Half Year 2015 Novatek OAO Earnings Call (IFRS)

Jul 30, 2015 AM CEST
NVTK.MZ - Novatek PAO
Half Year 2015 Novatek OAO Earnings Call (IFRS)
Jul 30, 2015 / 01:00PM GMT 

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Corporate Participants
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   *  Mark Gyetvay
      Novatek OAO - CFO & Deputy Chairman of the Management Board

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Conference Call Participants
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   *  Alex Fak
      Sberbank CIB - Analyst
   *  Karen Kostanian
      BofA Merrill Lynch - Analyst
   *  Alexander Nazarov
      Gazprombank - Analyst
   *  Maxim Moshkov
      UBS - Analyst
   *  Ksenia Mishankina
      UBS - Analyst
   *  Artem Konchin
      Otkritie Capital - Analyst
   *  Nikola Ivanov
      Prudential Financial - Analyst
   *  Ildar Khaziev
      HSBC - Analyst
   *  Evgeny Stroinov
      Renaissance Capital - Analyst

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Presentation
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Operator   [1]
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 Good day and welcome to the Novatek second quarter and first half 2015 results conference call. Today's conference is being recorded. (Operator Instructions).

 At this time, I would like to turn the conference over to Alex Fak, oil and gas analyst of Sberbank CIB. Please go ahead, sir.

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 Alex Fak,  Sberbank CIB - Analyst   [2]
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 Hello and thanks for joining this call hosted by Sberbank CIB. I am now pleased to introduce Mark Gyetvay.

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 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [3]
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 Thank you, Alex. Ladies and gentlemen, shareholders and colleagues, good evening and welcome to our second quarter 2015 earnings conference call. I would like to thank everyone for joining 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 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 risks and uncertainties and reflect our views as of the date of this presentation. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events.

 Please refer to our regulatory filings including our Annual Review for the year ended December 31, 2014, as well as any of our other earnings press releases and documents throughout the past year for more description of the risks that may influence our results.

 This week we celebrated our 10th anniversary as a publicly listed company on the London Stock Exchange and we are very proud of the many accomplishments achieved during this period.

 Specifically, we began 2005 with an SEC proven reserve base of 4.2b barrels of oil equivalent, and as of December 31, 2014, our proven reserves total 12.6b barrels of oil equivalent.

 Our gas production aggregated 20.9b cubic meters to begin our journey and we ended 2014 at 62.1 BCM.

 Although our liquid business is much more prominent today than it was at the time of the IPO, we have grown our liquid production from 2.1m tonnes to 6m tonnes at yearend 2014. And as you can see from our current results, we have significantly ramped up liquid production with the launching of several new fields this year.

 Our compound annual growth rate, or CAGR, has averaged roughly 11.5% over the past decade for reserves and gas and liquids production.

 More impressively, we have converted our proven reserves into revenue and operating cash flows, and during this respective period, we have grown our revenues from approximately RUB25b to RUB356b (sic - see documentation page 2 'RUB357.6b'), and our EBITDA has increased from RUB8.7b to approximately RUB160b, represented a CAGR of 31% and 34%, respectively.

 We have grown our business according to our ambitious strategic plans through various commodity and business cycles, and today we remain one of the lowest cost producers in the global oil and gas universe, a testament to our focus on cost control and project execution.

 Correspondingly, our market capitalization has increased from $5.1b to approximately $30b during this year period.

 We remain very optimistic about our future exploration and development prospects, as well as consistently demonstrating the cash generative nature of our business model.

 Yamal LNG remains front and center in investors' minds when speaking about Novatek. So I will begin tonight's discussion on current developments as has been customary on my earnings conference calls.

 As of today, the project shareholders have directly invested approximately $9.7b into the project and an additional RUB75b or approximately $1.2b was received from the National Welfare Fund of the Russian Federation was obtained from the Ministry of Finance via a subscription to bonds issued by Yamal LNG.

 We and our partners have recently signed a guarantee to the Ministry of Finance for our respective interests in the Yamal LNG project, which was a precondition for the release of the second tranche of financing from the National Welfare Fund. We anticipate receiving the second tranche or RUB75b over the next several weeks.

 Equally important has been the substantial progress made in respect to finalizing the external financing package for Yamal LNG. As we have stated publicly many times, we anticipate having external financing in place for the project in 2015.

 Without going into specific details on this conference call, I will state that we have substantially completed all of the major negotiation points and the completion of the project's financing term sheet is imminent. When the external financing package is completed, we, together with our partners Total and CNPC will make the appropriate announcement.

