defined and visible path to sustainable cash-generative growth while, at the same time, outlining our longer-term vision to move the Company into an international arena through the monetization of the Yamal LNG project.

 The capital program completed this past year supported our strategic objectives of increasing our marketable production of natural gas and unstable gas condensate and capitalizing on these results. During the upcoming year of 2015, we will successfully complete the five-year midterm portion of our corporate strategy.

 We have again demonstrated our focused commitment to delivering financial and operational results as well as constructing and commissioning key projects within the time and cost parameters outlined in our strategic plans despite the many external challenges we faced in 2014.

 Unfortunately, 2014 was a year of immense market volatility and geopolitical uncertainty. The operational results achieved through our development program was again overshadowed by a series of geopolitical and macro events beginning with the Ukrainian crisis and the negative response by the global community, the subsequent imposition on sanctions on the Company in July, restricting our access to new debt issued in US dollars for greater than 90 days, the weakening commodity price environment during the second half of the year, and the significant devaluation of the Russian ruble relative to the US dollar in December.

 The combination of all of these events created a very difficult and volatile operating environment as well as mitigating the accomplishments that Novatek achieved during our 20th anniversary year.

 All of these factors described are noncontrollable. Therefore, we are not in a position to influence these macro events. The significant decline in the benchmark crude oil prices affected all producers in the oil and gas industry to various degrees and obviously had a significant negative impact on the international industry's capital plans in 2015.

 The benchmark crude oil price Brent dropped precipitously in the second half of 2014 from an average high of $150 per barrel in June to $55 a barrel at year end. As of today, it is trading in the $61 to $62 per barrel range.

 The devaluation of the Russian ruble in the fourth quarter by 72% was also unprecedented. It was not justifiably correlated to the dropping crude oil prices and appears more speculative than economically warranted.

 Moreover, as we have mentioned on previous conference calls, there is no rational basis for including Novatek on OPEC's sectorial sanction list as our commercial and political involvement in Ukraine is nil, and the rationale of targeting one of our shareholders as a reason for this inclusion on the sanction list contradicts OPEC's own subsidiary requirements of 50% or more equity holding.

 Despite all the noise in the marketplace, we control our business in investment decisions. And as such, we delivered our 2014 development financial results as stated to the investment community. We remain intensely focused on our strategic plans, our capital investments, our operational goals, and our financial position and liquidity.

 We will move forward in 2015 to deliver sustainable, high-value production growth, as well as demonstrate notable progress at the Yamal LNG project.

 At Yamal LNG, we've made significant progress on various work streams during the year, culminating with the first commercial landing of a Boeing 737 aircraft at the International Sabetta Airport in December.

 26 production wells have now been drilled and completed at the South-Tambeyskoye field, representing approximately 45% of the production wells needed to supply feedstock to the first LNG train.

 The completion of the production wells confirmed the field's geology and the estimated well flow range.

 [Backfilling and piling] for the first LNG train is underway. The fabrication of LNG models was contracted. And the steel-cutting works were done for the first modules.

 The construction of the cryogenic LNG tanks made notable progress over the past year as casting works on the external concrete walls of LNG tanks for the plant's first LNG train were completed as well as external roofing on one tank.

 The work progress on the EPC contract exceeded 20% by year end. And steel for the first ARC-7 ice class LNG tanker was also cut.

 Approximately 20 million cubic meters of soil was dredged at the approach channel at the Sabetta Port. And this facilitated additional ship and barge movements throughout the year, 95 ships and 351 barges.

 The port facility handled 2.1 million tons of construction materials and equipment, representing 2.5 times more than 2013. There were approximately 6,800 construction workers, 1,350 construction machinery at the site at yearend. Long-term contracts were more than 95% of the LNG volumes replaced as of yearend. And we continued work on progressing towards finalizing external financing.

 It is of great interest to us to read the various analytic comments regarding Yamal LNG, but the diversity of views and opinions regarding the economic viability of the project, our ability to attract external financing, and market risk to Novatek is extreme and we suspect confusing to most readers of this information.

 Despite hosting our first field trip to the Yamal LNG site this past September and providing quarterly updates on the ongoing progress at work activities, there still appears to be a general negative bias toward the project.

 We find it quite instructive and to some degrees annoying that subjective comments on speculative or off-the-cuff statements without first contacting the Company to clarify the statements or comments.

 I believe we need to be crystal clear on one key point. There are no delays on the Yamal LNG project as far as work activities are concerned. We are proceeding forward according to our plans and work schedules.

