Q3 & 9M 2015 Novatek OAO Earnings Call (IFRS)

NVTK.MZ - Novatek PAO
Q3 & 9M 2015 Novatek OAO Earnings Call (IFRS)
Oct 29, 2015 / 01:00PM GMT 

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Corporate Participants
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   *  Alex Fak
      Sberbank CIB - Senior Analyst
   *  Mark Gyetvay
      NOVATEK OAO - CFO

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Conference Call Participants
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   *  Karen Kostanian
      Bank of America - Analyst
   *  Ksenia Mishankina
      UBS - Analyst
   *  Alexander Kornilov
      Alfa-Bank - Analyst
   *  Artem Konchin
      Otkritie Capital - Analyst
   *  Alexander Nazarov
      Gazprombank - Analyst

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Presentation
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Operator   [1]
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 Good day and welcome to the NOVATEK Third Quarter and Nine Months 2015 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alex Fak, Oil Analyst, Sberbank CIB. Please go ahead, sir.



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 Alex Fak,  Sberbank CIB - Senior Analyst   [2]
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 Good day, everyone, and thanks for tuning in. I'm Alex Fak with Sberbank CIB and I'm happy to introduce, Mark Gyetvay, the CFO of NOVATEK, and Alexander Palivoda, the Head of IR.

 I now hand over to Mark.



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 Mark Gyetvay,  NOVATEK OAO - CFO   [3]
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 Thank you, Alex. Ladies and gentlemen, shareholders and colleagues, good evening, and welcome to our third quarter 2015 earnings conference call. I would like to thank everyone for joining us this evening and again extend our sincere gratitude to Sberbank CIB for organizing and hosting our earnings conference call.

 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 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 the 31st of December 2014 as well as any of our earnings press release and documents throughout the past year for more descriptions of the risk that may influence our results.

 The commodities, currencies and equity markets continue to be extremely volatile during the reporting period with benchmark crude oil prices averaging $51 per barrel versus $62 per barrel in the second quarter and $102 per barrel in the third quarter 2014 as well as the depreciation of the Russian ruble to the US dollar by 19%.

 The news flow from the oil and gas sector globally remains quite bearish as companies slashed capital budget and announced large employee reductions to cope and survive during this period of low prices in the US oil and gas industry. Companies are beginning to [report asset] impairments and significant stress to balance sheet due to significant borrowings during periods of higher oil prices.

 The combination of these events has severely depressed equity valuations and is a recipe for continued stock-market volatility. Last week, I read a report stating that approximately $65 billion of asset impairments were announced by US oil and gas companies during the first half of 2015 and that this amount is expected to rise significantly over the next six months as banks monitor and assess asset bases to support reserve base lending determinations.

 In other recent industry news, the Edinburgh-based energy consultant firm, Wood Mackenzie, reported that as much as $1.5 trillion of investments destined to new North American oil and gas projects are uneconomical at a sustained $50 oil price level.

 These are staggering impairment numbers exceeding those already written off during the economic crisis of 2008 to 2010 as the oil and gas industry significantly leveraged the balance sheets through debt during the recent high commodity prices and again serves as a good proxy to consider low-cost producers and those companies with strong balance sheets in today's pricing environment.

 I'm glad to report that the malaise impacting the US and for that matter, the global oil and gas industry has not negatively affected NOVATEK and/or our Russian oil gas peers to the same degree, although we expect this overall reporting season to be generally weaker. As an exercise to assess our financial and operational performance, we recently benchmarked our operations against -- relative to -- and international peers comprised of super-independents and international majors by assessing the sources and uses of cash during the first half of 2015.

 As expected, the results were strikingly different as NOVATEK's cash flows from operation significantly exceeded our capital expenditure requirements, whereas our international peers and international majors either had to borrow money to fund their capital programs or resort to asset disposals. And in fact, it appears that both groups, international independents as well as international majors to some extent borrow funds and/or cut capital expenditures to make dividend pay-ins, which was not the case for NOVATEK and our Russian peers.

 So, why am I highlighting this analysis on tonight's call? Firstly, I wanted to specifically reiterate again the robustness of our financial and operational business model and its resiliency in lower commodity price market as was the case in the last commodity downcycle in 2008 and 2009. We maintained relatively strong financial performance metrics vis-a-vis the global energy sector and I believe that that will be the case in today's environment.

 Secondly, I wanted to stress some of the fundamental changes that are transforming our business. I had mentioned on previous conference calls that the intensity of our capital program is declining, which theoretically should improve cash-generating capacity of our asset base as well as returns generated from these same assets.

