Half Year 2016 NK Lukoil PAO Earnings Call (IFRS)
Aug 30, 2016 AM EDT
LKOH.MZ - NK Lukoil PAO
Half Year 2016 NK Lukoil PAO Earnings Call (IFRS)
Aug 30, 2016 / 12:00PM GMT
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Corporate Participants
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* Pavel Zhdanov
NK Lukoil PAO - Director, Capital Markets & M&A
* Alexander Matytsyn
NK Lukoil PAO - SVP, Finance
* Alexandr Palivoda
NK Lukoil PAO - IR
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Conference Call Participants
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* Karen Kostanian
Bank of America Merrill Lynch - Analyst
* Maksim Moshkov
UBS - Analyst
* Alexander Nazarov
Gazprombank - Analyst
* Artem Konchin
Otkritie Capital - Analyst
* Koszenya Miszenkina
UBS - Analyst
* Ildar Davletshin
RenCap - Analyst
* Pavel Kushnir
Deutsche Bank - Analyst
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Presentation
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Operator [1]
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Good afternoon, ladies and gentlemen, and welcome to the Lukoil 2Q 2016 Conference Call. My name is Maddie, and I will be your coordinator for today's conference. For the duration of the call, you will be on listen-only however, at the end of the presentation, you will have the opportunity to ask questions. (Operator Instructions) I would like to inform you that the questions from the press will not be accepted on this call. I will now hand it over to the Pavel Zhdanov, Director of Capital Markets and M&A to begin today's conference. Thank you.
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [2]
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Thank you. Good afternoon, ladies and gentlemen, and welcome to Lukoil's second quarter and first half 2016 financial results webcast and conference call. My name is Pavel Zhdanov, I'm the Head of Capital Markets and M&A. I'm here today with Alexander Matytsyn, Senior Vice President of Finance and our colleagues from the accounting department. I am here today with Alexander Matytsyn, Senior Vice President of Finance, and our colleagues from the accounting department, Igor Kozyrev and Sergei Epifanov. I would like to start today's call with introducing our new Head of Investor Relations, Alexandr Palivoda, who has recently joined our team. I'm sure you know Alexandr on the back of his previous jobs in the Russian oil and gas companies. Alexandr has more than 13 years of oil and gas experience, including more than eight years in the IRO, so assuming his highly qualified background we expect Alexandr to contribute to our joint efforts on raising the level and quality of our day-to-day communication with the investment community and enhancing our transparency and disclosure to the international best standard practice. The plan for today's call is as follows. Alexander Matytsyn will start the presentation with a general overview of our results, then together with Alexandr Palivoda we will discuss our operating performance in more detail, which will be followed by a Q&A session. I kindly remind you that have two options for asking a question either by phone or using our webcast Q&A interface. As a routine procedure, I need to draw your attention to our cautionary statements. During today's presentation and Q&A session, we may make some statements regarding future of the Company, so called forward-looking statements, actual results and outcomes could differ materially from such statements due to the factors listed on the second slide of our presentation. Please refer to our Annual Report and stock exchange filings for more detail, these documents are available on our website. Thank you and now I'd like to pass over to Alexander Matytsyn.
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Alexander Matytsyn, NK Lukoil PAO - SVP, Finance [3]
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Thank you, Pavel. I will start with market update. Second quarter was favorable for our upstream business as the average price of Brent increased by 44% in dollar terms compared to the previous quarter. However, it was still 26% lower year-on-year. In the ruble terms and net of taxes, price volatility was less pronounced due to the year-on-year ruble devaluation and specifics of the Russian tax regime, including the [expedited] time lag effect. Net price for crude oil in the ruble terms increased by 12% quarter-on-quarter and 8% year-on-year, which enhanced the margin of our Russian upstream business. However, the increase in the oil extraction tax base rate from January 1, 2016 was negative for the performance of the upstream segment. The market environment for our domestic refining business was less favorable due to the [stagnant] market for petroleum products and two increases in excise taxes during the first six months of the year. Another step in the tax maneuver implementation in the beginning of the year was also negative for Russian refiners. As a result of these and other factors, benchmark refining margin in Russia fell into the red zone in the second quarter. However, amid these difficult microeconomic environment, we are very proud to state that due to high quality of our refining capacities which is primarily a result of our recently completed upgrade program, our domestic refining business posted positive EBITDA in the second quarter. The benchmark European refining margin was lower than a year ago, but still high enough for solid financial results, which was further supported by positive impact of inventories driven by oil price growth during the quarter. Taking into account all microeconomic and tax changes and thanks to our continuous effort of cost optimization, we demonstrated strong financial results in the reporting period. EBITDA in the second quarter remained flat quarter-on-quarter and decreased 8% year-on-year; excluding Iraqi project, EBITDA increased by 7% both quarter-on-quarter and year-over-year. Our bottom line increased 1.5 times quarter-on-quarter and remained flat year-on-year.
