Q1 2015 Novatek OAO Earnings Call (IFRS)

Apr 29, 2015 AM CEST
NVTK.MZ - Novatek PAO
Q1 2015 Novatek OAO Earnings Call (IFRS)
Apr 29, 2015 / 12:30PM GMT 

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Corporate Participants
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   *  Mark Gyetvay
      NOVATEK - CFO

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Conference Call Participants
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   *  Alex Fak
      Sberbank CIB - Moderator
   *  Karen Kostanian
      BofA Merrill Lynch - Analyst
   *  Alexander Kornilov
      Alfa Bank - Analyst
   *  Max Moshkov
      UBS - Analyst
   *  Alexander Nazarov
      Gazprombank - Analyst
   *  Farid Abasov
      Standard Bank - Analyst
   *  Ildar Khaziev
      HSBC - Analyst
   *  Artem Konchin
      Otkritie - Analyst

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Presentation
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Operator   [1]
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 Good day, and welcome to the NOVATEK first quarter 2015 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Alex Fak from Sberbank. Please go ahead, sir.

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 Alex Fak,  Sberbank CIB - Moderator   [2]
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 Hello, everyone. This is Alex Fak from Sberbank CIB, and welcome to the call. It is my pleasure to introduce to you Alexander Palivoda, the head of Investor Relations; and Mark Gyetvay, the CFO.

 Mark, I now hand over to you.

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 Mark Gyetvay,  NOVATEK - CFO   [3]
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 Alex, thank you very much. Ladies and gentlemen, shareholders, and colleagues, good evening, and welcome to our first-quarter 2015 earnings conference call.

 As usual, 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.

 Before we begin with the specific conference call details, I would like to refer you to our disclaimer statement, as is our normal practice.

 During this conference call, we may make reference to forward-looking statements by using words such as plans, objectives, goals, strategies, and other similar words, which are other than statements of historical facts. Actual results may differ materially from those implied by such forward-looking statements, due to known and unknown risk and uncertainties, and reflect our views at the date of this presentation.

 We undertake no obligation to revise, or publicly release the results with any revisions to these forward-looking statements, in light of new information or future advance.

 Please refer to our regulatory filings, including our annual review for the year ended December 31, 2014, as well as any of our earnings press releases and documents throughout the past year, for more descriptions of a risk that may influence our results.

 The present oil price markets present enormous challenges for the oil and gas industry, including those companies operating in the Russian market, as these low pricing dynamics impact the viability of many long-term projects; create a volatile market for oil services; and puts enormous pressure on management to effectively and efficiently manage and reduce costs through this down commodity price cycle.

 Although we have successfully navigated through the prior commodity price downturns, nonetheless, we remain cautious, yet focused, on delivering results, according to our long-term strategic plans.

 It is also important to take a balanced view in these current market conditions as we are making significant strategic investments that we believe will deliver sustainable long-term production growth for the Company, as well as generating substantial future cash flows to support shareholder value creation.

 The current environment offers unique opportunities for oil and gas companies, like NOVATEK, to take advantage of this downturn to further strengthen our present market position vis a vis our competitors, as well as taking a critical review of our overall capital plans and cost structures.

 As of today, we remain committed to our capital program of RUB50 billion, and there are no plans to revise our guidance.

 I recently had the opportunity to present the current status of the Yamal LNG project at the Flame gas conference in Amsterdam, and the IHS CERAWeek in Houston.

 But as an attendee to both of these events, it was also illuminating to hear a number of presenters discuss the challenges they face in the present market condition, as well as their various forecasts and scenarios around the state of current oil pricing. Therefore, to begin tonight's call, I would like to provide a few highlighted points from these two key industry events.

 The main themes resonating from the majority of presentations was a need to ensure a tight control around capital expenditures, with the primary aim of reducing headline numbers over the next two to three years; maintain a keen focus on project efficiencies and enhance productivities, particularly through the use of innovation; and an almost consensus view that we will not see a V-shaped recovery in the crude oil prices, but rather a longer U-shaped curve over the next 18 months to 24 months.

 These views were predominantly expressed by the super majors, or international oil companies. But these sentiments were also discussed by national oil companies, large independent producers, and other major players in the global energy space.