 We already announced substantial reductions in our capital program for our core asset base as we move forward from growth capital to maintenance capital over the next two years. This will free up discretionary cash flows for future growth projects, some of which we are currently assessing, and debt service prepayments among other things.

 Finally, the gradual shift in our hydrocarbon revenue stream from domestic natural gas to international liquid sales as this shift has improved our cash flows due to better commodity pricing and higher-value margins as well as balance in our future debt repayments with [WhiteCoin] foreign currencies.

 This process will continue to evolve as we move towards a formal launch of Yamal LNG and its export earning capacity and clearly distinguishes NOVATEK's cash flow growth prospects and our operational and capital cost advantages amongst our global energy peers. Our financial results continue to be distorted by abrupt movements in foreign currency markets.

 We reported another non-cash foreign exchange loss of RUB2.3 billion during the third quarter 2015 versus a non-cash foreign exchange gain of RUB1.3 billion in the second quarter at the Group level, but more notable was a significant non-cash foreign exchange loss at our joint ventures of roughly RUB37.5 billion.

 These non-cash foreign exchange movements, either gains or losses, have significantly distorted our net profit line and are driven by significant foreign-denominated borrowings at the joint venture level, mainly Yamal LNG as well as to some extent at NOVATEK from the prior issuances of dollar-denominated Eurobonds.

 To counterbalance this trend, we have significantly increased our foreign earnings capacities with the ramp ups of our liquid production over the past two years and we believe that this present foreign currency exchange issue does not represent a major problem for us in the future as the expected revenues generated from the Yamal LNG project will be denominated in foreign currencies combined with our present liquid growth, which represents a better match with future debt repayments.

 Despite the bearish operating environment and present volatile markets, we remain very optimistic about our future exploration and development prospects as well as our ability to consistently demonstrate the cash generative nature of our unique operations and the resiliency of our business model. We have built an asset base and cost structure that serves us well in these market conditions.

 The Yamal LNG project remains the dominant question among investors and analysts. So, I will provide the latest project status update as has been customary in the past. We remain very busy this past quarter at Yamal LNG and presently have 12,600 workers on-site as well as approximately 24,000 people working at construction yards involved in various module fabrications. There are approximately 2,460 construction vehicles on-site. So, it is quite active from both the standpoint of workers and equipment at the construction site.

 Yamal LNG financing continues to move forward as we are in the final stages of collecting credit approvals from financial institutions. As of today, the overall amount of credit approvals received, already exceed the $20 billion for the overall external financing stated in the term sheet. However, we are still waiting on some more credit approvals from international banks underlying some of the export credit agencies coverage.

 This process has been painstakingly slow as we are subjected to many different variables out of our control as well as the specific timing of credit committee meetings to review the term sheet and determine if additional questions and/or information is needed to finalize the respective decisions. Moreover, in parallel, we continue to work on all of the primary loan documentation to close the external financing, which is also an excessively time consuming process.

 I know this question is important to everyone and we have tried to keep all investors and analysts informed throughout this difficult process as best we can, but quite frankly, we are beginning to lose our patience with the excessive comments and a myopic focus on the singular point as we are trying to navigate through various ministerial meetings and discussions, various credit committees and intergovernmental requirements to name a few in a less than ideal macro and geopolitical environment.

 You have been thoroughly appraised of the construction progress throughout our previous earnings conference calls and tonight will be no exception. We have consistently provided everyone with the latest status regarding finances. So, we are asking you to remain patient as we finalize this process. As an example, it is my understanding that Shell was more than 80% of the cost funded during the (inaudible) project before they received their external financing. So, I believe we are at a good stage in the process as at tonight's call.

 As of today, the project shareholders have directly invested approximately $10 billion into the project, [$9.7 billion] as of the second quarter as well as an additional RUB75 billion or approximately $1.2 billion was received from the National Welfare Fund of the Russian Federation in February, which was obtained by the Ministry of Finance via the subscription of bonds issued by Yamal LNG comprised at a total of roughly [$11.2 billion] invested.

 We should receive the second and final tranche of funds from the National Welfare Fund shortly as all conditions have been met for the release of the RUB75 billion, but I can't tell you with complete certainty the exact date of this release. As I specifically stated on our last conference call, 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 I can discuss on tonight's call and I will not answer or elaborate any further questions or details on the specific question during the Q&A session.