Strict capital discipline allowed us to thoroughly use our CapEx from the first quarter level and make it 20% lower year-to-year. While due to the harsh macro condition, many companies in the industry are experiencing [difficulty] with CapEx coverage by operating cash flow. Our conservative financial policy allows us to continue successfully executing our major project generating significant free cash flow and increasing dividend. In the first half of the year, we recorded RUB93 billion of free cash flow, including RUB57 billion in the second quarter. I'm proud to say that it's one of the best results in the industry.
To summarize, I believe that our results prove that our conservative financial policy, together with well balanced portfolio ensure our stability in almost any environment. Strong fundamentals and our actual financial results should leave no doubt about our ability to fulfill our new progressive dividend policy.
As you know that Annual General Shareholder meeting held on June 23 approved dividend for 2015 in the amount of RUB177 per share, which was 15% higher year-on-year and exceeds the ruble inflation for the year by 2%. The payout ratio is 28% of our profit adjusted for one-off items, which is 3% higher than recently announced new minimum payout. As we stated before, treasury shares are excluded from the payout calculation, dividend yield is around 7% and dividends were paid out on August 15. As you can clearly see, this is in line with our recently announced updated dividend policy principle. The policy itself will be submitted for approval at one of the upcoming Board of Directors meetings.
With that, I would like to pass the floor to Pavel.
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [4]
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Thank you, Alexander. Now I'm going to elaborate on our operational performance in the upstream in the past quarter and six months. There were two main factors behind the decline of our total hydrocarbon production, the Iraqi project and accelerated drilling rate at our Brownfields in West Siberia. The daily production at the West Qurna field was pretty much flat during the quarter at approximately 400,000 barrels per day. However, our share in this production declined substantially. This was due to the fact that by the end of the first quarter, we have almost fully booked in our P&L the compensation of historically incurred capital expenditure and moved on to booking the compensation of current expenses. As we're currently in the production maintenance mode, the capital expenditures on the project decreased substantially as well as operating expenses. As a result, the volume of compensation crude oil and EBITDA from this project declined quarter-on-quarter by approximately three times. In terms of physical shipments of compensation crude oil, in the second quarter we received 18 million barrels worth almost $700 million, which is 50% more than in the first quarter. Given our capital and operating expenses during the quarter of approximately $200 million, we reduced our exposure in [Iraq] by more than $0.5 billion to approximately $1 billion. In July, we received another 12 million barrels of compensation oil, such accelerated reimbursement dynamics confirm our expectations about reducing our exposure to the project to approximately two recurring quarters of CapEx and OpEx. As for our core West Siberian Brownfields, we've recently made a decision to increase drilling rates in the region on the back of substantial oil price recovery since the beginning of the year. As a result, in the second quarter, we recorded a 30% increase in drilling volumes quarter-on-quarter. We are planning to keep these increased rates throughout the second half of the year, which would positively impact future production dynamics. We're also working on a new three year plan with a special focus on increasing drilling rates at our Brownfields. I think the important message for this call would be that we have enough profitable drilling slots to achieve much lower decline rates in West Siberia relative to what we have today. We will keep you updated on this important topic. We are getting ready to start production at two major fields Filanovsky in the Caspian Sea and Pyakyakhinsky in West Siberia. These launches will allow us to significantly improve our production dynamics as well as to increase our EBITDA and operating cash flow as these new barrels will generate much higher margins due to tax concessions and high quality reserve base. We completed the first well at the Filanovsky fields in the beginning of August. The length of the well bore is 3,300 meters and it took us 55 days to drill the well. By the way, the drilling speed was twice higher compared to our first well drilled at the Korchagin field and we are planning to further enhance this indicator as we gain necessary expertise. The completed well is already in test production mode with a production rate of 2,700 tons or 20,000 barrels per day, which is better than our estimates and already contributes to our overall crude oil output. We would like to stress once again our confidence in achieving total production level at the field of 120,000 barrels per day in 2017. We started drilling the second well on August 3 and are planning to officially launch the field in early October. We also have plans to arrange a field trip for analysts and investors on October 10 and October 11. The Pyakyakhinsky field is ready for launch in early September with 69 oil wells completed yielding 3,300 tons or practically 25,000 barrels of oil per day. We are waiting for the trunk pipeline availability to start oil production and stick to our plan of producing approximately 1.5 million tons of crude oil next year. Gas production in the field will start later this year and is planned to reach up to 3 billion cubic meters in 2017.