 Let me also state this evening that progress continues to be made toward securing the external financing for this project, although maybe not at the breakneck speed that some believe could be achieved despite the complexity of the project, the size of the financial package, the imposition of the sanctions, the restructuring of the project consultants, and the current national environment.

 The external financing discussions are an ongoing process. Our finance team is actively engaged with export credit agencies and other financial institutions as well as project consultants. And we expect this constructive dialogue to continue over the next several months.

 In other financing developments last week, Yamal LNG closed the first transit financing on the National Welfare Fund by issuing RUB75 billion of 15-year bonds to the Ministry of Finance, added RUB150 billion financing package approved by the Russian government.

 The funds obtained through the bond placement will be used to partially finance Yamal LNG's capital program in 2015.

 Moreover, as of today, the project sponsors, Novatek, Total, and CNPC, have financed the equivalent of approximately $9 billion according to approved plans and budgets, demonstrating the project sponsor's commitment towards this very important project despite the current commodity price environment.

 We will continue to provide periodic updates on the status of our discussions regarding external financing for Yamal LNG, and we fully understand and appreciate that it is an important question to all of our investors.

 Moving ahead with (inaudible), I would like to highlight some of the activities accomplished over the past year. In the fourth quarter, Arctic LNG 1, a wholly owned subsidiary, won an auction tender for exploration and production at the Trekhbugorniy license area on the Gydan Peninsula, which borders our Geofizicheskiy license area.

 Estimated natural gas reserves under the reserve classifications C1 plus C2 is 5.9 billion cubic meters, while the license area [broader] recoverable resource classification exceeds 1 trillion cubic meters of natural gas and 90 million tons of liquid hydrocarbons. We paid RUB435 million for the license area through the tender process.

 We continued full-scale exploration activities at our licensed areas located on the Gydan Peninsula and offshore in the Gulf of Ob, as this geographical area represents the next phase of Novatek's transformation to a global energy company.

 The future activities at our license areas on the Gydan Peninsula along with the current development and construction activities at Yamal LNG represents the Company's ambition to be a significant player in the global LNG markets.

 Over the next several years, we will continue to explore and development our fields on the Gydan Peninsula and to connect technical design and feasibility studies for additional LNG capacity.

 Our 100% owned license areas have already received formal regulatory approval for LNG export rights as well as being approved for the same concessionary fiscal terms as those received by Yamal LNG.

 The first phase of field development at the Urengoyskoye field was commissioned in April 2014 followed by the second phase in December. Overall production capacity is approximately 13 billion cubic meters of natural gas and over 4.7 million tons of de-ethanized gas condensate per annum.

 We successfully relaunched the fields de-ethanization unit, which caught fire in April, over the course of the year recovering a portion of the field's production during this period, and we are now operating the field at full capacity.

 We also launched the third production train at the Samburgskoye field in September, adding another 2 billion cubic meters of natural gas to the field's overall production flows, which now equals approximately 7 billion cubic meters of natural gas and 900,000 tons of deethanized condensate per year.

 In December, the North Khancheyskoye dry gas field was commissioned with a total capacity of 400 million cubic meters of natural gas per annum.

 In 2015, we planned to launch three new fields as part of our ongoing development plans, the Yaro-Yakhinskoye field, operated by SeverEnergia, with peak production of 7.7 billion cubic meters of gas and 1.3 million tons of de-ethanized gas condensate; the Termokarstovoye field, operated by Terneftegas, with peak production of 2.4 billion cubic meters of natural gas and 800,000 tons of de-ethanized condensate; and the Yarudeyskoye field, operated by Yargeo, with crude oil production of 3.5 million tons, all of which are estimated per annum volumes.

 During the past year, we invested capital in preparing these fields for launch. And accordingly, we anticipate that the Yaro-Yakhinskoye and Termokarstovoye fields will be commissioned during the second quarter and the Yarudeyskoye field sometime during the latter part of the fourth quarter.

 We anticipate that all three main producing fields at SeverEnergia will reach initial plateau levels during 2015 and that these three producing fields represent approximately 80% of the planned production output at SeverEnergia.

 The total estimated production per annum at SeverEnergia is approximately 35 billion cubic meters of natural gas and 6.5 million of gas condensate. These production figures exclude the joint venture's crude oil potential, which is being evaluated with additional testing.

 During 2014, the Ust-Luga complex processed 4.7 million tons of stable gas condensate into 4.6 million tons of refined end product, including 3.4 million tons of heavy and light naphtha, 472,000 tons of jet fuel, and 721,000 tons of fuel oil and gas oil, representing a year-on-year increase of 151%.