 Another topic that generated a fair share of discussion was the potential for US LNG imports -- exports to be a game changer, but there was a fairly wide divergence on the quantities of potential LNG exports. But, generally speaking, most forecasts settled around 70 million tons per annum, rather than a wider range of 150 million tons to 200 million tons.

 The current commodity pricing environment has negatively affected or postponed those projects that have not taken a final investment decision, although most of the main speakers or panel discussions noted the need to remain focused on a longer term view of project [effectuation], rather than a short-term view driven primarily by the current pricing environment.

 We completely agree with this longer term sentiment, and largely anticipate that the Yamal LNG project will come onstream when the forecasted commodity prices are expected to recover to the $70, $80 per barrel range. But, more importantly, we should anticipate that over the course of the projects life cycle we will operate in multiple commodity price and business cycles.

 What I also found interesting throughout both conferences was the shift in model towards a tolling or hybrid approach for LNG marketing arrangements, specifically led by the US LNG projects. But most of the main buyers present, those from Japan and South Korea, for example, still considered long-term contracts to play a major role in future LNG contractual discussions.

 Most of the main LNG buyers are looking for flexibility in pricing terms, as well as an increase in spot trading of LNG, to complement their long-term portfolios. This wish to seek more flexibility is understood by the industry, but it needs to be balanced against the cost of building liquefaction capacity.

 The probable outcome will most likely be a range of diverse LNG projects, from tolling to hybrid, to the fully integrated model, like the Yamal LNG and [Qatari] projects.

 I would like to remind everyone again this evening that we have already executed long-term contracts for over 95% of Yamal LNG's output.

 Another thing that was hotly debated was the potential lifting of the US export ban on crude oil that has been in place since the Arab embargoes of the late 1970s.

 Many US producers support a lifting of the export ban, and this sentiment was further echoed by Senator Lisa Murkowski of Alaska, who became the Chairwoman of the US Senate Energy & Natural Resources Committee in January 2015.

 Arguments were made by various senior executives that this export ban should be lifted before the lifting of sanctions against Iran are considered. And Senator Murkowski stated that a legislative bill would most likely be issued this year, following the export of US crude.

 I believe this issue is gaining steam, but there is still a lot of barriers that need to be resolved before we can see any changes to this legislation.

 There were not many discussions on further industry consolidation, except for the announced Shell-BG bill.

 But I believe it's safe to say that a prolonged period of lower oil prices, lack of capital investments, and [debt] service issues, to name a few, will bring compelling opportunities for oil and gas companies to selectively enhance existing asset portfolios, as well as consolidate its geographical areas of operations.

 Overall, I believe the industry sentiments expressed at these two leading industry conferences was well balanced. Not too pessimistic, and not overly optimistic in the short term, but rather another commodity price cycle that needs to be cautiously and effectively managed.

 I believe it is widely understood that large-scale oil and gas projects intended to start pumping crude oil and natural gas in, say, five to 10 years requires sufficient lead time to complete.

 And the impact of the industry-wide spending cuts or postponements in capital programs of approximately $114 billion will play a major role in the future supply for hydrocarbons. This is a major challenge confronting the industry today.

 Moving forward, I would like to now recap our main activities during the first quarter 2015.

 Yamal LNG continues to play a major role in the future development of NOVATEK, so I will begin this evening's discussion with some of the key highlights of this important project.

 As of today, we have approximately 9,500 people working on the project site, including 68 contractors and 104 sub-contractors, with approximately 1,500 construction vehicles at the construction site, and in the field.

 The cumulative EPC contract progress as at the end March is approximately 24.3% completed, and the first modules for the LNG plant are currently being fabricated in Asian yards.

 The LNG plant-site preparation is approximately 90% complete, including 100% of the land back filling for the first LNG train.

 Pilings for the west and south interconnecting pipe racks are completed ahead of schedule and pile caps delivery and installation is currently underway. The first pipe rack modules are scheduled for delivery this summer.

 All module yards have been selected, and all fabrication contracts have been awarded.

 Current progress in terms of module fabrication, excluding procurement, is approximately 20%. And the first LNG plant modules are scheduled for delivery to the construction site in August 2015.

 Overall, 10 fast-track modules are scheduled for delivery in 2015. And to ensure prompt delivery, a fleet of module transport vehicles and vessels have been chartered to guarantee the timely delivery of these modules.