Among other growth projects in West Siberia is our Imilorskoye field where we drilled 23 production wells in the first half of 2016 and achieved almost 70% production growth. We also demonstrated oil production growth in Timan-Pechora driven by further development of the Yaregskoye field and fields of the Denisovskaya Depression. At the Yaregskoye field, we launched new production facilities, namely oil treatment complex, the water treatment facility and additional steam generation unit. This new infrastructure enables us to continue increasing highly profitable production at these fields.
Now turning to upstream costs, as a result of the investment program optimization, Lukoil reduced its upstream CapEx in the second quarter by 14% year-on-year to just over RUB100 billion. We significantly reduced our investments in International segments by about 45% in dollar terms, while our investments in Russia remained almost flat. On a per barrel basis, our upstream CapEx is substantially lower than that of international majors and is in line with Russian peers. I would like to draw your attention again that if we strip out our capital intensive Caspian projects and our major oil mining project in Timan-Pechora, our adjusted CapEx per barrel becomes one of the lowest in Russia. Higher per barrel CapEx spend in our Caspian and heavy oil project is well justified by tax concessions guaranteeing appropriate returns on these investments. Our per barrel lifting cost in Russia increased by 14%, which is slightly above inflation for two major reasons, an increase in share of high-cost projects with tax benefits and reduction for production in West Siberia. At the same time, for example, lifting costs in our Perm region are significantly lower than our average and remain flat with only 1% growth year-on-year. Thank you. And now I would like to pass over to Alexandr Palivoda.
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Alexandr Palivoda, NK Lukoil PAO - IR [5]
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Thank you, Pavel. Good afternoon, ladies and gentlemen. I will now elaborate on the refining and marketing segment of Lukoil. Despite tax maneuver and two hikes in excise tax in January and April as well as the general weakness of the domestic market, delivering crude oil to all domestic refineries was more attractive than exports and this is one of Lukoil's key competitive advantages today and in the long run. This was achieved by timely launch of new conversion facilities in the last 18 months and general completion of the major upgrade program, which enables us to significantly improve our product slate today. This positive development is further supported by our strong vertical integration with well-developed product distribution network and major achievements in expanding our sales by a high margin priority [change]. In the second quarter, we were utilizing to full capacity our most efficient and advanced Volgograd and Perm refineries and at the same time at our Nizhny Novgorod and Ukhta refineries, we were maximizing utilization of converting facilities to reduce the dark product yield, which resulted in lower throughput volumes. Processing volumes at the Ukhta refinery were also affected by scheduled maintenance. Among other optimization measures aimed at improving product slate was minimization of vacuum gasoil exports from the Perm and Ukhta refineries. And its resurrection the direction to the cat cracking units in Nizhny Novgorod. As a result of our efforts, we achieved practically 90% refining depth in Russia, which is an increase of nine percentage points year-on-year, light product yield increased by seven percentage points to 65%. At today's call, I would like to stress that with the launch in the second quarter 2016 of the hydrocracking complex at our Volgograd refinery, we generally completed our Russian refineries upgrade program on time and on budget. As a result, Lukoil's refining segment today is one of the most advanced in Russia and will demonstrate significant reduction in capital expenditures in this segment. As it takes time to achieve optimal operating mode at the newly launched facilities, we expect the full impact on the output structure to be achieved in 2017. This means that we expect further enhancements of our product basket, but already today you can clearly see two times reduction in fuel oil and vacuum gasoil output compared to five years ago. I would like to reiterate what was said earlier by Alexander Matytsyn that we are proud to achieve positive financial results at our Russian refineries in the complicated market environment of the second quarter when benchmark refining margin was negative.