 Overall, the LNG plant construction progress against EPC contract is approximately 36% complete at the end of September, including approximately 44% progress towards the completion of LNG Train Number 1. In September, we began receiving some long lead items and LNG plant modules at the Sabetta port and offloading, transportation to the installation point and installation works were successfully tested.

 Some of the equipment already received in the project site include the full set of equipment for two compressor lines from GE, including turbines fabricated in US, two boil-off compressors representing 100% of the equipment needed for Train 1 from Siemens, the first cryogenic pump from the US manufactured by Nikkiso Cryo, all three of the LPG strippers from Chart Energy in the United States and 25 low-friction pneumatic valves from Cameron US amongst various other equipment.

 The fabrication is the first cryogenic heat exchanger, there will be one per train manufactured by Air Products in US is completed and tested and is expected to be dispatched for shipment just about shortly with expected delivery sometime in the second half of November. So far, 37 production wells, as of the second quarter it was 32, have been drilled and completed with three Arktika drilling rigs in operations and a fourth rig, as I have previously mentioned, is being assembled on-site.

 We have completed roughly [18%] of the total wells needed to be drilled on the South-Tambeyskoye field or roughly 64% of the wells needed for first LNG train, although I understand from our recent discussion with our geologists that the current well stocks is already sufficient with the first train as the wells drilled have exceeded the plant flow rates.

 We continue to make progress on the interior walls, floors and installation for the cryogenic LNG tanks 1 and 2, with this work more than 30% complete as of the reporting period. And we have also completed the exterior walls for tanks 3 and 4 and [roof-in] work is presently underway for these tanks. The main building for the 376-megawatt power plant is practically complete, including the fully completed section for gas turbines.

 Four gas turbine units at 47 megawatts each, manufactured by Siemens, were delivered to the site as planned. Ongoing infrastructure work at the port and the ice barrier continued throughout the current reporting period. And as of the first nine months of 2015, cargo ships unloaded roughly 2.5 million tons of cargo and we have completed over 70% of the construction works on the South-Eastern ice barrier, which will be used for the LNG and gas condensate shipments.

 Rosmorport completed their dredging operations during the navigation season in early October and approximately 14.8 million cubic meters of soil were dredged in 2015 and roughly 49.2 million cubic meters overall. The Sabetta Airport has been operational for domestic flights since February 2015 and during this period, approximately 90,000 passengers have been served and over 1,000 flights have landed at this new facility with daily flights from Novy Urengoy as well as Moscow and Samara.

 During the first nine months of 2015, we successfully launched the Yaro-Yakhinskoye field at Arcticgas and the Termokarstovoye field at Terneftegas, which when combined with the prior-year launches has largely contributed to the significant increase in our liquid productions as well as increasing a proportion of natural gas purchased from our joint ventures.

 Looking ahead, we have completed construction works at the Yarudeyskoye field, including all equipment installation and pipelines, and we are currently filling the crude oil pipeline with crude oil from the East-Tarkosalinskoye field to test both the pipeline and equipment. We have drilled and completed 33 production wells, already more than necessary to launch the field, and we anticipate that upon completing the required pipeline and equipment testing, we should be in a position to launch the field in December.

 We fully anticipate that the Yarudeyskoye field will immediately ramp up to the field's 3.5 million tons per annum production capacity and once commissioned, will contribute to our overall estimated production growth in 2015, but more likely will represent one of the main drivers of production growth in 2016 based on full-year run rates.

 Our 2016 liquids production growth will largely consist of the full-year run rates for the Yaro-Yakhinskoye, Termokarstovoye and Yarudeyskoye fields. For the nine months of 2015, we have drilled and completed 77 production wells versus 129 production wells in the corresponding nine months period, including 100% of the joint ventures. Our overall development plan calls for drilling of 103 production wells in 2015.

 We continued our exploration efforts in the Gydan Peninsula and during the third quarter 2015, we discovered one new natural gas deposit and one gas condensate deposit at the Utrenneye field.

 In addition, we processed additional 3D seismic at the Utrenneye field to further explore the field's potential and conducted ongoing geophysical work at the North-Ob license area. The initial exploration wells drilled vertically at the Utrenneye field have exceeded planned flow rates and we plan to complete these wells using horizontal and multi-stage completion techniques.