 The contract for inlet facilities and condensate storage was awarded in February 2015, with piling activities commencing in March. Approximately 90% of purchase orders for long lead items for this stage of work activities has been placed.

 We have completed the piling, thermal stabilization, concrete walls, and roofing for the first two LNG tanks required for the first LNG train, and work has now begun inside of these two tanks.

 We have also completed the piling and installation works for tanks three and four. As at the end of March, the overall progress for construction and completing the cryogenic LNG storage tanks is approximately 35% completed.

 We continued to make good progress on the construction of the power plant as approximately 27% of the construction activities are completed, with the first and second gas turbine units, manufactured by Siemens, ready for shipment to the site.

 As it's a better sea port, 18 ships, transporting roughly 192,000 tons of cargo, were unloaded at the marine berths during the first quarter.

 The contract for the construction of the LNG and condensate jetty trestle foundation was signed, and the fabrication of 95% of the piles is complete. And the first batch of piles were delivered to the site in March. 68 piles have been driven, representing approximately 16% of the work activities.

 The Russian Government selected the contractors for the construction of the ice barrier walls; and, as of today, progress towards the construction of the Southern, Eastern ice barrier is 46% completed.

 I mentioned on the last conference call that the first Boeing 737 airplane landed at the Sabetta international airport in December. And, as of the first quarter, there has been an additional 72 flights to the new airport.

 In February, the Sabetta airport became operational for domestic flights, and there are now daily flights for Novy Urengoy, as well as Moscow and Samara.

 Since becoming operational for domestic flights, 21,000 passengers have used the new airport terminal. And the airport is capable of handling Boeing 737 and 767 aircrafts; Airbus 320 and 321; and all major international cargo aircrafts.

 At the South-Tambeyskoye field, the project stipulates a production drilling program of 208 wells with 58 wells, 35 wells, and 31 wells required to start production for LNG trains 1, 2, and 3, respectively; and the remaining production wells to maintain production plateau.

 We have completed the drilling of 28 production wells of the 58 production wells for the first LNG train. Currently, there are three Arctic drilling rigs in use; and a fourth drilling rig is planned to begin drilling in late 2015.

 The project sponsors, NOVATEK, Total, and CNPC, have invested approximately $9.2 billion into the Yamal LNG project, as at the end of the reporting period. As at December 31, it was $7.6 billion.

 And in addition to the direct contribution from the sponsors, an additional RUB75 billion, out of the approved RUB150 billion, was received for the National Wealth Fund in February, as already reported.

 We are at very advanced stages of the negotiations regarding external finance in Yamal LNG project. That was confirmed recently by the joint press conference held by Mr. Mikhelson, CEO of NOVATEK, and Mr. Patrick Pouyanne, CEO of Total, at the Sabetta site. Therefore, for tonight's conference call, I do not have any new news to report on external financing for Yamal LNG, other than to say that we will keep our shareholders informed on new developments when they occur.

 In other development news, we successfully launched the Yaro-Yakhinskoye field in April as part of a series of new launches we expect to complete in 2015. As a result, we have now launched three major fields as a SeverEnergia joint venture, the Urengoyskoye, Samburgskoye, and the Yaro-Yakhinskoye fields, representing approximately 80% of the planned natural gas output; and 100% of the gas condensate production at this important joint venture.

 On an annualized basis, the three fields account for approximately 28 billion cubic meters of natural gas, and slightly more than 7 million tons of gas condensate.

 Great progress continues to be made towards completing our projects that we will launch over the remainder of 2015. We are planning to launch the Termokarstovoye field, operated by our joint venture, Terneftegas, which is 51% NOVATEK, 49% Total, towards the end of May, which will have an annualized peak production of 2.4 billion cubic meters of natural gas; and 800,000 tons of gas condensate.

 This joint venture will culminate in another successful milestone for the Company, as it represents our first full joint venture with an international oil company, Total, that started completely as a Greenfield exploration project and has now progressed to the state of completion.

 All 22 production wells have been drilled, and the formal launch of the first production is scheduled one year ahead of the field's original development plan.

 Another important event scheduled for the fourth quarter of 2015 will be the formal launch of Yargio. All necessary equipment has been purchased and delivered to the construction site. We have completed the construction of a 350 kilometer crude oil pipeline, and 150 kilometer gas pipeline, and both pipelines are currently being tested.