 By year end, the Ust-Luga complex has reached its full design capacity, and as a result of the increase in processing volumes at the Purovsky plant.

 The Purovsky plant increased its throughput capacity as a result of increase in volumes of de-ethanized condensate production as our producing fields and joint ventures and, by year end, was operating at 85% of the design capacity of 11 million tons per annum.

 The Purovsky plant processed 6.6 million tons of de-ethanized gas condensate, producing 5.1 million tons of stable gas condensate, 1 million tons of light hydrocarbons, 339,000 tons of LPG, and 14,000 tons of regenerated methanol, representing a 36% year-on-year increase.

 At the 31st of December, 2014, our SEC proved reserves totaled 12.6 billion barrels of oil equivalent, a three-tenths of 1% increase at our proved reserves as compared to year-end 2013, and representing a year-on-year reserve and placement rate of 109%.

 Proved natural gas reserves totaled 1.8 trillion cubic meters, and our proved reserves of liquid hydrocarbons were estimated at 135 million tons. At year-end 2014, our reserve to production rate, or R/P ratio, equals 28 years.

 Our year -- our reserve movements year on year were partially affected by the decrease in the Company's proportional ownership in SeverEnergia of 59.8% as at the 31st of December, 2013, to 54.9% at year-end 2014.

 Excluding this effect, our SEC proved reserves increased by approximately 2%. And our organic reserve replacement was 152%.

 Under the PRMS reserve reporting standard, Novatek's total proved and probable reserves based on our equity ownership in the respective fields aggregated 22.9 billion barrels of oil equivalent, which included 3.1 trillion cubic meters of natural gas and 293 million tons of liquid hydrocarbons.

 Under both reserve measure standards, Novatek ranks in the top echelons of the global oil and gas industry and currently ranks in the top five in terms of natural gas reserves amongst our global energy peers.

 We were also successful in converting these reserves into marketable cash flow and production. During 2014, our total gross marketable production in natural gas, including our share and our joint ventures, totaled 62 billion cubic meters or 2.2 trillion cubic feet, representing 89% of our total production output on a barrel of oil equivalent basis.

 Gross natural gas production increased by 900 million cubic meters or by 1.5% as compared to 2013, with the Valanginian layers or wet gas representing 83% of our total production.

 We average roughly 172 million cubic meters or 6.1 billion cubic feet per day of gas production in 2014. Novatek is a formidable gas producer relative to our global energy peers. And our track record of delivering sustainable growth annually since we announced our ambitions as a public company is not only impressive, but one of admiration by our industry peers.

 The growth in our liquid hydrocarbon output was even more impressive. Our gross production totaled slightly more than 6 million tons, of which 81% was unstable de-ethanized gas condensate, and the remaining 19% consisted of crude oil.

 On a gross production of liquids, increased by 27% or by 1.3 million tons as compared to 2013, whereas crude oil significantly increased by 55% to 1.2 million tons.

 The gas market in Russia has been undergoing a series of structural changes over the past several years, but we feel directionally were the right steps to implement. We now have a formula-based mineral extraction tax in place as well as the recently launched gas trading exchange.

 We don't see downward pressure on prices in the market. And the results from trading activities confirm this assertion. The Russian government has previously stated that domestic tariffs in 2015, 2016, and 2017 will rise in a line with forecasted inflation. And we have no reason at this point in time to question or change this expectation.

 This position was confirmed this past Friday by comments from the Federal Tariff Service. Moreover, we see no signs of price discounting from Gazprom and, as such, don't even believe this discounting question is being discussed.

 Our overall gas portfolio is well positioned, in our opinion, as we deliver a large portion of our gas production, representing 67% of our total gas volumes to power companies, which represents a relatively consistent and stable base load demand.

 Another 25% of our gas volumes are sold to large industrial companies, some of which are experiencing robust export growth with the Russian ruble devaluation.

 In terms of currency devaluation, the majority of both of our operating costs and capital expenditures are denominated in Russian rubles, which are substantially matched to our ruble-denominated gas sales and further supported by our growing foreign currency earnings from our liquid sales.

 The year-on-year comparatives were obviously distorted as the underlying currency environments were drastically different. We have been reporting large noncash movements period to period relative to the strengthening or weakening of the Russian ruble to the US dollar or other foreign currencies.