 We remain very optimistic about our future prospects on the Gydan Peninsula as this geographical area represents the next evolution of NOVATEK's long-term strategy and the primary natural gas feedstock for our future plans to expand LNG output. In the third quarter and nine months 2015, we processed 3.3 million tons and 8.7 million tons respectively of unstable gas condensate at the Purovsky Processing Plant, representing an increase in processed volumes by 93% as compared to both comparative periods in 2014.

 The Purovsky Plant increased its throughput capacity as a result of an increase in volumes of de-ethanized gas condensate production at our producing fields in joint ventures and by quarter-end was operating at a 120% of its design capacity of 11 million tons per annum. The Purovsky Plant processed 3.2 million tons of de-ethanized condensate, producing 2.6 million tons of stable gas condensate and 598,000 tons of LPG.

 During the third quarter 2015, the Ust-Luga Complex processed 1.6 million tons of stable gas condensate into 1.6 million tons of refined end products, including 1 million tons of heavy and light naphtha and 600,000 tons of refined petroleum products, which represented a 36% increase over the prior-year period.

 The Ust-Luga Complex has reached its full design capacity and as a result of the increase in processing unstable gas condensate volumes at the Purovsky Processing Plant and is currently operating at 113% of its nameplate capacity of 6 million tons per annum.

 During the reporting period, we began scheduled maintenance on the first train at the Ust-Luga Complex, which meant that we sent more stable gas condensate to the market than refined stable gas products. The first train maintenance was completed and we recently started and completed the second train maintenance scheduled in October.

 We achieved reasonably strong financial and operational results in the third quarter 2015 as well as for the nine months 2015, despite lower natural gas volumes and weaker benchmark commodity prices as our overall revenues increased with the continued growth in our liquid output as well as the benefit of a stronger dollar and its effect on the currency translation into Russian rubles. Our total output of liquids produced, combined with the purchases from our joint ventures, increased by 80% year-on-year and 11% quarter-on-quarter.

 With the ramp-up of our liquid productions in 2015, our liquid revenues represented 54% versus prior period of 37% of our total sales even though we continue to operate in a volatile commodity market. Our growing liquid business has changed the fundamental dynamics of our business profile and we expect robust cash flows as we transition towards higher-valued risk-adjusted margins and sustainable shareholder value creation.

 We realized weaker gas sales volumes in both year-on-year and quarter-on-quarter, largely due to a combination of higher injection rates in storage and a reduction in output from our consolidated subsidiaries. Despite the lower gas sales volumes in the reporting period, we managed to slightly increase our average netback margins year-on-year and quarter-on-quarter by 12% and 11% respectively, which represent a combination of increased gas tariffs and a reduction in transport distance in our geographical sales portfolio.

 The change in geographical sales mix and its corresponding impact on transport cost per million cubic meters affects the netbacks we received for our gas volumes sold. Our proportional mix between end-customers and wholesale traders in the currently reporting period was 94% and 6% respectively. The regulated tariff for natural gas and transport charges were approved on the 1st of January 2015 by the regulator and accordingly, we raised 7.5% and 2% respectively.

 As I mentioned on the last conference call, the approved tariffs represent 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. There are various discussions currently taking place in the government on the upcoming tariff changes for 2016 and beyond, but there is nothing concrete to report at this time.

 Our total revenues and adjusted EBITDA increased by 39% and 36%, whereas our normalized net profit increased by 32%. Net cash provided by operating activities decreased year-on-year by 2.1 billion or by 12%, which meant that we generated free cash flows of 2.2 billion during the reporting period, which was 67% lower than prior year.

 Although our capital expenditures were higher year-on-year by 18%, the general trend has been a decline in our capital program towards maintenance mode as has been noted over the past several periods with the change in mix of our quarterly capital expenditures. And during the third quarter 2015, we spent RUB14.5 billion during the quarter, of which RUB6.6 billion was used for ongoing work activities at the Yarudeyskoye field to support the launch of this new crude oil field in December 2015.

 The East-Tarkosalinskoye field accounted for RUB2.2 billion of the capital spent, mainly on further developments of the field's crude oil layers with the remaining funds dispersed among the Yurkharovskoye and Utrenneye fields at RUB1.5 billion and RUB1.9 billion respectively and other smaller field activities.

 Our operating cost mix changed during the reporting period, whereby the purchases of hydrocarbons represented the largest cost component for the first time with the continued growth in our liquid and natural gas volumes from our joint ventures, representing the majority of this important cost category. Purchases of hydrocarbons and transport expenses, each representing slightly more than 38% of the total operating cost with our tax obligations representing almost 11%.