 For the oil treatment facility, we have completed 98% of the piling work; installed approximately 70% of all the equipment; and completed 95% of storage tanks, comprising six tanks of 5,000 cubic meters each.

 We have also completed 100% of the backfilling for the gas treatment facility; 55% of the piling works; and have already begun installing the main equipment.

 Other infrastructure activities, such as metering points in power stations, are also in advanced stages of completion. The Yarudeyskoye field is expected to produce 3.5 million tons of crude oil per annum.

 Our primary exploration activities are being conducted on the Gydan Peninsula, particularly the Utrenneye license area. And we have begun drilling exploration wells to confirm the resource base of this area.

 As I mentioned previously, the future activities of 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 develop our fields on the Gydan Peninsula, and to conduct 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.

 I will provide additional updates later this year on the status of our exploration efforts, since it's kind of premature at this point to provide any more meaningful information.

 The Purovsky plant increased its throughput capacity as a result of increasing volumes of de-ethanized condensate production at our producing fields and joint ventures, and by quarter end was operating at 90% of its design capacity of 11 million tons per year.

 The Purovsky processing plant processed 2.5 million tons of de-ethanized condensate, producing 2 million tons of stable gas condensate, and 443,000 tons of LPG, representing a 79% year-on-year increase.

 During the first quarter 2015, the Ust-Luga complex processed 1.7 million tons of stable gas condensate into 1.7 million tons of refined products, including 1 million tons of heavy and light naphtha; and 652,000 tons of refined petroleum projects, representing a year-on-year increase of 69%.

 The Ust-Luga complex reached its full design capacity as a result of the increase in processing volumes at the Purovsky plant, which meant that in March 2015 we commenced selling stable gas condensate to the international markets from the port of Ust-Luga.

 We are off to a strong start in 2015, as our expanding production profile, driven largely by SeverEnergia, continues to demonstrate the strength and resilience of our operating business model.

 Despite weaker natural gas sales due to abnormally warm winter weather in Russia during the first quarter, we managed to achieve stronger year-on-year domestic gas prices, as well as more robust natural gas net backs, for both the year-on-year and quarter-on-quarter gas sales, largely due to changing geographical mix of our sales profile, and lower transport charges.

 Our proportional mix between end customers and wholesale traders remained relatively consistent throughout the reporting periods at 94% and 6%, respectively.

 The most notable change between reporting periods was the growing proportion of our liquid hydrocarbons and our total sales volumes with the successful launches, in 2014, of SeverEnergia, and the period's full effect on our output growth.

 Our total output of liquids produced, combined with the purchases from joint ventures, increased by 73% year on year, and 20% quarter on quarter. This important development will play a major role in 2015 as we continue to ramp up our liquids production, as promised in our strategic plans.

 Moreover, the first quarter of 2015 represented the first time our liquid revenues exceeded 50% of our total sales, even though we operate in a period where the benchmark reference contract prices for all of our products was substantially reduced by approximately 50%.

 It is due time that the market recognizes the change in dynamics of our business profile and robust cash flows as we transition towards higher valued, risk-adjusted margins and sustainable shareholder value creation.

 Our natural gas production and sales in the first quarter had a few peculiarities that I would like to highlight on tonight's call, but we believe the situation will be partially corrected throughout the remainder of the year.

 As for production, the Yurkharovskoye field was shut down for unplanned maintenance for three days, reducing output by roughly 300 million cubic meters.

 In addition, the Yurkharovskoye field was producing at flow rates above planned levels in 2014, which we will reduce to the field's peak levels during 2015.

 We also reduced gas sales to one of our main customers, due to an accident at one of their facilities, which meant we had to balance the flow of gas from our fields and underground storage to compensate or adjust for this incident.

 We also purchased a portion of natural gas output from SeverEnergia during the quarter, which is consistent with our agreement to periodically purchase natural gas from this joint venture, if needed.

 We will continue to balance our planned gas output with purchases to meet our contractual commitments.

 Our total revenues and adjusted EBITDA increased each by 28%, whereas our normalized net profit increased by 35%.

 Net cash provided by operating activities was strong during the period, and increased year on year by RUB12 billion, or by 45%, which meant that we generated free cash flows of RUB25 billion, or 83% higher than the comparative reporting period.

 We mentioned previously that the overall intensity of our capital program is declining towards maintenance mode, ad this trend is notable in the changing mix of our quarterly capital expenditures.