On the international side, favorable macroeconomic environment in the European refining segments supported by positive inventory effect due to the upward oil price trends during the quarter as well as the optimal performance at the hydrocracking units at our Burgas refinery resulted in higher throughput volumes and improvement of product slate. Volume growth was also due to maintenance works in 2015 at the ISAB and Petrocal refiners.
And now a couple of words about our marketing business. In the environment of weak domestic market for motor fuel, we, in fact, managed to maintain our sales volumes and achieved expansion in some of our priority sales channels. For example, sales volumes of our premium EKTO branded fuel increased by one-third in Russia and sales of our premium motor oils posted same growth rate. We also increased bunker fuel sales thanks to launching new products, production of which started following the launch of new facilities at our refineries. We also significantly raised jet fuel sales volumes in the airport of the Moscow air hub.
And I'll stop here with the operational update. But before we open the Q&A session, I would like to draw your attention to some novelties in our MD&A, which represents another step in our day-today effort to enhance transparency in this quarter. First, we changed our EBITDA calculation methodology to comply with market best practice standards. With this change, we eliminated the impact of Forex and impairments, and made this indicator more representative of our underlying operational performance. Second, we further enhanced description of the West Qurna-2 accounting process. Third, we added an explanation on the nature of the Forex exchange gains and losses in our P&L. Fourth, we substantially expanded the tax section to better illustrate the scale of tax concessions applicable to all fields and deposits. Fifth, we added refinery product slate statistics. And these are most important changes among other minor enhancements and we are planning to continue this work to facilitate the understanding of our business. On that note, thank you and we'll now open the Q&A session. For those who are listening to us by conference call, please follow instructions of the operator. For those who are with us via a webcast, please type your questions shortly, so we have enough time to process them. Thank you.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Karen Kostanian.
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Karen Kostanian, Bank of America Merrill Lynch - Analyst [2]
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This is Karen Kostanian from Bank of America Merrill Lynch. Thank you very much for your presentation and congratulations on good result. I have two questions. My first question is, would you be able to provide an overall CapEx number for this year? What do you project to spend. The reason I am asking this question is so far you're on track in generating the free cash flow necessary to pay your progressive dividend. I'm wondering if the upstream CapEx is going to be increasing on your Brownfields as you said, whether you think that free cash flow will be sufficient to fully cover the expected dividend payment given that the Russian inflation is around 7.5% this year. My second question is about Iraq, recently the news trickled down in the press that Iraq is asking all the participants in its upstream developments to actually increase production right now at higher oil prices. I wanted to ask where your negotiations do stand with the Iraqi government and whether you are planning to launch the second stage of West Qurna-2. Thank you.
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [3]
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Thank you, Karen. This is Pavel here. Regarding your first question on CapEx guidance for this year, at the current exchange rate and the current oil price, we believe the overall CapEx for the year will be somewhere around RUB550 billion. This is the result of the two factors. First is the increase in drilling in West Siberia, which clearly is an additional CapEx. Also the changed exchange rates resulted in lower rubles value of international CapEx. So overall guidance is somewhat lower to what we have given before. So that said, we assume the company will continue generating free cash flow if the [fuel price] environment will stay supported. Talking about Iraq as we mentioned before, we are not ready to so far to proceed to the next phase of development until our negotiation with Iraq leads to some hopefully changes in the economics of the contract, the negotiation is underway at the moment. So once we have any results to report, we'll do that. For now the situation is this and we continue maintaining the current level of production.
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Operator [4]
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Ildar Davletshin, RenCap.