 The purchases of gas condensate from our joint ventures accounted for 76% of the total expense category in Russian ruble terms with the majority of purchases from our Arcticgas joint venture and to a lesser extent Terneftegas. 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.

 It is important that we maintain a strong focus on minimizing controllable operating expenses consistent with our growth business. We continued to demonstrate strong cost control across all categories of controllable expenses and our general and administrative expenses were no exception. We did not experience any accelerated cost inflation pressures as far as operating expenses are concerned and more specifically in our G&A category.

 As customary, we indexed our general base salaries for the group, effective the 1st of July by 7%, which supports this observation. The main difference in an employee compensation quarter-on-quarter was the higher payment of prior-year performance bonuses in the second quarter relative to those paid in the third quarter.

 Our balance sheet and liquidity position remained strong throughout the reporting periods, although we moved RUB90 billion in long-term loans to the current portion of short-term debt, reflecting our quarterly payments of the syndicate facility as well as the expected retirement of the [$600 tranche] of our five-year Eurobonds during the first half of 2016.

 Our total debt position at the end of September 30th totaled RUB294 billion, which continues to be impacted by the revaluation of our loan portfolio at fair market value as well as the impact from the significant devaluation of the Russian ruble to the US dollar that we experienced in late-2014 and the current foreign exchange movements.

 We had the necessary cash flow generation to fund our capital expenditure program through internally-generated cash flows as well as the ability to meet all of our debt obligations and liabilities when they mature or come due for payment. The Company's ability to generate cash flows is clearly supported by our growing liquid business, despite the volatile pricing environment, and represents one of the main fundamental changes underlying our transformation to a global energy company.

 Another important point to highlight is our ability to generate sustainable free cash flows and during the nine months 2015, we generated free cash flows of RUB42.7 billion versus RUB24.7 billion in the comparative period, representing a 73% increase despite a significant decrease in the benchmark crude oil prices during this period. We are confident in our ability to sustain robust free cash flows as we move into the next phase of our corporate development.

 In conclusion, we are operating in a very difficult macro environment and the bearish forecast over the next several quarters, especially for the commodity markets, does not bode well for the companies in the energy space. With that said, we can only focus on what's controllable from our perspective and if we look back over the past quarter and nine months of 2015, I believe we have done a great job in delivering volume growth through the superb project execution of delivering new field launches, we have maintained our strong focus on cost controls and we have made great progress in bringing forth the construction of our Yamal LNG project, despite the suboptimal geopolitical situation and the difficult financing constraints.

 Our commitment to deliver sustainable shareholder value is clearly embedded in our daily decisions and we believe the platform we have built with our asset base is second to none as compared to our peers in the global industry, which are often plagued by high-cost development in exploration projects, delays in project execution and over-leveraged balance sheets to name a few.

 The volatile non-cash foreign exchange movements are an annoyance to everyone trying to model our business operations, but I would like to stress again that it really has limited impact on our profitability as we believe we will generate increasing amounts of externally-generated cash flows to better match our future debt payments.

 We will continue to provide timely updates and notifications of the progress of our works, particularly those related to Yamal LNG, including the status of closing of the external financing package. We just announced the execution of another contract for the delivery of natural gas to Enel Russia for the supply of 2 billion cubic meters and this contract, combined with the contract we announced in August for the supply of 2.8 billion cubic meters to [MMK] confirms our ability to market our natural gas, hopefully alleviating some of the concerns expressed recently by analysts.

 I would like to thank everyone again for attending tonight's earnings conference call and your continued support for the Company. I would like to now end tonight's prepared comments and open up the session to questions-and-answers. Thank you very much.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Karen Kostanian, Bank of America.



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 Karen Kostanian,  Bank of America - Analyst   [2]
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 Thank you very much, Mark. Thank you very much for the presentation. I have two questions. First question for me would be irregardless of the financial package, if you look at your plans, initial plans for financing Yamal LNG for the first quarter or maybe the first half of 2016, how much CapEx were you planning to put down towards the project? And if you can, could you provide how that CapEx could have been split between shareholder loans, external financing, et cetera?

 And my second question relates to the payment of RUB90 billion that you have -- a short-term debt of RUB90 billion that you have next year. I appreciate the very high free cash flow generation, which is, as you highlighted, very rare in this environment for an oil company, but with CapEx and closed external funding sources, would avenues of refinancing bad debt would you have because of my numbers, in the first half of the year, you probably won't be able to generate enough free cash flow to finance both CapEx and repayment of bad debt. Thank you very much.