 At year-end 2014, our financial results were impacted by several large noncash movements. At the joint venture level, primarily from Yamal LNG and Terneftegas, we reported a noncash loss of RUB20 billion from the remeasurement of US dollar-denominated loans from partners due to the change in the underlying discount rates and a significant increase in interest rates in the fourth quarter.

 We also reported a net noncash loss at the Novatek level of RUB26 billion primarily related to our revaluation of our foreign currency loans, both borrowings and those provided to our joint ventures.

 It is important to understand that, at the Yamal LNG, once production is commenced, our external revenues will be matched to our loan repayments, and this should mitigate the effect of these ForEx movements on our accounts.

 We normalize these noncash foreign currency effects by adjusting our EBITDA net profit. But, the negative currency effect in the fourth quarter was so severe at 72%, which clearly contributed to our first quarterly loss since reporting as a public company.

 We also take these adjustments into account when recommending dividend payments to the Board of Directors.

 We've witnessed a large drop in the benchmark crude oil prices during the second half of 2014, which clearly influences the underlying prices we receive for our liquid hydrocarbons. The unstable gas condensate derived from the production of wet gas is a byproduct of our natural gas business and, when combined with the cash we receive from selling natural gas, increases our overall cash flow per barrel of oil received. So, the negative impact is not only dramatic to our profitabilities.

 Although we are not in a position to predict the direction of commodity prices, our position is relatively consistent with our global peers that the current pricing environment is not sustainable on the longer term.

 The overall financial and operational results for 2014 were good and relatively consistent with our expectation. But, the weakening functional currency was a problem throughout the year and took a severe drop in December, which essentially accounts for the reported loss in the fourth quarter.

 We delivered natural gas and liquid production growth consistent with our annual guidance, reported double-digit earnings growth, excluding the noncash effects, and generated strong operating cash flows to fully fund our capital expenditure program. In our view, there were no major surprises in our overall financial accounts, except for the 72% devaluation in December and the corresponding effect as currency moves as our loans provided to our joint ventures and our largely weighted US-denominated dollar position.

 Our total revenues and adjusted EBITDA increased by 20% and 23%, respectively, whereas our normalized net profits decreased by 56%, largely on the currency devaluation noted. Our production costs on a barrel of oil equivalent basis year on year increased by 10% to -- excuse me, decreased by 10% to 953 per barrel of oil equivalent, largely influenced by an increase in mineral extraction taxes and the depreciation, depletion, and amortization charges, offset by the 21% year-on-year change in the Russian-dollar -- Russian ruble to the US dollar.

 On a ruble-to-ruble basis, our production costs increased year on year by 8%, well within our inflation-adjusted expectations.

 Our average netback for natural gas sold to end consumers increased by 9% year on year, reflecting the domestic tariff adjustments as well as the geographic change in our gas sales mix during the year.

 Our liquid realizations for 2014 were impacted by an average year-on-year increase in the benchmark crude oil prices by 9%. But, the change between the third and fourth quarters was pretty significant, decreasing on average by $25 per barrel for Brent or by 25%.

 The end of year was even more pronounced than the average, decreasing by roughly 50% as compared to year-end 2013. These movements have a direct impact on our liquid pricing formula for goods in transit as the final selling price is determined closer to landing rather than at dispatch.

 Our operating expenses increased by approximately 23% year on year, driven largely by increases in our transport and tax obligations, consider noncontrollable and volumetric, as well as a large increase in purchases of natural gas and liquids from our joint ventures and third parties.

 There were no major surprises in our general administration expenses as we continued to demonstrate strong cost controls across all of our controllable expense categories.

 We spent RUB63 billion in capital expenditures this past year, continuing on our path of delivering sustainable high-quality growth, which was relatively consistent with our overall guidance of RUB60 billion for 2014.

 The most notable change in our capital program year on year was to move away from processing projects to more growth-oriented cash generating projects that I highlighted earlier as well as the projects we expect to launch in 2015.

 Equally notable was a large decrease in our capital expenditure program at the Yurkharovskoye field, signaling a clear move towards maintenance capital in 2016 and beyond.

 This movement towards maintenance capital is an important differentiating factor from prior years and represents one of the most compelling variables in our investment case as we generate substantial cash flows sufficient to maintain our growth story, provide ample liquidity to meet our obligations, service our debt portfolio, and increase our dividend payout.

 Our balance sheet and liquidity position continued to remain strong throughout the reporting period, although we increased our total deposition year on year from approximately RUB166 billion on the 31st of December to RUB246 billion at year end, mainly through the final withdrawal of funds on our syndicated credit facility, but more dramatically on the revaluation of our loan portfolio at year end and the negative effect of this revaluation resulting from the significant devaluation of the Russian ruble to the US dollar by 72% in December.