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Ildar Davletshin, RenCap - Analyst [5]
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Good afternoon, gentlemen. Thank you for the presentation and welcome Alexandr. Just a follow-up question on the West Qurna. Can you provide some guidance what recovery or revenue do you expect to book from West Qurna in the second half roughly and in terms of contribution to cash flow what balance, in the past you provided the guidance on how much outstanding cost recovery you expect or was outstanding at the particular point of time, so how much cash you expect to recover from West Qurna until the year end. And then in the future assuming your negotiations are successful, so you are going to increase production and spend more, are you continue booking CapEx - consolidating CapEx in your accounts and also report higher revenues as a result or will you change methodology or will it continue like this? Thank you very much.
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [6]
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Thank you. Well, starting with your second question, I guess we were discussing in terms of how to account for this project going forward. The current methodology, of course, you are aware of, we were having internal discussions on how to make reporting of this project as transparent to the market as possible. So I guess just bear with us and we'll try to improve the transparency of the report on this project. If there are any news on the accounting on how we calculate, we'll also let you know. In terms of the forecast for the remainder of the year, as we mentioned the second quarter we received more compensation more than in the first quarter, but also in July we continued to accelerate its recovery. So we assume that the recovery in the third quarter will be substantially higher than the cost we incurred during the quarter. The cost we incur as we mentioned before is around $200 million and $250 million per quarter this year. So it remains to be seen how the schedule is fulfilled but we anticipate to substantially reduce the unrecovered cost by the end of this year, as I said it's [usually one], two recurring in quarters of CapEx and OpEx.
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Operator [7]
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Maksim Moshkov, UBS.
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Maksim Moshkov, UBS - Analyst [8]
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Good afternoon. Thank you very much for the presentation, also congratulation for the very good results and also the improvement in transparency is quite important and quite welcome. In terms of questions, the first question is actually also regarding Iraq, but the news just out is that Iran is ready to auction some new fields in September/October and some news previous suggest that Iran has completed the preparation for the international investors in the oil industry and so would you be able to elaborate a bit on what are the terms in Iran right and how do they compare with what they have already achieved in Iraq. And in case of flexibility between Iraq and Iran, what your strategy may be here? Would you be able switch from Iraq if you will not be able to achieve the terms, you are trying to achieve during the negotiations and switch to Iran instead where the terms might probably be better for you. And the second question if I may so in terms of production guidance. Could you, yes, we see that the CapEx are increasing in Western Siberia and expect the slowing down for the production declines. Do you have any target for the like oil production decline in Western Siberia for the year. Thank you.
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [9]
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Thank you, Maksim, starting with your first question Iraq-Iran switching from one to another. I guess we're not thinking about this in this way. Iraqi project is a major project for our company, but also for the country. It's one of the most successful projects in Iraq. So we are there to stay, we truly believe that Iraq is a great opportunity for oil production and we are totally committed to our Iraqi project. We sincerely hope that considering the change of the scenario, the pricing scenario, the macroeconomics and our overall balance, the Iraqi party will be much more receptive to changing the contract terms for the oil companies, including Lukoil to create the basis for further production growth in the country, without which we believe it will be hard not only for us but for other partners - our partners in the country to do that. The time has changed and now Iran is trying to do the same, which is open up the industry for the foreign capital, yes they are not as lucky as Iraq has been, the time has changed and now they need to offer much better terms to the foreign companies to commit investments. We cannot disclose any of the exact terms at the moment. I understand the discussion continues but I think everybody should assume that any country opening up the industry to private capital today, Iran and Mexico, need to offer attractive terms to attract foreign capital, okay. So in terms of your second question, production guidance or rather the guidance on decline rates in West Siberia this year, well, I'd rather not answer this question in terms of the guidance, we are doing everything we can now to come up with the best outcome of the investment decisions that we made earlier this year i.e. to increase drilling rates in West Siberia, the outcome will be seen later this year. But more importantly, I guess we're working as I mentioned on a three year plan, which will provide a detailed strategy on how to deal with our Brownfields in West Siberia. So I suggest we wait until that to give you a more detailed update on how we plan to work with our West Siberian Brownfields in the next few years, so but for now you should assume that the increased drilling rates in West Siberia will definitely lead to the reduction of the decline trend in this area.