 We spent RUB14.5 billion during the quarter, of which RUB7.1 billion was used for ongoing work activities at the Yarudeyskoye license area, reflecting the eventual launch of this important new field in the latter part of 2015.

 The East Tarkosalinskoye field accounted for RUB2.5 billion of capital spend, mainly on further development of the crude -- fields crude oil layers, with the remaining funds disbursed amongst the Yaharskoye and Utrenneye fields at RUB1.8 billion and RUB1.5 billion, respectively, and other smaller field activities.

 Our operating expenses increased by approximately 37% year on year, driven by increases in our transport and tax obligations, considered non-controllable and volumetric; but, more importantly, by significant increases in purchases of natural gas and liquids, mostly from our joint ventures, and, to a lesser extent, from third parties.

 We expect the future purchases of hydrocarbons will continue to grow as a relative proportion of our overall operating expenses, due to the continued growth in production output from our joint ventures.

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

 I have received many questions from investors during our recent meetings concerning the level of inflation experienced by us in our operating and capital expenditures. I can report tonight that we are not experiencing any notable inflation pressures on our capital program.

 Based on the first quarter results, we do not see any accelerated cost inflation pressures as far as our operating expenses are concerned, and, more specifically, in our general and administrative categories.

 We will continue to monitor, of course, inflation issues, and report back to our shareholders accordingly.

 Our balance sheet and liquidity position remained strong throughout the reporting periods, although we increased our debt position year on year from [RUB168 billion] at March 31, 2014, to [RUB258 billion] at the end of the current reporting period, largely due to the revaluation of our loan portfolio; and the impact from the significant devaluation of the Russian ruble to the US dollar that we experienced in late 2014, and continued in the first quarter 2015, albeit at a lower rate of depreciation.

 We have the 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 become due, or they mature.

 I would like to conclude tonight's presentation with a quote that I've slightly modified by Dr. Martin Luther King, which I felt adequately sums up our situation. The true measure of a company is not where it stands in times of comfort and convenience, but where it stands in times of challenges.

 We have had our fair share of challenges over the past 20 years, where many people felt we would not survive in a monopolistic environment, or we would not achieve our ambitious production- and sales-growth targets.

 We have had many people question our ability to tackle the technical and political obstacles to build in the Yamal LNG project, or secure export rights and international partners.

 We have had to overcome the stigma and challenges from being named on the US Treasury Department's OFAC's sectoral sanctions lists and the implications that this meant to us in raising capital to finance the Yamal LNG project.

 These are just a few of the more notable challenges that we heard from investors and analysts over the years.

 I believe we have directly met all of these challenges, and have built a world-class energy company that is poised for substantial and sustainable production and cash flow growth for the foreseeable future.

 The Yamal LNG project is a world-class project that will transform the Company into an international energy player, as well as substantially increasing our cash flows from operations.

 We will launch value-accretive projects throughout 2015 that will substantially increase our liquid hydrocarbons and continue to generate significant foreign-denominated revenues to counterbalance our domestic gas business.

 These are substantial changes that we have outlined in detail, and articulated in our strategy presentation, countless meetings with investors and analysts, and highlighted on all of our past earnings conference calls.

 Yesterday, we announced the signing of a new four-year contract for the delivery of 9 billion cubic meters of natural gas to Mosenergo; an important provider of power generation to the city of Moscow and the Moscow regions.

 We have read recently that some analysts are questioning our ability to market our natural gas beyond 2016, so, hopefully, the execution of this contract dispels some of these concerns, or speculations.

 We are absolutely confident in our ability to market 100% of our future gas production. And in the nearest future, we will finalize our gas balance for 2016, and beyond.

 In summary, we have delivered what we promised we would deliver.

 I would like to now end this portion of the conference call and open the session for 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). Alex Fak, Sberbank.

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 Alex Fak,  Sberbank CIB - Moderator   [2]
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 Mark, thanks very much. This might be running ahead a little bit, but you mentioned Gydan LNG prospects. Your partners in Yamal LNG, Total, have said that Yamal LNG project just about breaks even at the current oil prices, assuming the full equity financing. I wanted to ask, given the oil price decline, does it still make sense to proceed with the second LNG project, based on the Gydan fields?