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 Mark Gyetvay,  NOVATEK OAO - CFO   [3]
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 Thank you, Karen. I don't fully understand the first part of your first question. Can you elaborate a little bit more exactly what you're looking for, because I'm not following why you're looking at this split in 2016.



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 Karen Kostanian,  Bank of America - Analyst   [4]
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 I was wondering how much financing the shareholders had to provide to advance the Yamal LNG project for next year-end, how the financing would have been structured in the normal environment, would it be external funding, would it be shareholder loans and if that's clear.



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 Mark Gyetvay,  NOVATEK OAO - CFO   [5]
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 I believe as it relates to the fourth quarter as an example, we'll probably have to put some additional financing among the partners, but I don't have that number as we speak, because it's really largely dependent also on the closing of the National Welfare Fund's RUB75 billion. So, it's really a function of the timing of that release of funds, which will then mean whether or not the shareholders have to put additional funding until such time as that financing comes in. So, it's a hard question to answer at this point.



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 Karen Kostanian,  Bank of America - Analyst   [6]
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 Yes, if I may clarify, I was just looking for a CapEx number, how much CapEx is required by your plan for Yamal LNG for next year, maybe you shouldn't provide any breakdowns, but how much were you planning to spend as a consortium in the first half of 2016 on the project?



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 Mark Gyetvay,  NOVATEK OAO - CFO   [7]
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 Well, I mean we haven't released CapEx numbers yet for 2016. I'll do that in December after the Board approves. We have to get the approval of the Board at Yamal, plus our approval here at NOVATEK. So, I'll give you those numbers later on in December when we release the numbers for 2016.



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 Karen Kostanian,  Bank of America - Analyst   [8]
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 Okay. Fine.



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 Mark Gyetvay,  NOVATEK OAO - CFO   [9]
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 Okay. And that also goes for production, our expected growth in production numbers et cetera, okay, for gas and liquids. All right? As your second question, we've already been paying down -- we've already made payments already this quarter and we'll continue to make payments towards the syndicate loan. We have the capacity, we have the free cash flow generation to support, we have cash in the balance sheet, plus we have the ability to tap in to some of the lines of credit if there is any shortfall between the timing of the payments of this RUB90 billion, because really the big payment that's due is the $600 million tranche in the first half of the year for the retirement of the Eurobond.

 I don't see us having any significant problem. I know you may not be able to balance the numbers as you speak on the cash flow, but I believe we have enough access between the discretionary cash flows that we have in place to fund as well as the cash generative nature of the business as we look forward for the next couple of quarters, as well as the ability to look at the closing of the Silk Road Fund, which we're still working on as we speak.



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Operator   [10]
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 Ksenia Mishankina, UBS.



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 Ksenia Mishankina,  UBS - Analyst   [11]
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 Hi, thank you for the presentation. On page 34 of your presentation, you mentioned that you have credit lines for RUB50 billion in addition to $300 million line. Are they all committed and are all of them unused as of today? And the second question, what percentage of your cash balance is in hard currency? Thank you.



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 Mark Gyetvay,  NOVATEK OAO - CFO   [12]
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 To answer on the credit lines, I believe, most of those are committed numbers or some of them are committed numbers, maybe not all of them, but we've been able to tap into that when we needed them. So, I can't give you the exact breakdown on say the US dollar breakdown once committed or not committed, but they are available for us and we have been able to draw down on it like we just recently drew down on some of our credit facility in this respective quarter. As the cash on the balance sheet, I believe a large portion of it, I would say, probably greater than about 75% is in US -- in foreign currencies, not Russian rubles.



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 Ksenia Mishankina,  UBS - Analyst   [13]
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 Okay, thank you. And in terms of your credit lines, are they with Russian banks?



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 Mark Gyetvay,  NOVATEK OAO - CFO   [14]
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 Combination. There are some international banks. I mean we have access. We used some of the credit lines also in our trading operations, which we roll over on a regular basis to fund the payment of our cargos until such time as the funds are received. So, we're constantly using these facilities on a regular basis and they are both by international banks and Russian banks.



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Operator   [15]
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 Alexander Kornilov, Alfa-Bank.



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 Alexander Kornilov,  Alfa-Bank - Analyst   [16]
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 Good afternoon, gentlemen. Thank you very much. I have two questions. First of all, if you can share with us, could you please provide the number of effective gas MET rate, which you had in third quarter? And second question, I have noticed that your production from the core assets, your core fields, which are consolidating the numbers, is down 7% for both natural gas and for the liquids. If you could share with us the expected number for the entire year, that will be great and maybe you could provide also the guidance for 2016, what you expect from your core assets next year? Thank you.