 We remain free cash flow positive throughout 2014 and concluded the year with a free cash flow position for the Company of RUB47 billion, representing a year-on-year increase of 61% despite a 7% increase on our overall capital expenditures program during the reporting year.

 We have necessary cash flow generation to fund our capital expenditure program through internally generated cash flows as well as having the ability to meet all of our debt obligations and liabilities when they mature or become due for payment.

 As you know, both S&P and Moody's recently downgraded the Russian sovereign debt rating to below investment grade, which prompted both credit rating agencies to downgrade Russian issuers, including Novatek, to below investment grade.

 We do not agree with this broadly negative macro assessment on the Russian sovereign level and the corresponding implications to our credit rating, as our liquidity and cash flow position improved and by the fact that we will generate sufficient cash flows from our core business operations as well as substantially increase our foreign earnings with the ramp of our liquid productions for sale to the international markets.

 Although both credit rating agencies understand our cash flow-generating capabilities and our strong liquidity position, it is warranted to highlight these points on tonight's call because many of our fixed income investors have expressed concerns to us regarding this trend.

 In conclusion, our fourth quarter results were an anomaly, affected largely by the devaluation of the Russian ruble and its negative noncash currency effect on a US-denominated loan portfolio.

 We are not going to make any excuse for these results since the rapid devaluation of this currency is not something we can control.

 Our financial and operational results achieved this past year was consistent with our expectations. And more importantly, the capital program we completed in 2014 positions the Company to deliver high-quality, sustainable results consistent with our strategic plan.

 We remain committed to our guidelines provided earlier this year with the forecast year-on-year growth of natural gas and liquids at 6% and 40%, respectively, and our capital expenditure program at roughly RUB50 billion, which is approximately 15% less than 2014.

 We are well positioned to meet our challenges. We have built a resilient company that is on the cusp of generating substantial cash flows and industry-leading rates of returns on our past capital expenditure programs.

 With the launching of our new producing fields in 2015, we will complete another chapter of our company's story. And we look forward to the next chapter of growth and transformation to a global energy company.

 We remain keenly focused on our upcoming challenges. We will complete the next phase of our business transformation as planned. We will get through this period of market volatility and a stronger position generating sufficient cash flows from our previous capital programs. And as always, we are committed to sound corporate governance, financial transparency, and sustainable development practices.

 We can unequivocally state to all our investors that our economic interests are fully aligned to create sustainable shareholder values.

 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). Max Moshkov, UBS.

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 Max Moshkov,  UBS - Analyst   [2]
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 Hello, Mark. Thank you for the presentation. I have two questions, first, regarding [Yurkharovneftegas] project, and the second regarding the utilization of Purovsky port. So, first, actually, what is the situation with the shareholder dispute over Yurkharovneftegas ownership? And how would you share profits and production when you've stopped producing this year?

 Regarding Purov plant, when do you expect Gazprom (inaudible) and Novatek reaching a parity for the SeverEnergia in terms of the ownership? And how do you sort impact redistribution of stabilized gas condensate from the Purov plant? Thank you.

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 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [3]
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 (Interpreted) Thank you for your question.

 As for Yurkharovneftegas, everything is going to plan, and we are expecting to launch this field between Q3 and Q4 (inaudible) with significant volumes there.

 The litigation with (inaudible) ongoing does not affect in any way the launch date.

 The profits from production, as realized, will definitely be distributed pro rata as to the equity holding, subject to payoff of all [check hold] loans, first and foremost, and that's mostly Novatek.

 As for SeverEnergia balancing out, it's a purely legal matter, given that companies from other jurisdictions than Russia are involved.

 And we believe that, legally, this matter will be finally resolved next year.

 Purovsky plant in the meanwhile is operating in a very sustainable manner.

 And it will reach full capacity in the nearest future. And that is 11 million tons plus of unstable gas condensate.

 Thank you.

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Operator   [4]
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 [Eskay Nestronef], Renaissance Capital.

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 Eskay Nestronef,  Renaissance Capital - Analyst   [5]
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 (Spoken in Russian).

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Unidentified Company Representative   [6]
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 Yes, we can hear you.