 For now, this information is all that we'll discuss on tonight's call and we will not elaborate any further information or details on this topic during the question and answer session.

 As for the Yamal LNG project, we continue to make progress according to our scheduled program, and as of June 30, 2015, we are approximately 32% complete towards the cumulative EPC contract for Train 1 construction. So far, 32 production wells have been drilled and completed with three Arctica drilling rigs in operation and a fourth rig scheduled to be mobilized later in 2015.

 The LNG plant site preparation is approximately 92% complete, including 100% of the land backfilling for Train Number 1. We have also completed ahead of schedule the piling for the west and south interconnecting pipe racks. Significant work activities are now progressing for the compressor lines and all six turbines produced by General Electric are presently in Italy for full load testing.

 We now anticipate the first LNG project modules to be delivered in September rather than August and 10 module transport vessels have been secured for the delivery of this equipment to Sabetta.

 As previously reported, we have made progress with all long-lead items, and at the end of June 2015, approximately 43% of the overall cryogenic LNG tanks construction works have been completed. We are presently preparing for roof concrete work on tanks 1 and 2, and the construction of outer concrete walls is currently underway for tank number 3. All remaining piling works for tanks 3 and 4 have been completed.

 We have begun erecting the steel structures for the 376 megawatt power plant and we are approximately 33% complete with overall construction works as of the end of June. We're anticipating the arrival of the first two gas turbine units manufactured by Siemens to be delivered to the site during September.

 Ongoing infrastructure work at the port and the ice barrier continued throughout the reporting period and, during the first six months of 2015, 65 cargoes were unloaded, with roughly 782,000 tonnes of cargo. And we have also completed approximately 85% of the construction works on the southeastern ice barrier. Rosmorport will commence ongoing dredging operations during the navigation season from late July until the end of October.

 There are currently 10,000 workers presently on site, and we anticipate this number to reach roughly 14,000 workers by yearend. The Sabetta airport has been operational for domestic flights since February 2015 and, during this period, approximately 30,000 passengers have been served. There are daily flights from Novy Urengoy as well as Moscow and Samara, and we anticipate that flight certifications will be attained in 2015 to accept certain direct international flights as well as performing customs services at Sabetta.

 In other operational news, we had a successful second quarter launching a couple of new fields as well as ongoing exploration activities on the Gydan Peninsula. In April 2015, we launched the Yaro-Yakhinskoye field, representing the third field to be successfully launched at Arcticgas. Thirty-seven condensate wells have been drilled and put into commercial operations, and the field's peak production is 7.7b cubic meters of natural gas and 1.3m tonnes of gas condensate. The field reached its full production capacity in June.

 Currently, the Arcticgas joint venture is producing more than 70m cubic meters of natural gas and 20,000 tonnes of gas condensate, which on annualized basis translates into roughly 27b cubic meters of natural gas and 7.5m tonnes of gas condensate per year, respectively.

 Our development activities at Arcticgas, formerly referred to as SeverEnergia, have transformed our liquid business and have largely been responsible for the significant increase on our gas condensate output.

 On a combined field basis, we have achieved an output level for gas condensate that exceeds our initial production plans by more than 15% or roughly 1m tonnes on an annualized basis.

 We and our partner, GazpromNeft, are presently studying exploration development plans on two additional fields within the joint venture, along with preliminary studies on future crude oil production at Arcticgas.

 In May 2015, we launched the Termokarstoye gas and gas condensate field along with our joint venture partner Total into commercial production, almost a year ahead of its original plan launch and under budget for the field's proposed development plan. The field's production capacity is 2.3b cubic meters of natural gas and 800,000 tonnes of de-ethanized gas condensate per annum. And by the end of June, we achieved the field's projected daily output levels.

 These two launches contribute approximately 8% of our total natural gas production and approximately 16% of our overall liquids production on an annual basis. At a combined 100% working interest, the two fields will produce approximately 85m barrel of oil equivalents per annum or roughly 230,000 barrels of oil equivalent per day, a significant contribution by any measure and one of the main reasons supporting our expected production growth in 2015.

 We also plan to commission our third new field this year, the Yarudeyskoye field during the fourth quarter, which is primarily a crude oil field with expected annual output of 3.5m tonnes. The majority of the field's infrastructure is already completed, including the crude oil and gas pipelines, as well as the drilling of 27 production wells, representing about 44% of the field's overall development drilling plan.

 We anticipate that once this field is commissioned, we will quickly ramp up production to 3.5m tonnes, again contributing to our estimated growth in 2015, but more likely one of the main drivers of production growth in 2016 based on full year run rates.

