Full Year 2015 Novatek OAO Earnings Call (IFRS)
Feb 26, 2016 AM CET
NVTK.MZ - Novatek PAO
Full Year 2015 Novatek OAO Earnings Call (IFRS)
Feb 26, 2016 / 01:00PM GMT
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Corporate Participants
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* Mark Gyetvay
OAO NOVATEK - CFO
* Leonid Mikhelson
OAO NOVATEK - Chairman
* Editor
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Conference Call Participants
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* Max Moshkov
UBS - Analyst
* Ksenia Mishankina
UBS - Analyst
* Ron Smith
Citi - Analyst
* Artem Konchin
Otkritie - Analyst
* Alexander Nazarov
Gazprombank - Analyst
* Ildar Khaziev
HSBC - Analyst
* Evgeny Stroinov
Renaissance Capital - Analyst
* Denis Derushkin
Bank of America - Analyst
* Alexander Kornilov
Alton - Analyst
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Presentation
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Operator [1]
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Good day and welcome to the NOVATEK 12 months 2015 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Gyetvay. Please go ahead, sir.
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Mark Gyetvay, OAO NOVATEK - CFO [2]
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Ladies and gentlemen, shareholders and colleagues, good evening, and welcome to our full year and fourth quarter 2015 earnings conference call. I would like to thank everyone for joining us this evening in state that tonight is the first time that we are hosting our own conference call. Joining me this evening during the question-and-answer session will be Mr. Leonid Mikhelson, Chairman of the Management Board and a member of the Board of Directors. During the question-and-answer session, we will revert to the dual languages of Russian and English, so please bear in mind when asking questions for the convenience and respective other investors. We have allotted sufficient time this evening to address your questions.
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 such words 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 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 31 December 2014, as well as any of our earnings press releases and documents throughout the past year for more description of the risks that may influence our results.
2015 was an extremely difficult year for the oil and gas industry with a precipitous decline in the benchmark crude oil prices and its correspondent impact on business operations and cash flow generation. Many industry insiders believe that we are at a low point in the commodity price cycle but its impact has been profoundly felt in all areas of the industry, including a significant amount of asset impairments and rising debt defaults.
Unfortunately, the pricing question continues to persist in early 2016 and bankruptcy announcements have begun. I will not spend much time stating the obvious implications of sustained lower prices and its impact on our industry, as I'm sure everyone on this call tonight fully understands the present macro-environment and the severity of the problem such as reduced capital expenditures, increased employee reductions, stressed balance sheets, credit defaults and bankruptcies to name a few.
I would prefer to spend this evening focusing on the strengths of Novatek's operating model to grow and prosper through these commodity cycles. One of our main strengths has been and will continue to be our ability to bring low-cost production to the market and this enviable position has served us well in both boom and bust has served us well in both boom and bust price cycles. Equally important, we cannot leverage our balance sheets during the past several years to fuel debt-driven production growth in a high-commodity price environment like many of our global peers. We maintained a disciplined approach to capital deployment and invest it into production growth within the means of our cash flows.
Leveraging our present infrastructure to facilitate our growth, combined with the close proximity of our processing facilities to our producing fields obviously reduced our cost structure and contributed to the strong rates of returns we have achieved over the years.
Our focus on cost controls throughout our operations has been a hallmark of our business over the years and this mindset permeates throughout our organization and is a testament to the hard work and dedication of our valued employees.
We achieved significant operational success by efficiently monetizing our asset base through timely production launches in 2015. The successful launches of Yaro-Yakhinskoye, Termokarstovoye, and Yarudeyskoye fields during the year, combined with a full year production run rates on launches commissioned in 2014 contributed to a record 51% growth in liquids production in 2015 over the corresponding year.
We also achieved a 9% growth year-on-year on our natural gas production, which slightly exceeded our production forecast for the year. Extending on our success, we managed to increase our SEC proved reserve base by 1.4% year-on-year to 12.8 billion barrels of oil equivalents, representing a reserve to production life of 25 years based on the current year production. Excluding the effect of our reduction in our interest in SeverEnergia, the organic growth in our SEC proved reserves was 2%, which represented a reserve replacement rate of 148%.