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 Eskay Nestronef,  Renaissance Capital - Analyst   [7]
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 (Interpreted) Thank you. No, I have two questions for now. The first question is this. In 2014, we met good price dynamics, which was above the average tariff [code], which is explained by the fact that you redistributed your sales geographically. So, based on your historical experience, what do you think of your potential doing the same exercise going forward? That means, how can you seed tariff price growth in the future as you manage your geographies again?

 And my second question is this. Mark has already provided some guidance on your CapEx plan for 2015, which is RUB50 billion in total. But, can you give a more specific split into natural gas on the one hand and liquid hydrocarbons on the other?

 And then again, I also have a question on your liquidity position, your loans to JVs and affiliates. Currently, you have RUB40 billion plus to pay off. And you're probably going to pay some dividends as well. Would you need some loans maybe to compensate for that liquidity?

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 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [8]
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 (Interpreted) As far as I understand, you have asked three questions. And here are the answers. The first question is about our geographies management, so to say which did provide better price dynamics as compared to the growth of the domestic tariff.

 Indeed, that is a regular habit, and we will continue to explore further opportunities here. Opportunities may include launch of new generating capacities or generally an increase in consumption volumes by our consumers. We're going to look into those opportunities forward as well.

 As to your -- the other -- another question of yours, Mark has noted indeed total CapEx plan of RUB50 billion in 2015, which marks a 15% reduction as compared to last year. It's important to note here many reports in media portray that as if the CapEx has been taken down from a larger figure. But, no, that was planned initially. We've stress tested it. We looked at it, considered different approaches, and understood that there was no need to take it any further down.

 The 15% reduction is vis-a-vis 2014. But, that is as planned. We have no need to take it further down in any way.

 And as for the third question, considering our external debt payoff and the dividends, we believe our liquidity position is sufficient to manage these obligations without any need for any external funding. Thank you.

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 Eskay Nestronef,  Renaissance Capital - Analyst   [9]
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 (Spoken in Russian).

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 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [10]
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 (Interpreted) Follow-up question whether you provide a breakdown of loans to your JVs or affiliates. And the answer is it's rather difficult to give these numbers out of the top of my head. As you hear from Mark, our projects are in an advanced stage. The development is ongoing. And we are starting launching the new fields this year with some small maintenance CapEx already priced into the total of RUB50 billion of the investment program.

 However, it's rather difficult for me to come up with a JV or affiliate breakdown out of the top of my head.

 To conclude with this matter, I would like to [nod] that our major affiliate [Arcticgas] is capable of generating enough cash flow to manage its own investments and operating activities. Thank you.

 Another question, please?

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Operator   [11]
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 Alexander Nazarov, Gazprombank.

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 Alexander Nazarov,  Gazprombank - Analyst   [12]
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 (Interpreted) Thank you, Mr. Mikhelson, for this opportunity. Thank you much for the presentation and the questions, question-and-answer session. I have a question regarding the financing of Yamal LNG. As far as I understand, the total amount (inaudible) stands at $8 billion. (inaudible) here from the presentation, RUB75 billion have already been received from the National World Fund out of the total of RUB150 billion. So, that takes me to quite amount down from $8 billion in total dollars to less than a little bit less than $6 billion.

 My question is, how much more money do you need until the project financing kicks in? That is, how much more funding is required mandatorily in the first half of 2015? That means how much money the shareholders will have to contribute on their own before the project financing kicks in.

 And my other question is about disproportionate funding option for Novatek. When does it end in terms of the total size or in terms of some deadline of timing? That is, when would Novatek have to contribute the full amount, so say pro rata to their share?

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 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [13]
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 (Interpreted) Thank you for your questions. Interestingly (inaudible) it's good that those questions come from Gazprombank, our financial advisors when it comes to project financing.

 You have [reached] the correct figure, which we reduced as an estimate for Yamal LNG 2015 budget. That is $8 billion.

 Given that more than 30% of our costs related to this project are in rubles, and you've heard of the ruble devaluation, we are now reconsidering the number. This exercise is close to complete, and the eventual number will stand at slightly above $7 billion.

 We are optimistic regarding the timing of external project financing, including tariff assessment. We expect this funding to arrive within 84 months.

 The shareholders are producing enough investment to suffice for delivery of this project on schedule.

 As to your last question regarding the disproportionate financing, as to its timing, it's going to end in early Q3.

 Thank you.

------------------------------
 Alexander Nazarov,  Gazprombank - Analyst   [14]
------------------------------
 (Spoken in Russian).

------------------------------
Operator   [15]
------------------------------
 Grinya Mishonkina, UBS.

------------------------------
 Grinya Mishonkina,  UBS - Analyst   [16]
------------------------------
 Hi. My questions have been answered. Thank you very much.