 For the six months of 2015, we have drilled and completed 52 production wells versus 80 production wells in the corresponding six-month period, including 100% of our joint ventures. Our overall development drilling plan calls for the drilling of 103 wells in 2015.

 We are actively conducting exploration activities on the Gydan Peninsula, most notably at the Utrenneye field. Four exploration wells have been drilled at the field and are currently being tested.

 In 2015, we conducted mainly three-dimensional seismic activities, and as of today we have run and processed approximately 1,985 square kilometers of 3D seismic as well as the previously-run and processed 2,197 kilometers of 2D seismic. The whole field is essentially covered with both 2D and 3D seismic and, accordingly, we are updating our subsurface geological models based on this seismic information.

 During the second quarter 2015, we discovered three new gas deposits and one gas condensate deposit as a result of our efforts. We are very optimistic about the future perspective of the Gydan Peninsula as this geographical area represents the next evolution of Novatek's long-term strategy and the primary feedstock for our future plans to expand LNG output.

 As you know, all of our 100%-owned license areas on the Gydan Peninsula received the same legal status of Yamal LNG and accordingly we have already received formal regulatory approval for both export rights and fiscal tax concessions as those received by Yamal LNG for the liquefaction of natural gas into exportable LNG.

 In the second quarter and first half 2015, we processed 2.9m tonnes and 5.4m tonnes, respectively, of unstable gas condensate at the Purovsky processing plant, representing an increase in process volumes by 105% and 93% as compared to the comparative reporting periods in 2014.

 The Purovsky plant increased its throughput capacity as a result of increasing volumes of de-ethanized gas condensate production at our producing fields and joint ventures, and, by quarter-end, was operating at 120% of its designed capacity of 11m tonnes per annum.

 The Purosky plant processed 2.9m tonnes of de-ethanized gas condensate, producing 2.4m tonnes of stable gas condensate and 526,000 tonnes of LPG. Average daily throughput increased to 35,000 tonnes in June 2015, which represents a more than two-fold increase than in June of the corresponding 2014.

 During the second quarter 2015, the Ust-Luga Complex processed 1.7m tonnes of stable gas condensate into 1.7m tonnes of refined end-products, including 1m tonnes of heavy and light naphtha and 700,000 tonnes of refined petroleum projects, representing a year-on-year increase of 69%.

 The Ust-Luga Complex has reached its full design capacity as a result of the increasing process in unstable gas condensate volumes at the Purovsky plant and is currently operating at 113% of its nameplate capacity of 6m tonnes per annum.

 The seasonally adjusted financial and operational results we have achieved in the second quarter, as well as for the first half of 2015, remained strong despite weaker natural gas sales due to warmer weather and the inability of one of our major customers to off-take the full contractual volumes due to an accident in one of their facilities and were mainly driven by increasing volumes of liquids in our total product mix.

 The most notable trend continued to be the significant growth in our liquid output with the new field launches, as previously mentioned, and the full year run rates on prior-year launches. Our total liquid output produced, combined with the purchases from our joint ventures, increased 69% year on year and 15% quarter on quarter.

 With the ramp-up of our liquids production in 2015, as promised in our strategic plans, our liquid revenues represented 54% of our total sales, even though we continued to operate in a volatile commodity market whereby the benchmark reference price for the majority of our products were substantially reduced by roughly 40% to 45% year on year, although we had a slight recovery of commodity prices quarter on quarter.

 Our growing liquid business has changed the fundamental dynamics of our business profile and we expect robust cash flows as we transition towards higher value, risk-adjusted margins and sustainable shareholder value creation.

 Despite the weaker gas sales in the second quarter 2015, we managed to slightly grow our average netback margins year on year and quarter on quarter, although our average distance to market per kilometer increased by 9% and 20%, respectively.

 Sequentially, we significantly increased the volume of natural gas sold to the city of Moscow by 1.8b cubic meters as compared to the first quarter, which were offset by decreases in volumes sold to both the Chelyabinsk and Kostroma regions.

 The changing geographical mix and its corresponding impact on transport costs per million cubic meters affects the netback we receive for our gas volumes sold. Our proportional mix between end-customers and wholesale traders was slightly lower than the prior reporting periods at 93% and 7%, respectively.

 The regulated tariff for natural gas and transport charges were approved on July 1 by the regulator, formerly known as the FTS, and accordingly, were raised by 7.5% and 2%, respectively. This represents the first time that the regulators have approved a notable difference in the percentage between both the gas price and the transport tariffs, recognizing our request for a more balanced approach to maintaining the relative profitability of domestic gas sales for independent gas producers.