According to the PRMS reserve methodology, our proved plus probable reserves including our proportionate share in joint ventures totaled 23.1 billion barrels of oil equivalent. It is also important to note this evening that by year-end 2015, we completed the mid-term or five years of our 10-year strategic plans and I would like to highlight some of our accomplishments.
Since we outlined our strategic plans in late 2010 in London, we have achieved a 58% growth in our SEC proved reserve base from 8.1 billion barrels of oil equivalent to 12.8 billion barrels of oil equivalent, a 90% growth rate in our total marketable production, comprised of an 82% growth in natural gas and 151% growth in liquids, a five-year average replacement cost of $2.19 per barrel, a five-year average fund in development cost of $2.85 per barrel. Our lifting costs were some of the lowest in the global industry at $0.49 per barrel of oil equivalent in 2015 versus $0.54 per barrel in 2010. Our free cash flows increased 337% from RUB19 billion in 2010 to RUB82 billion at year-end.
And finally, we have consistently raised our dividend pay amount since 2010, despite the growth nature of our business. Our results have been stellar over the past five years despite the many obstacles along the way. We remain optimistic that we will be profitable at stressed commodity prices while maintaining strong cash flows achieving our above-industry rates of returns throughout our investment cycle relative to our global peers.
Our goal of maximizing liquid production through the timely launches of new fields to optimize our processing capacity has been achieved. Last year was the first year that our liquid revenues exceeded that of our core gas business. This has transformed the Company from purely a domestic player to one of global ambition. The foreign currency earnings from our international liquid sales achieves higher cash flows per unit sold and provides a better matching of dollar-denominated debt to the repayment of such debt when it becomes mature.
At Yamal LNG, we made good progress throughout the year according to our planned work programs and are approximately 45% complete on the overall project at year-end versus 36% at the end of the third quarter. Construction of the first LNG train continued to progress in the fourth quarter and we are now more than 56% completed versus 44% at the end of September.
The shareholders have invested approximately $12.5 billion, inclusive of $3.9 billion invested by Novatek. We have now received both tranches of the National Welfare Fund of RUB150 billion and these funds have also been invested into the project. Presently, we have approximately 13,000 construction workers on-site at Sabetta with roughly 3,100 construction vehicles in use. With the Sabetta Airport now fully operational, we transported approximately 130,000 people to and from the site in 2015, which dramatically improves the efficiency of shift worker logistics. We actively drilled production wells at the South-Tambeyskoye field throughout 2015 and have now completed 44 production wells where roughly 75% of the wells reported to launch the first production train.
We will continue to actively drill wells in 2016 utilizing four drilling rigs on site. By the end of 2015, we had delivered to the project seven LNG plant modules, a cryogenic heat exchanger from air products and a full equipment package for the compressor lines for the first and second LNG trains, boil-off compressors, a backup plant heater, 46 crates of steel pipe racks, six packages of pipe installs, electrical substation, power plant turbines and other ancillary equipment. The outer concrete walls as well as the insulation of roofs for four LNG tanks were completed, and work has now progressed on the multi-layer internal walls.
We also made significant progress on the construction of the 376 megawatt power station by installing four gas turbine units on the concrete foundations as well as full piping on two units. Other work streams such as the South-Eastern ice barrier, dredging of harbor area and ongoing piling works are at various stages of completion and we will continue to provide periodic updates on the progress of Yamal LNG throughout the year.
In terms of exploration work, we focus our efforts in 2015 on the Gydan peninsula and the Gulf of Ob to access the resource potential of this strategically important area. We commenced to running a three-dimensional seismic activities at the North-Obskiy license area and continued 3D seismic interpretation and exploration drilling works at the Utrenneye field. The hydrocarbon-rich Gydan peninsula represents the future growth area for the Company in the next decade and we are currently studying options on how best to monetize these assets.
Exploration work was also conducted on our fields and license areas in the Nadym Pur Taz region including ongoing works at our joint ventures. In 2015, we completed the running and interpretation of 1,004 square kilometers of 3D seismic drilled approximately 15,000 meters of exploration drilling and completed seven prospects and exploration wells. We discovered nine new gas deposits at the Utrenneye, North-Russkoye, North-Tazovskoye fields as well as adding wet gas reserves from the Achimov formation at the Urengoyskoye field within the Samburgskoye, Yevo-Yakhinskoye license areas. Our ongoing exploration efforts throughout 2015 produced positive results. We successfully commissioned three new fields as part of our development program last year, which contributed to our production growth for natural gas and liquids in 2015.