------------------------------
Operator   [17]
------------------------------
 Artem Konchin, Orkritie Capital.

------------------------------
 Artem Konchin,  Orkritie Capital - Analyst   [18]
------------------------------
 (Interpreted) Thank you. I have two or rather 2.5 questions. My first question is about the tariff growth as expected in 2015. (inaudible) this morning that the Federal Tariff Service announced no growth in tariffs in 2015 surprisingly.

 How do you read that? Does this mean no growth at all, or do you understand that as growth to plan and no further growth? So, do you expect the tariff growth in 2015 in line with 2014 inflation or half of that amount? So, what's your view on the subject (inaudible)?

 My second question concerns the MET, the mineral extraction tax, you're paying for crude. So, what's the tax environment these days, and what's the current numbers that you are paying, given, let's say, the [euro's] priced at $60 per barrel?

 And my third question is about your downstream operation. You've marked in the presentation that you saw certain delay of naphtha deliveries while in transit. And because of that, (inaudible) was a loss rather than a gain.

 Looking forward to the first quarter of 2015, thinking about the domestic crude price, which went up significantly, and SeverEnergia has a formula in their contract, which is [off unstable] condensate.

 So, I'm wondering, in the current environment of higher domestic crude prices, can you disclose the margins at Purovsky plant? Is that earning [anything] at all and what the margins could be, how temporary expectation, and what could (inaudible)? Thank you.

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [19]
------------------------------
 (Interpreted) Thank you for your questions, which have turned out to be four rather than 2.5 (inaudible). Speaking of the domestic tariffs, indeed, the original plan by the government says 7.5% of tariff adjustments, which is in line with full 2014 inflation. However, the government still is considering a potential increase as to that target number.

 This discussion has not been finished as yet. Our plans internally, however, target 7.5% in total.

 As you may be aware, the government is also discussing a potential hike in its transportation tariff, which does affect the earnings in some of our countries as well. And that could be as high as 7.5% again. However, discussions do envisage (inaudible).

 As you understand, these discussions are still ongoing. They are to be complete within three months from now. However, we continually target 7.5% of natural gas as well as 7.5% hike in the transportation tariff.

 Concerning your second question about the MET, the ongoing (inaudible), as far as I'm aware, fields behind the 62nd degree, 62 degrees latitude, and now, they have enjoyed historically zero MET rate. However, now, the duty change has been offset by MET change. And nothing is different for us for now.

 As for your next question regarding (inaudible) and the Q4 developments vis-a-vis Q1 this year, as you understand, we normally account for revenues upon delivery. That means get profit once the product has been delivered to the customer and (inaudible) customers in Asia and Pacific.

 Indeed, that means a lengthier transportation route. But, overall, (inaudible) does provide us with a good extra margin.

 As for your next question concerning Purovsky plant, indeed, we have a formula to buy feedstock from [Severnefte] and Arcticgas. And that is unstable gas condensate. The price does include a transportation element as well as the investment element, fully compensating for these two for us. And we have extended the Purovsky plant to account for sustainable growth with a good margin. Thank you.

------------------------------
 Artem Konchin,  Orkritie Capital - Analyst   [20]
------------------------------
 (Interpreted) Thanks a lot for all the answers.

------------------------------
Operator   [21]
------------------------------
 (Operator Instructions). Alexander Rozhetskin, Unicredit.

------------------------------
 Alexander Rozhetskin,  Unicredit - Analyst   [22]
------------------------------
 Yes, good afternoon. Thank you very much for your presentation. Just two questions from me, if I may. First is, when do you expect to receive the second part of the RUB150 billion of the National Welfare Fund support?

 And the second question also relates to this. What do you expect the impact of this RUB150 billion to be on our tax leverage, if any? Thank you.

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [23]
------------------------------
 (Interpreted) In terms of your first question, we expect another RUB75 billion to arrive in the second quarter subject to decisions by credit committees of banks involved in the project financing exercise. So, it's (inaudible).

 And the tax we expect from that is very straightforward. That is, we're going to need the equivalent of RUB75 billion less in foreign currency loans. So, we'll have to get loans in foreign currencies which are less than what we initially needed by the equivalent of RUB75 billion. That's it.

 Thank you.

------------------------------
 Alexander Rozhetskin,  Unicredit - Analyst   [24]
------------------------------
 Thank you for your answers.

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [25]
------------------------------
 (Interpreted) Are we out of questions now?