 Our total revenues and adjusted EBITDA increased by 27% and 24%, whereas our normalized net profit increased by 31%. Net cash provided by operating activities increased year on year by RUB6.7b or by 28%, which meant that we generated free cash flows of RUB15b or 262% higher than the comparative reporting period.

 Capital expenditures are declining towards maintenance mode, and this trend has been noted over the past several periods, with the changing mix of our quarterly capital expenditures. And during the second quarter, we spent RUB15b during the quarter, of which RUB7.1b was used for the ongoing work activities at the Yarudeyskoye field to support the launch of the new crude oil field in the latter part of 2015.

 The East-Tarkosalinskoye field accounted for RUB2.5b of the capital spent, mainly on further development of the field's crude oil layers, with the remaining funds dispersed among the Yurkhavoskoye field and the Utrenneye field at RUB2.3b and RUB1.3b, respectively, and other smaller field activities.

 This trend is important as we anticipate that our estimated capital expenditures in 2016 will be almost 50% less than the projected full amount spend in 2015. The intensity of the capital program is reflective of our commitment to realize our strategic goals and objectives. And with the five-year midterm portion of our 10-year strategy from 2011 to 2020 fast approaching realization, we have achieved our main aim of expanding and building out our processing capabilities as well delivering value-added margins with our liquid production growth.

 Our current Investor Relations presentation package includes a recap of what we have achieved over the past five years relative to our strategic objectives. And I would encourage both investors and analysts to review this information as it clearly demonstrates our longstanding practice of delivering results according to our announced plans and serves as a good benchmark of the robustness of our financial and operational results relative to our global peers.

 In line with the growth of our business, we had corresponding increases in our total operating expenses by approximately 43% year on year, largely due to increases in our transport and tax obligations, considered non-controllable and volumetric, but more importantly, by a significant increase in the purchases of natural gas and liquids, mostly from our joint ventures, and, to a lesser extent, from third parties.

 The purchase of hydrocarbons as a relative proportion of our overall operating expenses increased significantly due to the combined growth in production output by our joint ventures. The purchases of gas condensate from our joint ventures accounted for 79% of the total expense category in Russian ruble terms, with the majority of purchases from the Arcticgas joint venture. We continue to purchase natural gas from third parties, mainly SIBUR, and our joint ventures for all reporting periods to support our gas marketing efforts.

 General and administrative expenses were reasonably in line with our expectations as we continued to demonstrate strong cost control across all of our controllable expense categories. As I mentioned in our first quarter conference call, we did not experience any accelerated inflation pressures as far as operating expenses are concerned, and more specifically, in our general and administrative category. Effective July 1, we indexed our general base salaries for the Group at 7%, which supports this observation.

 In the present reporting period, our employee compensation was higher than we internally forecasted, due largely to the payment of a prior-year performance bonus in the quarter, which accounted for approximately 68% of the increase, that was higher than the amount originally accrued combined with increased headcount in the Group by 120 new employees and the corresponding changes in benefit payments.

 Our total headcount, including administrative and operational personnel, increased from 5,786 employees to 6,637, or by 581 new employees, largely due to the prior acquisition of NovaEnergo and the expansion of our business activities.

 Our balance sheet and liquidity position remained strong through the reporting period, although we moved RUB85b in long-term loans to the current portion of short-term debt, reflecting our quarterly payments of the syndicated facility as well as the expected retirement of the $600m tranche of our five-year Eurobond during the first half of 2016.

 Our total debt position increased year on year from RUB161b at June 30, 2014 to RUB242b 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.

 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 mature or become due for payment.

 The Company's ability to generate cash flows is clearly supported by our growing liquids business despite the volatile commodity pricing environment and represents one of the main fundamental changes underlying our transformation into a global energy company.

 Another important point to highlight is the Company's ability to generate robust free cash flows. In the first half of 2015, we generated free cash flows of RUB40.4b versus RUB17.9b in a comparative period despite a significant decrease in the benchmark crude oil prices during this period. We are confident in our ability to sustain robust free cash flow as we move into the next phase of our corporate development.

 In conclusion, w have once again, delivered solid financial and operational results for the second quarter of 2015 and for the first half of 2015. Equally important, we continue to deliver on our strategic objectives which are a testament to the dedication, commitment and hard work of all of our valued employees.

 We have an exceptional group of people at Novatek, and our subsidiaries and joint ventures, and I want to take this opportunity to credit them for our continued success.

 Without question, the current environment in the oil and gas sector globally is challenging, and you can clearly see this point through financial and operational results as well as the recent announcements by many of our global peers to cut capital expenditures and reduce employee headcounts.