We completed and launched a 2.5 megawatt gas turbine plant at the Yurkharovskoye field, as well as completing scheduled turnaround maintenance work on the field's booster compression stations. We drilled eight new production wells targeting the shallower (inaudible) layers and began construction work on a new 48 megawatt booster compression station.
In 2015, we invested RUB7.6 billion of capitals into the Yurkharovskoye field represented a year-on-year reduction in capital expenditures of 29%. At East-Tarkosalinskoye field, we intentionally targeted the field's crude oil deposits and completed 23 oil production wells during the year. The field's development activities over the past several years have been largely focused on increasing crude oil production. And in 2015, we invested RUB8.8 billion, a decrease of 30% from the prior year. We will continue to target crude oil producing zones from this field in 2016.
We also launched a condensate de-ethanization facility at the western dome of the North-Urengoyskoye field reducing our dependence on utilizing Gazprom's de-ethanization facilities and increasing our output and lowering our operating cost. We spent approximately RUB50 billion in our capital program in 2015 on a cash basis with almost half of the funds or approximately RUB26 billion spent on completing the launch of the Yarudeyskoye field. Year-on-year, our capital expenditures declined by roughly 10%. We achieved our operational goals in 2015 and accordingly we plan to invest about [30%] less capital in 2016 based on our assessment of various capital projects within our asset portfolio.
Total oil and gas revenues in the fourth quarter of 2015 were relatively strong against both the year-on-year and quarter-on-quarter comparatives. We increased our oil and gas revenues by 33% year-on-year and 13% quarter-on-quarter, largely driven by a substantial increase in our liquid revenues and a corresponding translation of these foreign earnings to Russian rubles. Volume growth was a main factor contributing to our increased revenues as we realized declining average prices for the majority of our liquid products year-on-year and quarter-on-quarter, consistent with the declines in benchmark reference prices.
Our liquid revenues accounted for 53% of our total revenues versus 35% in 2014. This is important for a number of reasons. Revenues derived from our liquid sales are generally indexed to international benchmark crude oil or oil product derivative reference prices, which have historically been higher than domestic prices. In addition, export volumes are denominated in foreign currencies, better matching our dollar-denominated debt portfolio, and particularly in 2015, our export sales were favorably correlated to the movement in the US dollar Russian ruble exchange rates, which positively impacted revenues throughout the year.
We sold slightly more than 62 billion cubic meters of natural gas versus 67 bcm in 2014. The decrease was from a combination of factors such as lower demand [offtake] from end customers due to unseasonably warmer weather, as well as a disruption in volume offtakes from a customer due to technical reasons. Our quarter-on-quarter natural gas sales volumes were reasonably strong although we injected approximately 1.4 bcm into underground storage facilities for withdrawal in future periods.
On a quarter-on-quarter basis, we increased our natural gas sales by 3.5 bcm due to the resumption of offtake from our end customers, as well as growth in seasonal demands. Our average natural gas prices increased by 3.8% in 2015 but more importantly, we increased our average netbacks by 6.3% and 7.2% for end customers and wholesale traders respectively. During the fourth quarter, our end customer sales declined by less than 1% quarter-on-quarter and this was due to certain shifts in regional sales, which resulted in a 3.2% reduction in our average netbacks during this period. We sold 12.9 million tons of liquids, representing an 82% increase over the prior year. The average price we received in dollar terms was lower across our product range because of the declines in the international reference prices while we achieved reasonably strong prices in Russian ruble terms due to the average currency depreciation by 59% against the US dollar.
During the fourth quarter, we increased our liquid sales by 194,000 tons or 5.6%, largely due to the commencement of crude oil production from the Yarudeyskoye field in early December. Our average commodity prices received during the quarter were relatively mixed as compared to the third quarter of 2015.
Our operating expenses continued to grow year-on-year and quarter-on-quarter relative to the growth in our business, representing an increase of 42% and 13% respectively. The most significant increase in our operating expenses year-to-year related to the purchases of hydrocarbons, followed by increases in both transportation and taxes.