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 Mark Gyetvay,  NOVATEK OAO - CFO   [17]
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 Okay, unfortunately I don't have the average MET rate for the quarter. I mean, I will get it for you, if you need that number for your calculations, please contact [Ashad] at IR and he'll give you that number, but I don't have that readily available before me as I speak.

 In terms of the declines, there are a combination of factors, I mean largely driven by the reduction of our liquids, content inside of our gas stream with the different downhole pressure, but you also got to look back at the fact that some of these wells -- when we look at declines, I mean it's not a straightforward answer to say that the whole field is declining, what we're looking at is some of our prior wells that were drilled, East-Tarkosalinskoye 1998, 1999, early 2000s have already been producing for more than a decade. They are naturally in declines [at bearish rates].

 We were seeing declines in both at the Yurkharovskoye and some of its earlier gas production fields. We're fully confident that we'll meet the numbers that we put out in our plan for this year. As I just mentioned on Karen's question, we haven't given the guidance for 2016 yet. We'll do that in December, but we're pretty comfortable at this point that we'll meet our production growth numbers and targets for 2016 both for liquids and natural gas.

 Just to put a little flavor of what we're doing too, to offset some of these sort of expected declines in some of the core assets, we have a portfolio of assets that we're working on, such as the Northern Russkoye field. We're working on those assets as we speak and we expect that over the next several years, as we started seeing some declines in our three core assets, will be sufficiently replaced with the growth of production coming from these new fields that we'll be launching 2018, 2019. So, we don't look at this a negative, we look at this as being the natural trend in the field's development cycle as we see declines happening over time. This is just a natural function of these fields. They are going to decline over time.

 So, they're not unexpected. I can tell you that now -- I had a long discussion with our geological department yesterday on this very issue. They outlined to me the series of plans that are in place in terms of arresting some of these declines or some of the various fields.

 For example, in the Yurkharovskoye field, we're looking at developing and we're drilling well as we speak in the (inaudible) level, which we're not producing significantly. We know there is a lot of hydrocarbons there, but that doesn't answer the question on the decline in liquid side. It will sustain the gas side, but the liquid side in that concentration is declining and that's just a natural flow from this field. That's not going to reverse itself unless we find new deposits and/or replace them with new fields, but these are all natural declines that are fully expected in the life of these fields and our technical teams are fully aware of this and are working on this process. So we are not alarmed by these changes.



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Operator   [18]
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 Artem Konchin, Otkritie Capital.



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 Artem Konchin,  Otkritie Capital - Analyst   [19]
------------------------------
 Hi, guys. Thank you for the presentation, fairly detailed disclosure. I only have two small questions on your P&L. The first one related to the RUB5 billion revaluation of the shareholder loans provided by the group. I'm just curious what's this different methodologies that you mentioned in accounting for those. And the second one is more broad, I was curious if you ever considered changing the IFRS accounting methodology to something similar that BP or Rosneft utilizes to avoid significant fluctuations of the bottom line on the currency shift. That's pretty much it. Thank you.



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 Mark Gyetvay,  NOVATEK OAO - CFO   [20]
------------------------------
 On the RUB5 billion, it's not unusual, we've done that last year. It's just a revaluation of the fair market value on those loans. So, it's not something -- it doesn't happen on a regular basis. And I think last year, we had almost [RUB7 billion] revaluation. So, it's not unusual.

 On the second question, I think that's a more difficult question that need to be discussed with our colleagues at Yamal LNG, because I mean -- as well as our auditor, PwC, because there need to be a specific trigger event to support a change in functional currency and we realized from a practical perspective that the majority of loans, the majority of contracts as well as the majority of costs are in foreign currencies. So, we're working on that and I've actually -- have in discussions from our perspective with PwC on this particular point.

 So, I don't know the answer right now, because then I have to go through some technical questions, but that's something that we are considering as we speak.



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 Artem Konchin,  Otkritie Capital - Analyst   [21]
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 Okay. So it's work in progress. And as far as the first question, I was just saying, I mean your reports has different methodology in valuation of the loans. So, I was curious if something new (multiple speakers).



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Operator   [22]
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 (Operator Instructions) Alexander Nazarov, Gazprombank.