 You can then add another layer of complexity and challenges with the current sanctions in place, and it would be easy to make a myriad of excuses on why goals and objectives are not being met.

 But this is not the case at Novatek. We have accepted these challenges and continue to exceed market expectations with solid financial and operational results. We have not cut our capital expenditures, but continued to make the appropriate investments to grow our business and create value for our shareholders.

 Ten years have passed since we completed our IPO, and initiated trading of Novatek shares on the London Stock Exchange and our business has grown over these years to a point where we are now a formidable player in the global oil and gas industries.

 A lot has changed over this period, but one thing remains constant. We have delivered everything we have promised to our shareholders.

 The next major event is obviously the launching of Yamal LNG and the further transformation of our Company into an international gas player.

 We have made great progress on delivering this next stage of transformation and as of today, we have a group of investors visiting the site at Sabetta. I am sure their impression will reflect the enormity of construction activities presently taking place at the site, but also observing and hence intuitively recognizing the scale and size of our eventual footprint into the global LNG market.

 We truly understand that the main topic on everyone's mind is a closure of the financing package for Yamal LNG, and I can say tonight that we are very close to finalizing this process which I am also reiterating the recent comments made by our CEO, Mr. Mikhelson, as well as the periodic updates I receive from my colleagues.

 We will continue to provide timely updates and notification on the progress of our works including the status of closing the external financing package.

 I would like again to thank everyone for attending tonight's earnings conference call and your continued support of our Company. I would like to now end tonight's prepared comments and open up 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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 Thank you, Mr. Gyetvay. (Operator Instructions)

 Alex Fak, Sberbank CIB.

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 Alex Fak,  Sberbank CIB - Analyst   [2]
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 Mark, thanks very much for the presentation. Two questions from me.

 First of all, on the crude oil output potential and in particular, on the Yarudeyskoye field. I was wondering if you could update the guidance for whether we can expect production there to start in the fourth quarter or maybe even in the third quarter and how much crude oil you expect to produce there?

 And the second question relates to the potential 9% stake in Yamal LNG, that was discussed previously. Is that being negotiated at all? And if so, is it in any way, connected to the project financing negotiations for Yamal LNG? And if so, can we expect an announcement on that at about the same time as their announcement on project financing? Thanks.

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 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [3]
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 Thank you, Alex.

 As to your first question on the crude oil output, I mentioned that we plan to launch the Yarudeyskoye field in the latter part of 2015. Obviously, you know, its impact on our crude oil production or liquids production in total will be dependent on the day it's actually launched. But I can say that once we launch it, we anticipate that we will be able to almost immediately ramp up to 3.5m tonnes.

 But I can't give you the exact date as to when we expect to make that announcement or launch. Once we know that, we will inform the market.

 As to your second question, regarding the 9% stake, I can say tonight that we are at advanced stages of negotiation on the stake and that's all I will be able to talk about today. If and when it is completed, we will make the appropriate announcement to the market.

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 Alex Fak,  Sberbank CIB - Analyst   [4]
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 Mark, thanks, and just a very quick follow-up on capital expenditures. Can you update the guidance for 2015 in ruble or dollar terms and also for 2016?

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 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [5]
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 Capital expenditures for 2015 have not been changed, and it is estimated at roughly about RUB50b. And as I mentioned, we're anticipating that 2016 will be roughly half of that amount. We will provide the formal announcement once the final capital expenditure plan is prepared and has been approved by the Board of Directors in late December.

 But by all indications, as of today, you know, we can see that the capital intensity of our program is declining as we move to maintenance mode and I fully anticipate that that number will be reduced by at least 50%.

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 Alex Fak,  Sberbank CIB - Analyst   [6]
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 Okay. Thank you very much.

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Operator   [7]
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 Karen Kostanian, Bank of America Merrill Lynch.

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 Karen Kostanian,  BofA Merrill Lynch - Analyst   [8]
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 Mark, thank you very much for the presentation. I have two questions.

 So the first question as we wait for the financing for Yamal LNG, and are they --- are there any potential delays to implementation of the project [construction] and how are you funding it in the meantime while you are waiting for the financing to be in place? Is it from internal cash flows; are partners contributing to that as well?

 And my second question comes regarding your strategy and congratulations on completing the five year goal. Now, are you currently working on releasing a long-term strategy? When should we expect that and can you provide a potential date or the scope of this presentation?

 Thank you.

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 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [9]
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 Karen, thank you very much and good evening.