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 Mark Gyetvay,  NOVATEK - CFO   [3]
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 Alex, as I mentioned before, nobody is looking at the Yamal LNG under these current pricing environments. We're not producing today at these current prices. And we fully anticipate that by the time production comes onstream we will return, or revert back to the $70, $80 per barrel of oil, which is what the industry is forecasting as we speak.

 Gydan, what I mentioned earlier, we're just at the very beginning stages of undertaking exploration activity and design and feasibility work. Again, this is a project that we look at post-2020. And if we're -- to understand that, again, these are long lead items and long-term projects that we fully anticipate, just as Yamal LNG, that we will go through various price commodity cycles.

 At this particular point, we're very comfortable with where we stand on the Yamal LNG project, as well as our wishes to move forward with the preliminary works on Gydan. It's just more important to understand that we have stated, as well as Total have stated, that this particular project is profitable in the current pricing environment.

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 Alex Fak,  Sberbank CIB - Moderator   [4]
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 Okay, thank you.

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Operator   [5]
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 Karen Kostanian, Bank of America.

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 Karen Kostanian,  BofA Merrill Lynch - Analyst   [6]
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 Mark, thank you very much for the presentation. I have two questions. First of all, it's very commendable that in the current [gas cut] environment in Russia basically, and recession following, you're still increasing your volumes.

 My question is in your renegotiations of contracts, given the recession and everything else, do you have to make price concessions or any other special adjustments to perhaps take-or-pay volumes to sustain the contract and to sign them again?

 And my second question, given that the situation with the sanctions has stabilized, you are close to perhaps selling 9% stake in Yamal LNG, and also to securing project financing. Have you thought, perhaps, about resuming the buyback that you've suspended last year? Thank you.

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 Mark Gyetvay,  NOVATEK - CFO   [7]
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 Karen, on the first question, the contract was extended at the same pricing terms we had on a previous contract, so there are no discounts offered on these particular contracts. And we don't see the pressure on discounts at this particular time. So, I guess, I can only say that they are on the same terms and conditions as the prior three-year contract.

 In relation to your second question, as you rightly said, we're in negotiations on a potential transaction for the 9% stake.

 But in terms of reinstituting our buyback, the buyback period is usually extended for a year; we'll consider that coming up pretty soon, because it expires it June. I believe we're pretty comfortable that we will extend it out for another year. Once we settle the financing situation in regards Yamal LNG, we will consider going back in the market on the share buyback program.

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 Karen Kostanian,  BofA Merrill Lynch - Analyst   [8]
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 Thanks, Mark.

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Operator   [9]
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 Alexander Kornilov, Alfa Bank.

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 Alexander Kornilov,  Alfa Bank - Analyst   [10]
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 Thank you very much for the presentation. I have two minor questions, actually, related to the cash flow statements. I have noticed that you have received the dividends in the amount of [RUB1.9 billion], roughly, from your JVs. As far as I understand, this is the dividends that perhaps came from Nortgas.

 I have two related questions. First, what kind of amount would you expect for the whole year? Do you expect any further dividend proceeds going forward before the end of the year?

 And secondly, is there any particular dividend policy which Nortgas is speaking to? So if you could elaborate a little bit more on that, it would be great. Thank you.

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 Mark Gyetvay,  NOVATEK - CFO   [11]
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 On the first part of your question, you're absolutely correct, the dividends received were from Nortgas. And we fully anticipate that our joint ventures, given that they're ramping up production, etc., will start paying dividends in the future. That was anticipated.

 I believe that was slightly delayed in 2014, due to the incident we had early on with SeverEnergia with the fire at the de-ethanization complex, but we should be in a position to start generating dividends in the future on our joint ventures.

 As relates to the dividend policy specifically on Nortgas, I really can't comment on that at this particular time.

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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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 Max Moshkov, UBS.

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 Max Moshkov,  UBS - Analyst   [14]
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 Mark, just also two questions. First, regarding the Ust-Luga output, where I see that the amount of [crude] oil is increasing, probably on the back of the more heavy nature of the gas condensate stemming from SeverEnergia fields. What's your outlook when SeverEnergia will reach its peak production? [What should be this rate] of the Ust-Luga? What will be likely rough amount of crude oil this split you will be producing?

 And second question is regarding Yamal. So it's -- thank you very much for the update, it's quite useful. What is actually a break in price, LNG breaking in price for the project, if you can provide this estimate? Thank you.