------------------------------
Operator   [26]
------------------------------
 Max Moshkov, UBS.

------------------------------
 Max Moshkov,  UBS - Analyst   [27]
------------------------------
 (Interpreted) I have a follow up question regarding the mineral extraction tax you commented on [through MET], but what about gas and gas condensate? Can you provide some better insights in terms of tax for 1 million cubic meter, 1,000 cubic meters, or [for a ton]? Thank you.

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [28]
------------------------------
 (Interpreted) Frankly, I don't quite understand the purpose of this question. Do you want me to give you the exact absolute numbers as to how much tax we pay?

------------------------------
 Max Moshkov,  UBS - Analyst   [29]
------------------------------
 (Interpreted) Well, frankly, I just wanted to clarify because there is a formula which we are all very well aware of. This formula contains a ratio that is not as transparent and not disclosed. That ratio would affect the rate of certain types of reserves that had to recover, not so efficient to recover, but [on] distance geographically, etc. So, can you basically provide just the effective MET ratio? Thank you.

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [30]
------------------------------
 (Interpreted) You're right. The budget indeed is really intricate with lots of taxes involved. We have been working with the government at length to produce that formula eventually in order to link to formerly independent processes, which is about tariff regulation on the one hand and MET regulation on the other.

 In the past, these two were not related at all. But, as now, there is a clear link between MET development vis-a-vis tariff increases. So, this really facilitates our planning internally. I hope this answer will suffice.

------------------------------
 Max Moshkov,  UBS - Analyst   [31]
------------------------------
 (Interpreted) Thank you.

------------------------------
Operator   [32]
------------------------------
 [Alan Cambrisy].

------------------------------
 Alan Cambrisy,  - Analyst   [33]
------------------------------
 (Spoken in Russian).

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [34]
------------------------------
 (Spoken in Russian).

------------------------------
 Alan Cambrisy,  - Analyst   [35]
------------------------------
 (Spoken in Russian).

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [36]
------------------------------
 (Spoken in Russian).

------------------------------
 Alan Cambrisy,  - Analyst   [37]
------------------------------
 (Spoken in Russian).

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [38]
------------------------------
 (Spoken in Russian).

------------------------------
 Alan Cambrisy,  - Analyst   [39]
------------------------------
 (Spoken in Russian).

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [40]
------------------------------
 (Spoken in Russian).

------------------------------
 Alan Cambrisy,  - Analyst   [41]
------------------------------
 (Spoken in Russian).

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [42]
------------------------------
 (Spoken in Russian).

------------------------------
 Alan Cambrisy,  - Analyst   [43]
------------------------------
 (Interpreted) I have two questions from now. One question concerns your Yarudeyskoye field. What's the current valuation? And how do you expect that to change post-launch? For example, there is another field valued at EUR5 billion with 5 million tons of production. So, what would your assessment be in a similar fashion regarding your Yarudeyskoye field?

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [44]
------------------------------
 (Interpreted) And the answer is we don't look at [MPV] (inaudible). We have that [spliced] into our CapEx plan. And we're going to launch per schedule. Once launched, we'll see some comments. But, the question -- I don't see the purpose of your question and what you're asking about. And what was your second question, please?

------------------------------
 Alan Cambrisy,  - Analyst   [45]
------------------------------
 (Interpreted) The other question is regarding your well assets. The market believes it's reasonable to carve out your oil-related assets and turn standalone entities, such as Gazpromeneft, for example. How can you comment on that? Would you consider a potential carve out?

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [46]
------------------------------
 (Interpreted) The answer is it's the first time I hear of these discussions. And we are definitely not considering anything like that internally.

 Thank you.

 Do we have any final questions, or is that it?

------------------------------
Operator   [47]
------------------------------
 There are no further questions.

------------------------------
 Leonid Mikhelson,  Novatek OAO - Chairman of the Management Board   [48]
------------------------------
 (Interpreted) I would like to thank all participants on this call.

 To conclude, I'd like to [nod] that there has been no question on the dividend. So, may I kindly put that forward to myself?

 Well, as Mark mentioned in his presentation, the FX-related noncash loss does not affect Novatek performance financially.

 Most of the loss is accounted in relation to the Yamal LNG project.

 Well, all future sales or its products would be foreign currencies.

 (inaudible) is going to propose it to the Board to consider a dividend payout adjusted for these losses. That means not accounting for the loss.

 Thank you.

------------------------------
Operator   [49]
------------------------------
 Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

------------------------------
Editor   [50]
------------------------------
 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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