 As to your first question regarding the fund and the timing of funding, there is no delays in the project construction as I have mentioned. We've continued through -- with shareholder funding as we mentioned before and I believe the number was about [$9.2b] at the end of the first quarter. And I said today, it was [$9.7b] at the end of June.

 We are anticipating the release of the next tranche of the National Welfare Fund in the upcoming weeks, of RUB75m. And as I mentioned, we are at the very end of the negotiations on the term sheet. So I believe that we're pretty much funded from the shareholder perspective but it's also my understanding that the shareholders have agreed to continue financing the project until such time as the funds are received from the external financing.

 But right now, I can say without question, there is no delays in the project at all.

 Second, in relation to the strategy question, again, thank you for the recognition of the five years. And we are currently working on updating Novatek probably to 2025, I would say, so taking us on the ten-year horizon, largely, probably related to information about the -- our ambition on the Gydan Peninsula.

 Right now, I don't have a timing for the update. I spoke with Mr. Mikhelson on Monday about this point and you know, we would like to try to get something to the market as quickly as possible. Although we recognize that it has been delayed, but it's been delayed largely due to the fact that it's important for us to get additional information in line with Gydan to provide a kind of meaningful update on the next wave of strategy development.

 So I think it's just -- it will be just a -- helpful to be a little more patient as we continue moving forward with the exploration work at Gydan, as well as some of the other ancillary work we are doing in terms of potential expansion of LNG, being the Arctic LNG 1, 2, and 3. And I believe that will really underscore what we will talk about in the next update on strategy.

 So I would just ask for a little more patience on that and we will get it to the market as soon as we feel comfortable that we have sufficient material to talk to.

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 Karen Kostanian,  BofA Merrill Lynch - Analyst   [10]
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 Okay. Thank you very much, Mark.

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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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 Good evening, Mark. Thank you very much for your presentation. I have two questions as well.

 First, sorry for asking this again but on Yamal LNG financing, as far as I can see from the report, Novatek financing for the loans was basically zero in the second quarter. Did I understand it correctly? Probably this is not true.

 And the second question is on actually, the marketing of gas condensate. I see from the report that the main increase of the sale of your excess gas condensates, I understand that Ust-Luga capacity are fully utilized. But the main sale of the -- the main sale of the parts of excess gas condensate is -- was domestically, while again, I see that export [NASDAQ] price for gas condensate is more than RUB5,000 higher.

 Can you please elaborate on that? What's Novatek marketing strategy of excess of gas condensate? Why you are selling so much on domestic market? Thank you.

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 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [13]
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 Okay. Thank you, Alex.

 In relation to your first question, again, I'm going to limit my comments on Yamal LNG finance and -- but you are right in your assessment on the impact quarter on quarter. It is my understanding that we will complete a sort of a carry [this portion of] finance at the end of this month, and so that shows that Novatek did not make a significant contribution.

 I think we are pretty comfortable with the levels of financing to date so far, given what we have already contributed as a shareholder as well as the funds that we've received from the National Welfare Fund.

 The second question, you're right to point out that as a result of increase in unstable condensate being processed by the Purovsky plant, as well as reaching almost full capacity of processing stable gas condensate at the Ust-Luga complex, we've commenced selling quantities of gas condensate on the market.

 And that commenced I think roughly in about March of 2015, so sort of at the end of the first quarter. Right now, we have signed an agreement with GazpromNeft whereby they will take approximately 1m tonnes of gas condensate at the Purovsky plant tailgate and that is where we stand right now. And anything above the 1m times, we will market on the export markets. And that's really about all I can comment on this particular point at this time.

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 Alexander Nazarov,  Gazprombank - Analyst   [14]
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 So, you just sell about 1m tonnes a year?

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 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [15]
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 Yes, as I said we have a contract, a negotiated contract with GazpromNeft to sell them 1m tonnes of gas condensate at the Purovsky processing plant tailgate.

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 Alexander Nazarov,  Gazprombank - Analyst   [16]
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 Okay. Thank you very much, Mark.

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 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [17]
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 You're welcome.

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Operator   [18]
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 Maxim Moshkov, UBS.

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 Maxim Moshkov,  UBS - Analyst   [19]
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 Hello, Mark. Thank you for your presentation. I have a couple of questions on (inaudible).

 So the first question is regarding your generation, the biggest one, SeverEnergia. So the -- could you name what is the outstanding debt of SeverEnergia and then do you expect dividends from SeverEnergia to be paid, this year or next year?

 And also regarding the Arcticgas, the joint venture, it seems to me that you are quite happy that the joint ventures are now self funded, potentially including Yamal, if we see some project finance will be granted.