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 Mark Gyetvay,  NOVATEK - CFO   [15]
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 In terms of the output, I don't believe the output has changed dramatically in the process in Ust-Luga, and so we were roughly getting about 74%, 75% of -- okay, well, that was the original. I think that I've just been told it might be slightly lower coming out, but I don't think it's changing dramatically from what we've had at the first wave of output.

 So I think it's going to be roughly about 60-plus-%, and then the rest of the other product. And I think the plan is to remain at roughly about 60% on a relative stable basis. It actually has dropped down slightly from the original output that we had in the -- when we originally launched, because I believe it was at, roughly, about 74% initially, so it has decreased slightly.

 In terms of your second one, I'm just not at a stage to provide that information right now. We don't provide a break-even points for Yamal LNG.

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Operator   [16]
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 Alexander Nazarov, Gazprombank.

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 Alexander Nazarov,  Gazprombank - Analyst   [17]
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 Thanks very much for your presentation, Mark. You have been abnormally short tonight. I'm not sure whether because of Gazprom, or because the upcoming holidays.

 My question is I ask you to clear -- you mentioned several comments from both Mr. Mikhelson and from Total's CEO on Yamal LNG financing. So can you make clear, do you expect financing from Chinese banks to be on the level of $12 billion, or $13.5 billion? And what is the amount now being discussed with the export agencies, because I saw also two different amounts of that amount? Thank you.

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 Mark Gyetvay,  NOVATEK - CFO   [18]
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 Alexander, the answer to the first part of your question, you're absolutely correct, we're cognizant of the fact that Gazprom will be following us; and also the fact that we didn't want to over work you folks, given that the May holidays are fastly approaching.

 We've already -- we've kind of outlined already -- both Mr. Mikhelson and Mr. Pouyanne has basically given relative ranges on the expectation of financing for Yamal LNG. And the numbers that were given before were in a range of [$10 billion to $15 billion]. And how that number ultimately comes out is a factor of additional negotiation, etc.

 So I want to just -- I wanted to put the message out today, is that we are getting closer to finalizing this transaction. And it will be within that relative range on financing.

 As relates to the other question, there is some other discussions going on. And I don't want to specifically indicate an amount at this particular point in time, but it's in the range that you talked about. And so I'd like to leave the financing as that, until it's complete.

 Once it's complete, we obviously will have an announcement of that; we'll have full discussions. Let us finish this work. There's still a lot of documentation and stuff that needs to be completed, and we're moving along the path to finalizing the financing. And that's all I want to talk about tonight on Yamal LNG. So, please, for the rest of the questions, I'm not going to answer any more questions related to the financing.

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 Alex Fak,  Sberbank CIB - Moderator   [19]
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 Okay. Thank you very much.

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Operator   [20]
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 Farid Abasov, Standard Bank.

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 Farid Abasov,  Standard Bank - Analyst   [21]
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 I have two questions, if I may. My first question is regarding your decline rates at the core fields, and specifically Yurkharovskoye. I noticed that the condensate actually posted quite a steep decline. What are your expectations, going forward?

 The condensate decline rate was a result -- a function of the overall gas decline and what do you expect going forward? Should we model a sort of 7% year-on-year decline? This is first question.

 And two is could you please clarify your take-or-pay volumes for domestic sales? What is the minimum amount that has a commitment from your clients for the next five years? If you could elaborate on this, I would be really grateful. Thank you.

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 Mark Gyetvay,  NOVATEK - CFO   [22]
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 On the first question, again, without elaborating in too much details on the decline rates, our Yurkharovskoye field -- just as well as our other fields, our East Tarkosalinskoye field and Ontriskoy. Our East Tarkosalinskoye field was producing gas since 1998, so, naturally, some of the wells in that particular field are in various states of decline.

 Yurkharovskoye and Khancheyskoye field were launched in 2002 and 2003, and some of the earlier fields -- sorry, earlier wells of those fields are in a declining state. Part of the problem that we had in this particular quarter, the first quarter was, which I tried to explain on the call, that in 2014 we ran at a higher level on the production output for Yurkharovskoye.

 So it's not a direct function of notable declines in the overall gas. We planned to be at a plateau level, what we call peak level, beginning toward the latter part of this year. We've also had that unplanned shutdown.