Year-on-year and quarter on quarter, our purchases of hydrocarbons increased by RUB68 billion of gas and RUB1.4 billion respectively, driven by substantial increases in the purchases of gas condensate from our joint ventures. Our major cost trends were relatively the same on the quarter-on-quarter comparatives, but we marginally increased salaries and bonuses in our general administrative category during the fourth quarter. Overall, there were no major surprises in our operating expenses both year-on-year and quarter-on-quarter.
Our balance sheet and liquidity position remained strong in 2015. We generated free cash flows of RUB82 billion in 2015 versus RUB49 billion in the prior year based on an increase in our operating cash flows of 19.4% and a corresponding reduction in our capital expenditures by 18.5%. We have sufficient cash flows to fund our operations and pay our obligations in debt service as they become due. We repaid our $600 million Eurobond tranche in February 2016 according to the bond's maturity schedule.
In conclusion, 2015 was a very good financial and operational year for Novatek despite the declines in crude oil prices throughout the year, the negativity surrounding the industry and the general declines in oil and gas equity values in December.
We launched the three new fields on schedule and within budget, which will serve as a platform for volume growth in 2016 and beyond. We can only manage what's within our control so we are subject to declining commodity prices like all of our global peers. So, one of the main differentiating factors in our business model is our relative cost advantage and our ability to generate strong cash flows across a range of commodity prices. We demonstrated the robustness of our business model during the last crude oil price collapse in 2008 and 2009 and hopefully, we have demonstrated this again with the release of our current year financial results. Not many of our global oil and gas peers can make this assertion.
We are confident we can successfully navigate the Company during these turbulent business times and withstand this volatile commodity price cycle. Novatek represents substantial investment value at present equity prices, and we believe the investment community has significantly discounted our operations and financial strengths in this current environment. We have a solid track record over the past 10 years of executing what we promised according to our strategy and delivering superior industry rates of returns.
We outlined three primary themes; the short-term build-out of our processing capabilities, the mid-term growth of our liquid productions, and now we begin our journey towards our long-term aspirations to enter the global gas markets, the liquefied natural gas or LNG. We have achieved extraordinary financial and operational results over the past five years despite the difficult macro environment along this journey and we're quite proud of these accomplishments but we don't rest on our past accomplishments.
As a shareholder of Novatek, I can unequivocally state that our commitment towards achieving sustainable operational and financial excellence, together with our commitment to climate change, the environment and our social responsibilities to the region where we operate has not diminished despite the economic slowdown, the imposition of unwarranted sanctions on the Company in 2014 and the present cyclical downturn in the industry.
The industry is currently in turmoil and we understand that fact very well. We are committed to achieving our goals despite these obstacles. We will deliver on our next phase of our strategy in Yamal LNG. I would like to thank everyone for attending tonight's conference call and now open up the night sessions to questions and answers.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Max Moshkov, UBS.
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Max Moshkov, UBS - Analyst [2]
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Hello, Mark. Thank you very much for the presentation and congratulations for the solid results in this very turbulent market. So, I have couple of questions. First, if I may start the discussion with the Yamal LNG because we see the Company continue providing loans to this very profitable project and very important from the strategic point of view to the Company. So, when do you finally expect to open the external finding for this project and either to subject to the completion of the transaction with a few growth funds?
And the second question on CapEx, I do understand correctly that you plan to cut CapEx in the ruble terms in 2016 by 30% relative to 2015. And one minor question, what is the CapEx outlook for the Yarudeyskoye project for 2016?
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Leonid Mikhelson, OAO NOVATEK - Chairman [3]
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(interpreted) Okay, if I may, let me handle this question as I meet investors and journalists, I get many questions, but this one would be the first to be asked. I would like to show here that the project is getting and will be getting financing in order to launch the facility fully in line with the schedule and with a plan in 2017. In November last year, we got the second tranche from the National Welfare Fund for equivalence of $1.2 billion. In December last year, as part of the transaction with Silk Road Fund, Novatek obtained long-term targeted facility for financing of the project. And in the very near future, we expect to secure and execute significant in scale loan agreements between Yamal LNG and banks. As far as the Silk Road Fund transaction is concerned, it will be completed in the near future, because there are quite a lot of CPs in the tranche. So, we expect to complete this transaction in the near future and we do not link this transaction to any external funding.