 And regarding the repayment of the loans being already provided to joint ventures, so I think the free cash flow improvement is happening with the Novatek and the -- also with the joint ventures. Would you expect like earlier repayment of these shareholder loans [that were provided to] the joint ventures?

 And the proposals regarding the joint ventures again, so it seems that the contribution from them is kind of increasing quite dramatically. Would you consider improvement of the disclosure of the transactions like (inaudible) revenues, EBITDA and net income, maybe also net debt by all big material joint ventures? Thank you.

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 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [20]
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 In relation to your first call, Maxim, I don't have the -- in front of me the outstanding debt of SeverEnergia so I'm not really going to talk about that topic at this point.

 But in relation to dividends, most of the dividends we received in the second quarter came from Nortgas and we expect sometime during the latter part of the year that we should be starting to receive dividends from the Arcticgas joint ventures.

 The second question, it is hard to say right now, if there is any -- you know, we have outstanding shareholder loans, it is self financing, as you rightly said. Whether or not there would be any early repayments on the loan facilities, we have certain tenures which we established on these loans. If we feel that it is prudent to early repay we'll do that, but I don't really have any substantive comment to make on this at that point.

 I think it's really up to the joint ventures to decide according to their scheduled cash flows and needs on what the repayment schedule would be.

 And your third question on disclosures, it's -- I understand and we are constantly, as joint ventures continue to take a larger proportion of our business, that it's inevitable that we will continue tweaking the disclosures on that. And we've already started as you can see on the EBITDA and profit levels.

 Whether or not we will put any more disclosures, I think I'll just have to sit there and talk with my reporting team to see how -- what makes sense for us and potentially look at sort of benchmark comparative reporting disclosure by other companies, etc. I don't think we will provide any more detail than what's really currently acceptable practice in the oil and gas industry. But I understand that we will look at this -- continue to look at this as joint ventures become a large portion of our business.

 So right now, I can't give you a definitive yes or no answer. But we are constantly tweaking the levels of disclosures to make it more transparent and easily understood by our investors and analysts alike. So I think you'll just have to wait on that point.

 Next question?

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Operator   [21]
------------------------------
 Ksenia Mishankina, UBS

------------------------------
 Ksenia Mishankina,  UBS - Analyst   [22]
------------------------------
 Hi. Thank you for the presentation. I have one question.

 Could you please indicate whether you plan to refinance your short-term debt or repay it? Thank you.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [23]
------------------------------
 Right now, it's scheduled for repayment.

------------------------------
 Ksenia Mishankina,  UBS - Analyst   [24]
------------------------------
 Thank you very much.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [25]
------------------------------
 You're welcome.

------------------------------
Operator   [26]
------------------------------
 (Operator Instructions). Artem Konchin, Otkritie Capital.

------------------------------
 Artem Konchin,  Otkritie Capital - Analyst   [27]
------------------------------
 Hi Mark, and everyone. Congratulations on the strong results.

 I have one question on today's statement by the [federal] tariff regulators, who said that they are favoring to replace Gazprom's 16% potential discount on gas price domestically with some sort of a unified transportation type tariff or schedule or whatever. I was curious if you could shed some light as to what it could mean in terms of the industry impact and the impact on your particular company?

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [28]
------------------------------
 Artem, unfortunately, I have not seen that yet. So I mean if it just came out today, it would --

------------------------------
 Artem Konchin,  Otkritie Capital - Analyst   [29]
------------------------------
 At about 1.30 p.m.

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 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [30]
------------------------------
 Yes, I have not seen it and we will not make a comment until we have a chance to at least assess this impact. So you'll have to wait on that.

------------------------------
 Artem Konchin,  Otkritie Capital - Analyst   [31]
------------------------------
 Okay. And then just in case, maybe I can rephrase it. Have you heard of any kind of discussion with regard to changes -- potential changes in the tariff for gas expectation mechanisms or is this something new to you as well?

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [32]
------------------------------
 Not that I am aware of. I have not heard anything substantive about any changes in the [transport] tariff so (multiple speakers).

------------------------------
 Artem Konchin,  Otkritie Capital - Analyst   [33]
------------------------------
 We will just have to wait and see.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [34]
------------------------------
 If that is the case, obviously, it will get published and we will get a better sense of it, when everybody gets a chance to analyze exactly what it is.

 But just reading on the press, it's something that we would never comment until we have a chance to formally see what the regulation is, what's the changes, and have a chance to assess its potential impact on the Company and our transportation rate. But we have not seen that and I have not heard that yet.