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 Alexander Nazarov,  Gazprombank - Analyst   [23]
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 Good evening, Mark. Thank you very much for presentation. Two also short question from my side. First, concerning your buying back program. We've all seen the press release at the beginning of this month saying that you've resumed buyback for one week, but then again, it was sub -- what was that, it was just one-off for some reasons or are you going to start again buying back your own shares at regular schedule?

 And the second question is that NOVATEK is one of the few companies in Russian oil and gas which doesn't disclose the amount of export duties paid. And on the other side, you remain like one of the companies, who is less hit by the proposed tax hike in 2016. So, it's pretty hard for us to exactly relate the effect for you. So, could you probably say what's your estimation on how much more export duties will you pay next year for your oil products? Thank you.



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 Mark Gyetvay,  NOVATEK OAO - CFO   [24]
------------------------------
 Okay, thank you, Alex. The buyback program, I mean, obviously, we assessed it on a regular basis. The program is done on an annual basis. We never said that we're going to be in the market every week. We assess the market every day. We make a determination if we believe that we want to go in at a particular price point and buy some shares and that's what we do. And when we do that over a course of the week, the following Monday, we make that announcement. So, the plan is in place, but there is no structure that say that we're going to buy every week. So, we just do it on an opportunistic basis when we believe that it's important for us to come into the market to support the share price and/or we believe that the direction of the price is below evaluation point that we like to see for our Company. Point is simple, we'll continue and we'll continue to use in the buyback program over the course of the upcoming weeks in year. And we're not going to disclose one behind the market, that kind of defeats the purpose.

 As to your second question, on the export duty, I mean it's still a work in progress as you can appreciate with the question on taxes, but I think the initial prognosis, considering that the government maintains the export duty as the same, coupled with the fact that they are continually changing the product side, I think the affect will be relatively minor for us in 2016, but we don't provide those level of forecast or numbers at this particular point in time.

 Are you suggesting that maybe we should add a table? Would that be helpful? I think if we add a table on the export (inaudible) do not do this, would that be helpful for you?



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 Alexander Nazarov,  Gazprombank - Analyst   [25]
------------------------------
 No, I mean, probably colleagues would not support me, but for me it will be helpful, it's very helpful, yes.



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 Mark Gyetvay,  NOVATEK OAO - CFO   [26]
------------------------------
 All right, well, let's see. We'll take a look at it.



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Operator   [27]
------------------------------
 (Operator Instructions) There are no further questions in the queue at this time, I'd like to hand the call back to the speaker.



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 Mark Gyetvay,  NOVATEK OAO - CFO   [28]
------------------------------
 Thank you everybody. I'd like to just make a final comment and say that I know there is a lot of concern on people about the finance and I know there is information in the press that are basically citing unnamed sources. And I would just caution reading and reading too deep into that type of analysis, because there's probability, a high probability that these people have no idea of what's going on in the process and are not linked into any discussions that are currently taking place in regards to Yamal LNG financing.

 So, I would just caution that when you read this stuff, particularly when we start reading all these things about unnamed sources, if they have any information, put your name out in the press, okay, and stop hiding behind these unnamed sources, if they believe they have something to say. Secondly, I think when you look at our financial results in this quarter, I mean, keep in mind that given the difficult market -- difficult macro market we are faced with right now, our results were quite good. Particularly when I'm starting to read now, Shell loss, Total loss, Conoco loss, I mean, we're going to see a whole dart of really negative financial reports coming out.

 And I believe at the end of the day, when you look at our operations, the cash flow nature of our business, we're going to be able to survive. I mean I was reading today about Shell, telling that they breakeven at $60 oil price. I mean we have a completely different operating environment that has always been predicated on low cost and we are able to survive in this particular market although you're going to see fluctuations from quarter-to-quarter.

 So keep that in mind when you're looking at the results. And I think [at the end, you're] going to find out that the Russian industry, despite all the negativity that we constantly read about or the questions that are constantly asked upon ourselves and our Russian peers that we're actually going to report relatively good numbers in vis-a-vis the oil and gas sector. So just keep that in mind.

 Again, thank you very much. Thank you for your patience. We'll see you out on the road on upcoming conferences and we'll deal with you on the next conference call. On the annual conference call, Mr. Mikhelson will be there with me. So, you'll be able to ask him the questions directly on what's going on on the Company, the strategy, et cetera, but we look forward to addressing you for the full-year results. Thank you very much.



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Operator   [29]
------------------------------
 That will conclude today's conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.








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