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Max Moshkov, UBS - Analyst [4]
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(spoken in foreign language)
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Leonid Mikhelson, OAO NOVATEK - Chairman [5]
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(interpreted) Indeed, Mark put it in correct way in his presentation. 30% is our target to reduce CapEx in 2016 versus 2015, and as we said, we are reducing our CapEx for all of our main fields without or excluding the new projects. Indeed, Yarudeyskoye was launched at the very end of 2015 and some payments are still pending, if you take the CapEx for this year, then payments due under this project would be about one quarter or 25% of that.
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Operator [6]
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Ron Smith, Citi.
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Ron Smith, Citi - Analyst [7]
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Thank you very much for the call, gentlemen. I was wondering our clients asking when can we expect the next five-year strategy presentation from Novatek, as you mentioned earlier in the call, Mark, the last one was in 2010, it's about time.
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Leonid Mikhelson, OAO NOVATEK - Chairman [8]
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(interpreted) I fully share what you say, it's about time. The markets are volatile now and NOVATEK has very strong opportunities in front of that with a reserve life of 25 years at the current production rates. We have launched quite a number of fields and we have achieved a significant growth in our production volumes for gas and more importantly and larger in size for liquid hydrocarbons. As of now, our share in total Russian production stands at 10% to 11% whereas our share in the domestic sales is about 20%. We believe this share to be optimal for NOVATEK and its operations in the domestic gas markets. Our strategy is about maintaining that level flat and maintaining the market share. And as I mentioned it earlier, we are ready to look into potential new LNG projects. I would like to emphasize it specifically we're ready to look into that conceptually.
Our current experience and track record with the Yamal LNG gives us confidence looking ahead with new projects becoming more feasible and we could carry them out at low cost. In terms of strategic options, we would like to look into potential developments of those markets yet another time and come up with a more optimal strategy. I fully assure that with you in the nearest future, we are to disclose our strategic plans to the investment community.
And to an extent that is linked to completion of financial settlements at Yamal LNG, of which we have no doubt, so I would like to emphasize that. This is also linked to further development trends in the global gas market.
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Operator [9]
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Ksenia Mishankina, UBS.
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Ksenia Mishankina, UBS - Analyst [10]
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This is Ksenia Mishankina from UBS. I have one question, how do you plan to provide for your short-term debt and what portion of it do you plan to refinance? So, it's short-term debt overall?
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Leonid Mikhelson, OAO NOVATEK - Chairman [11]
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(interpreted) As Mark explained in his presentation, we have paid off of a major portion of our debt for 2016. 60% of the repayment comes from our own funds, whereas 40% is loans. We have no difficulties in repaying our debt to meeting our obligations in 2016 that's again taking into account the Silk Road Fund transaction. Looking ahead in 2017, our obligations will be much lower whereas (inaudible) 2018 to 2020, they will keep to a minimum. And again, as credit becomes more available and as markets improve, we would probably consider barrowing funds for our future projects. But we don't have any plans like that in the nearest future. Thank you.
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Operator [12]
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Artem Konchin, Otkritie.
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Artem Konchin, Otkritie - Analyst [13]
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(interpreted) I have two questions and my first question is about Yamal as well. You mentioned in your presentation that this project features very low cash cost per unit due to close proximity of your processing and production facilities. Now, have you developed an understanding of the operating cost for the processing plant itself and can you disclose that for us to have more detailed insight into the economics of that project. And then I have another question.
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Leonid Mikhelson, OAO NOVATEK - Chairman [14]
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(interpreted) Let me start with the operating costs. As Mark quoted, we have very low cash cost per unit (inaudible). I believe that production costs stayed too much similarly low at South-Tambeyskoye field of Yamal LNG that is about $0.50 per barrel, which translates into less than RUB0.10 per btu. More than two years ago now, we endorsed our capital expenditure and it still remains on par with the benchmark we set back then at RUB27 billion or so. Since our project is located in the Arctic area, pilot testing of the equipment and lab conditions have proved it's more productive in this environment. And even though the transportation costs would be somewhat higher since we need ice breaker tankers to transport our gas, we still believe our products will be competitive in any market.