------------------------------
 Artem Konchin,  Otkritie Capital - Analyst   [35]
------------------------------
 Okay. That sounds fair. It's just that he was kind of vague and misleading in terms of what he said and I was curious if you may have seen anything on the same topic over there. But anyway, thank you.

------------------------------
Operator   [36]
------------------------------
 Nikola Ivanov, Prudential Financial.

------------------------------
 Nikola Ivanov,  Prudential Financial - Analyst   [37]
------------------------------
 Hello, Mark. Thank you for the call. I have a quick question on cash and short-term debt.

 You have around RUB38b in cash and equivalents; however, RUB86b in short-term debt. You have also 180m available credit facility which is around RUB10b ballpark. So how are you going to get the financing for the rest? You said that you're going to repay short-term debt?

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [38]
------------------------------
 Right now, we're paying on a quarterly basis on our debt position as it becomes due. We have already made payments beginning in June for the syndicate facility. We are in the process of also ramping up liquids as you see in the financial results, so we believe that we will have sufficient cash to generate to pay back these debts when they become due.

 So I mean, all I can tell you at this point, Nik, is that as we move along and we look at the debt servicing, we are fully aware of what's due and when it become due. We've always paid back our debt earlier or on time and we have never had any concern about that. And we don't anticipate that we will have any problem moving forward.

 I think another situation is -- you know, it is difficult for us as you can appreciate, looking at any way of refinancing the first tranche of the Eurobond that comes due at $600m with the sanctions in place. So it's inevitable that either we look at something in a different currency, if need be. But at this juncture right now, the plan is to pay it back when it becomes due.

------------------------------
 Nikola Ivanov,  Prudential Financial - Analyst   [39]
------------------------------
 Thank you.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [40]
------------------------------
 You're welcome.

------------------------------
Operator   [41]
------------------------------
 (Operator Instructions). Ildar Khaziev, HSBC

------------------------------
 Ildar Khaziev,  HSBC - Analyst   [42]
------------------------------
 Good evening. I have one small question about the share of profit from associates.

 Is it possible at all to break down the $8b number which we reported as a profit from operations in the second quarter into the SeverEnergia, Nortgas and Yamal, if it's [all applicable]. Thank you.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [43]
------------------------------
 We -- I don't think we're doing that on a quarterly basis, we do that on an annual basis. So that might be one of the changes that Maxim of UBS mentioned about also changing a little bit the disclosures. So we're talking about that now and -- but right now, we just disclosed it on a quarterly basis combined where on an annually, we did it on a breakdown by ventures. So that is something that we will look at. Okay?

------------------------------
 Ildar Khaziev,  HSBC - Analyst   [44]
------------------------------
 Okay. Thanks.

------------------------------
Operator   [45]
------------------------------
 Evgeny Stroinov, Renaissance Capital

------------------------------
 Evgeny Stroinov,  Renaissance Capital - Analyst   [46]
------------------------------
 Hi Mark. Thank you very much for your presentation. I have a small question for you.

 You mentioned that you expect capital expenditures to fall significantly already in 2016. The question is will capital expenditures for your [core] fields also decrease and if yes, what effect will it have on production from your core fields?

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [47]
------------------------------
 (inaudible) is that yes, that will happen in terms of the reduction in the capital intensity. But we fully anticipated that we will be moving from what we call growth capital to maintenance capital and the maintenance capital will be spent to ensure the plateau levels of the field.

 So what we will be looking at is the maintenance capital will be used to either drill additional wells according to the total well count for the field and as well as you know, potentially put in some compressor stations when needed. But that's taking into consideration at the maintenance mode level, okay. So and then we have to balance out again, the basic natural declines that we experience on the fields due to its life of production. And so that is balanced out between what we expense between growth capital and maintenance capital.

 And so our core capital expenditure will decrease to maintenance. We don't anticipate any reduction in output at this particular juncture as a result of going into maintenance capital.

------------------------------
 Evgeny Stroinov,  Renaissance Capital - Analyst   [48]
------------------------------
 Thank you.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [49]
------------------------------
 You're welcome.

------------------------------
Operator   [50]
------------------------------
 (Operator Instructions). There are no further questions in the phone queue, we would like to turn the call back to Mr. Mark Gyetvay for any additional or closing remarks.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO & Deputy Chairman of the Management Board   [51]
------------------------------
 I'd just like to thank everybody for taking the time this evening to attend our call. And if -- we will be glad to provide you with further updates, particularly relating to the financing once we have that information in place.

 But again, thank you for your continued support and we look forward to seeing you when we are on the investor relation conferences or non-deal road shows.

 Thank you very much.

------------------------------
Operator   [52]
------------------------------
 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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