 But I have to say, and we reported it over the years, is that the concentration of condensate inside the gas stream declines at a faster rate than the gas. So, over time, due to pressure differentials down the hole, the wet gas becomes more dryer, and this is just a fact of the operating model. Mr. Mikhelson has explained that on prior conference calls; we've talked about it many times. It's even mentioned in our MD&A that we have this particular issue. It's not unique to our fields, it's just a function of declining pressures.

 So I really can't give you a good estimation on what will be an acceptable decline rate for you to model. I think what you need to do is just look at it for the rest of the year as we plan to correct some of these issues that happen as a result of stabilizing the production at the Yurkharovskoye field.

 In your second question, again, we don't specifically give terms and conditions of our gas contracts. So, again, I will refrain from answer on the take-or-pay question in that regard.

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 Farid Abasov,  Standard Bank - Analyst   [23]
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 Thank you. Thanks, Mark.

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Operator   [24]
------------------------------
 Ildar Khaziev, HSBC.

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 Ildar Khaziev,  HSBC - Analyst   [25]
------------------------------
 Mark, I have a question about SeverEnergia. Can you share with us when you expect the debt repayments to start? And what sort of [yielding] amounts do you expect to receive, going forwards? Thank you.

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 Mark Gyetvay,  NOVATEK - CFO   [26]
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 Can you just explain, what do you mean by yielding amounts going forward? I don't understand your question.

------------------------------
 Ildar Khaziev,  HSBC - Analyst   [27]
------------------------------
 No, I mean you have provided some financing for SeverEnergia, right, along with your partner, and my question was when do you expect this venture to start paying back the debt?

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 Mark Gyetvay,  NOVATEK - CFO   [28]
------------------------------
 Okay, well, I can tell you today already that SeverEnergia has already started paying back its debt, so that process has already begun.

------------------------------
 Ildar Khaziev,  HSBC - Analyst   [29]
------------------------------
 And then what sort of instalments -- yearly instalments do you expect?

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 Mark Gyetvay,  NOVATEK - CFO   [30]
------------------------------
 I don't want to get into that granularity about how much we have to pay each quarter at this particular point. All the point is, is that we are starting the process of repaying back the SeverEnergia debt.

------------------------------
 Ildar Khaziev,  HSBC - Analyst   [31]
------------------------------
 Okay, thank you.

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Operator   [32]
------------------------------
 (Operator Instructions). Artem Konchin, Otkritie.

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 Artem Konchin,  Otkritie - Analyst   [33]
------------------------------
 As usual, my favorite topic, your downstream net backs. I wanted to ask you, Mark, if you can tell us that we are out of the woods by now and that the numbers we're seeing, as far as differences in realized prices and the prices of the acquisition of your stock, the unstable condensate, if we are back to normal.

 And moving forward, what your feelings are for the pricing environment for the NAFTA [net of] duty, and domestic acquisition prices for the condensate. Thank you.

------------------------------
 Mark Gyetvay,  NOVATEK - CFO   [34]
------------------------------
 It's almost an impossible question to answer as a result they're based on spot market prices. So we're basically operating at more or less the [whims] of the market right now.

 I can tell you what the effect of the tax maneuver on our pricing and our net backs is obviously the net back of the fields are going to be lower, because we're paying more of the mineral extraction tax. But that is offset, on the other side, on the realizations we get, because it's offset by the change in the export duty.

 Now, I think it's kind of premature because the net back -- the export duty for, say, NAFTA was only reduced by 5%, and we should start seeing this over the next couple of years be a little more pronounced with the changes on the reduction in the export duty rates. But just to say that we're kind of a marginal benefactor of these changes.

 But to predict and analyze what our net backs are going to be, or what the price will be on a specific market, it's almost impossible to do at this particular time. You're just going to have to wait until we actually report the numbers on each quarter.

------------------------------
 Artem Konchin,  Otkritie - Analyst   [35]
------------------------------
 Okay, thanks. Fair enough.

------------------------------
Operator   [36]
------------------------------
 Thank you. There are currently no more questions in the queue.

------------------------------
 Mark Gyetvay,  NOVATEK - CFO   [37]
------------------------------
 Okay. Well, then thank you very much for your time this evening. And we look forward to reporting to you on the second quarter, and any additional information in the future. Thank you very much.

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Operator   [38]
------------------------------
 Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.




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