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Artem Konchin, Otkritie - Analyst [15]
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(interpreted) And then I had another question, can you comment generally on the export prices in the pricing environment generally and globally, especially LPG prices?
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Leonid Mikhelson, OAO NOVATEK - Chairman [16]
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(interpreted) In terms of the LNG market developments, we are keeping a close eye on that. It has just been reported to me that the first LNG tanker from United States is set course to its first consumers. Liquidity in this market is increasing. So, customers who buy today or maybe looking into tomorrow can get very favorable conditions.
And in terms of the supply side, it's the supply with low cash cost (inaudible). And that's the angle we look at it when considering our future projects. Considering our Yamal LNG project, well, we have contracted pretty much all the volumes. And even their pricing forecast today look most pessimistic. We still believe our project is feasible in that environment and it will ensure resilience and sustainability credit wise.
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Operator [17]
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Alexander Nazarov, Gazprombank.
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Alexander Nazarov, Gazprombank - Analyst [18]
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(interpreted) I would like to thank Mr. Mikhelson for answering the questions and thank you, Mark, for the presentation. My question consists of prospects of natural gas exports from Russia. Some government officials have been reported (inaudible) potential excess to exports market could be granted to those independent producers of gas who have the function of guaranteeing supply. So, question is to NOVATEK do you have this status in your regions of operations and what would be the cash cost associated with that status?
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Leonid Mikhelson, OAO NOVATEK - Chairman [19]
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(interpreted) I would put this in a little bit different perspective, not associating this fact with any potential additional costs. The most recent meeting of commission of fuel and energy complex under the President of the Russian Federation considered this particular matter. I'm talking about this guaranteeing supplier status and its introduction. We believe that given the fact NOVATEK has changed its strategy towards territorial gas distribution and you know that we contribute pretty much 100% of gas supply into (inaudible) regions. So, we have effectively gained that status. That's our vision and corresponding instructions have been given to the government following that meeting of the Presidential Commission. We believe that key players of the domestic gas markets have to enjoy certain commitments as well as obligations and also rights in exchange for that.
When it comes to commitments and obligations, that's quite clear we have to supply our consumers and off-takers in the regions of our operations subject to and including potential flexibility when it comes to high season, low season, ambient temperatures. Our commitments and obligations may also include providing gas to every consumer, including households. But at the same time, this means we also have to enjoy equal conditions of authorizing in this market.
So, I wouldn't quite link the two matters between each other, guaranteeing supply and potential access to exports market. Instructions provided by the Presidential Commission also include potential consideration of the basis for the transportation tariff and have granted that is we would be happy to enjoy equal terms and beyond power and gas prone in this regard. So in a nutshell, I think it's too early to conclude at this point as to how this arrangement may work out but we have started involvement with the government when it comes to these matters.
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Operator [20]
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Evgeny Stroinov, Renaissance Capital.
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Evgeny Stroinov, Renaissance Capital - Analyst [21]
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(interpreted) I have another question related to Yamal LNG. As we know, you provided a loan of about EUR1 billion to these projects back in the fourth quarter last year. Does this mean you probably increased your equity stake to 60% and also what's your outlook for 2016, what kind of loan would you like to extend?
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Leonid Mikhelson, OAO NOVATEK - Chairman [22]
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(interpreted) I cannot produce the exact number as to how much shareholder loans have been provided to Yamal LNG in the fourth quarter 2015. The shareholders do provide funding to Yamal LNG in accordance with the business plan and cash flows by the Company.
I understand your question is related to the fact that the previous equity contributions did involve a major carry from our shareholders. Indeed some of the carry remains for this year, but that is insignificant. We do envisage some shareholder contributions, former shareholder loans to Yamal LNG in the course of 2016, but that'll be insignificant.
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Operator [23]
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Ildar Khaziev, HSBC.
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Ildar Khaziev, HSBC - Analyst [24]
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(interpreted) I have a couple of questions as well. The first one is related to Yamal LNG funding, well, as usual. This has grown into somewhat of a longer history and it's generically wide. My question is this, did you have the need to revaluate cash flows or projects and hence the project revaluation as well. That's my first question and then I have another one.
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Leonid Mikhelson, OAO NOVATEK - Chairman [25]
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(interpreted) Just to clarify, while we are looking at numbers for your second question here, let me clarify the first question, what do you mean by Yamal LNG re-valuation, project re-valuation, can you explain?
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Ildar Khaziev, HSBC - Analyst [26]
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(interpreted) Let me explain, this project started its negotiations quite a long time ago and the macro environment has changed since then. If you have the need to do any FCF re-valuation ever since in discussions with your other partners when considering future cash flows and the terms and conditions for their loans respectively.
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Leonid Mikhelson, OAO NOVATEK - Chairman [27]
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(interpreted) We have not considered any revaluation of the terms of loans and the project generally together with that assumptions. As I have put it earlier today, we are very (inaudible) on the most pessimistic expectations I'm going to forecast sequentially with analyst meeting for more pessimists. And again we have contracted the gas from Yamal LNG as I said already.
And we understand our operation expenses looking ahead and even if we take the most pessimistic assumptions from the current forecasts available, we still see good feasibility of the project.
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Ildar Khaziev, HSBC - Analyst [28]
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(interpreted) Thank you and then I have another question what is at your JVs and their liabilities as well your current presentation does provide for a matrix where you outlined in this for Yamal LNG in oil and gas and SeverEnergia and you have a line called loan side liabilities which stand at $23 billion for (inaudible) can you explain what these are, please?
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Mark Gyetvay, OAO NOVATEK - CFO [29]
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Okay I'll try to explain in principal. Included in those numbers of other non-current liabilities is deferred asset retirement obligations and also TEP-related tax obligations. I mean you're asking a very sort of minute technical questions, but it's essentially the asset retirement obligations and deferred income tax liabilities that would comprise the majority of those numbers.
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Ildar Khaziev, HSBC - Analyst [30]
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That's very clear, thank you very much Mark.
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Operator [31]
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Denis Derushkin, Bank of America.
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Denis Derushkin, Bank of America - Analyst [32]
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(interpreted) Just a quick follow-up and thank you for this opportunity. Again Yamal LNG funding, you mentioned loan agreements due to designs in the near future. These involve European credit agencies or you talking about banks, be it Russia and Asian?
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Leonid Mikhelson, OAO NOVATEK - Chairman [33]
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(interpreted) I'm not sure if I can make you happy with my answer. I just don't want to put it in any other way and I hope you understand me. Let me repeat, in the nearest future, we expect to sign significant volume of loan agreements. You mentioned three particular sources of credit money and all of those will be involved. Thank you.
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Operator [34]
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Alexander Kornilov, Alton.
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Alexander Kornilov, Alton - Analyst [35]
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(interpreted) My question concerns your matured fields. NOVATEK has demonstrated 7% decline in both gas and liquid in matured fields so what's the outlook in 2016 and in particularly interested in Yurkhavoskoye field?
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Leonid Mikhelson, OAO NOVATEK - Chairman [36]
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(interpreted) Thank you for the question, this is just one and I think this question would be very interesting to having witnessed. Some of our mature fields are indeed in their declining phase, including your part of scan, that's true. But it's important to mark that these still enjoy some significant potential. For example, if we take Yurkharovskoye, the Valanginian reserves have been replaced with Cenomanian gas in the recent couple of years.
But we're considering a potential development of or leverage your asset levels as well. There is that we're successful at development at Termokarstovoye field. As you're aware those horizons are rich in gas condensate. Even the Arctic gas has launched some of its fields. Still the potential is quite good there. We still have the Yaro-Yakhinskoye and Severo-Chaselskiy fields which have a significant potential even on the exploration side.
Talking about the North-Russkoye cluster including North-Russkoye field, Yarudeyskoye field and East-Tarkosalinskoye fields. These fields are close nearby eastwards from our core assets. Currently, C1+C2 reserves stand at more than 230 billion cubic meters of gas and about 30 million tons of liquid hydrocarbons. On top of that we enjoy a number of smaller fields in our asset portfolio as well, and overall these assets do enable us to maintain the production levels that we have achieved so far. On top of that we are actively working on the Gydan peninsula. On top of that, we have Gvardeyskoye field, which is well explored already and to complement that we recently acquired the (inaudible) site. That's where we're starting the exploration of it soon.
These can and will serve as further sources of a sustained and increased production. Thank you.
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Operator [37]
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Max Moshkov, UBS.
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Max Moshkov, UBS - Analyst [38]
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(interpreted) Let me have just a quick follow-up. Thank you. My question concerns your JVs, in particular SeverEnergia, when do you expect first dividends from that given its debt liabilities.
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Leonid Mikhelson, OAO NOVATEK - Chairman [39]
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(interpreted) Regard the third dividends last yet. That was showing significance that it was hardly noted by anyone. If you take partial repayments of some of the outstanding loans that number ended up at RUB5.5 billion or so. Well, obviously the dividend policy of our JVs does envisage distribution of all outstanding profit to the shareholders. In the near-future, we'll sit down together it with that pattern to plan further development of Arctic gas looking ahead and I mentioned two deals already, given its leverage, by the way we are waiting to optimize and we will keep waiting to optimize our debt portfolio. The overall plan has not been endorsed as yet. But I think we will take focus on maximizing shareholder dividend. Thank you.
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Operator [40]
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Ildar Khaziev, HSBC.
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Ildar Khaziev, HSBC - Analyst [41]
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(interpreted) Just a quick question. I may have missed that can you remind me of short-term and mid-terms plans for SeverEnergia production targets for both gas and liquids? Thank you.
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Leonid Mikhelson, OAO NOVATEK - Chairman [42]
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(interpreted) Well, if I can connect the numbers right, we seem to have reached the shelf of 25 bcm or so and about 7 million tones of liquids. That's a new field, freshly launched so the shelf can be sustained for pretty much extended time. I may repeat myself but we are considering the very long term flat less production on the shelf to be sustained. Thank you.
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Operator [43]
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(Operator Instructions) Max Moshko, UBS.
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Max Moshkov, UBS - Analyst [44]
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(interpreted) Well thank you for handling the dividend question and indeed you have paid dividends. So, we will look closer in the future. But still I may have missed that your production outlook for subsidiaries and particular JVs, I would be interested in that, if you can explain, not in the SeverEnergia but also the Termokarstovoye field and the likes with the total number for which JV is standing.
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Leonid Mikhelson, OAO NOVATEK - Chairman [45]
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(interpreted) Did I get your question right, you would like to have production outlook and its increased target in 2016 for both subsidiaries and JVs, is this correct?
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Max Moshkov, UBS - Analyst [46]
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(interpreted) Just to put it simpler, if I may, I would be interested to understand the total gas production target including JVs, the one that you increased 9.3% in 2015 vis-a-vis 2014. And also liquids including JVs, which was increased by [30.7%] in 2015 vis-a-vis 2014. So, can you produce the same guidance for 2016 versus 2015? Thank you.
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Leonid Mikhelson, OAO NOVATEK - Chairman [47]
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(interpreted) Well, normally when we say liquid hydrocarbons, this includes both crude and gas condensate. As you know from the filings we just launched Yarudeyskoye field in the very last date of 2015. Our plans to increase liquid production is about 30% that's the target which is contributed to a great extent by Yarudeyskoye. As for general customer we only launched Yarudeyskoye field in the second quarter last year. That means it hasn't been producing for full year and it does account for some parts of the 30% increase as well. Thank you.
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Operator [48]
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(Operator Instructions) There are no further questions in the queue at this time. I would like to turn the call back to our host for any additional or closing remarks.
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Leonid Mikhelson, OAO NOVATEK - Chairman [49]
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(interpreted) I would like to thank all participants on this call. Well, (inaudible) you are looking closely at both our achievements and our plans. We've had a very justified question on this call that is a reminder we haven't yet delivered to the investment community our strategic plan. This is a very timely and a very justified question. But I would like to assure all our investors at this time that we keep waiting on that very closely until the moment. Let me reiterate this, NOVATEK enjoys significant reserves and resources, a large infrastructure or processing facilities and then again the (inaudible) alone, which only achieved full capacity in 2015 that contributes very significantly to (inaudible) performance. We do not stay where we are when it comes to our reserves and sources. We are looking closely at potential M&As and opportunities in that field as well as potential auctions for new license areas. Having completed the exercise of analyzing both domestic European and global markets. We will complete as well the most optimal development strategy for NOVATEK, which will bring most profit and most value to our shareholders. Thank you.
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Operator [50]
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That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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Editor, [51]
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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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