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Operator [10]
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Pavel Kushnir, DB
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Pavel Kushnir, Deutsche Bank - Analyst [11]
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Good afternoon. Thank you for the presentation. Two questions please. First, you mentioned at the first quarter results conference call that in 2017, crude oil production will be at the same level as in 2015 as you may refer to the Russian crude oil production. Can you elaborate does it mean that crude oil production will increase next year by between 2% and 3% year-on-year? Can you confirm those numbers? And second, you have indeed started to spend more money on West Siberian drilling but the reason why you decided to do it now is not very well understood, and it's also a fact that crude oil price has increased since the beginning of the year, but still you significantly reduced your West Siberian drilling two, three years ago when oil price was still high, again can you please elaborate on why you think that this is a good time to intensify your investments in this traditional region? Thank you.
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [12]
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Thank you, Pavel. I guess to start with your second question, why the decision has been made at the time? Basically you correctly said [three] years ago or 2015. We will try to answer this question; essentially we have to reallocate capital to the new growth projects in Russia within a limited budget. We made that decision based on our conservative financial policy not to raise debt to continue with the high CapEx program in a volatile price environment. So we tried to reduce CapEx and we successfully managed to do this and within this limited budget without raising external funding to execute the big new projects but also to optimize the investments into the Brownfield. This essentially resulted in lower drilling, and lower CapEx in the Brownfield, the outcome of which you know. In January this year, the oil price reached its lowest level [than last the case] and at that time it seemed to be a totally correct decision. Since the oil price has recovered since the first quarter, we have promptly reacted to this and as you know increased the drilling rates by 30% in the second quarter. So we believe the decisions were timely made and were absolutely correct considering the circumstances, okay. And answering your first question in terms of production guidance in 2017, yes, we stated that with the launch of the new projects, which are coming on-stream later this year we'll reach full production sometime next year. We plan to compensate for the decrease in production in 2016 versus 2015. So the overall guidance still stays the same, the 2017 production flat versus 2015, that's what we'll try to achieve also considering the additional investments in the Russian Brownfields.
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Operator [13]
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Alexander Nazarov, Gazprombank.
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Alexander Nazarov, Gazprombank - Analyst [14]
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Good evening, gentlemen, and thank you very much for presentation and really well done for changes in [MDE], I really appreciate that. My question regards your cash pile. Last several quarters, you consecutively built up your cash pile. Probably I may assume you thought about Bashneft privatization, which now is postponed and there are few other companies which would like to participate in that. As this particular transaction is not [poised] in the short-term horizon, so probably you could use this cash for some other reasons, in particular to buyback your debt or potentially apply your dividend policy for interim dividends. I mean increasing by CPI rates. So could you probably answer to that to consider these particular two actions or any other cash usage method. Thank you.
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [15]
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Thank you, Alexander. I guess at this moment today, I cannot tell you how the plans have changed. Clearly, there has been some changes in terms of the privatization, the timing of that is unknown. For now what we will be doing, we'll try to efficiently allocate or do the existing (inaudible) plans but also discuss at the Board level. So at this stage, I cannot tell you more, we'll have to review it in the third quarter and make a decision.
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Alexander Nazarov, Gazprombank - Analyst [16]
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Okay. So a follow up on that is for this year is the schedule for interim dividend's Board discussions hasn't changed compared to the last years?
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [17]
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No, no change, you should assume pretty much the same timing
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Operator [18]
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Artem Konchin, Otkritie Capital.
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Artem Konchin, Otkritie Capital - Analyst [19]
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I would like to ask you to clarify your downstream segment's performance a little bit, you are showing a benchmark refining margin in a negative, yet your segmental disclosure shows fairly solid financial performance, EBITDA generated by the downstream. Historically, you used to disclose a breakdown of your domestic versus foreign refining operations in terms of the earnings. I was wondering if you could do this for us this quarter, so that we can tell where the money is being generated in Russia and how or are you getting that money from your European assets and how much that's basically my question. Also, the follow-up on this, about the excise taxes which you referenced have been hiked twice already this year. I was curious if you are successful in passing them on to the consumers or whether you are seeing these taxes stock in the company basically. Thank you.
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [20]
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Thank you, Artem. We're just trying to identify when exactly we disclose the breakdown between Russian in terms of planning.
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Artem Konchin, Otkritie Capital - Analyst [21]
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There was a $1 billion EBITDA I think in your annual accounts for 2015?
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [22]
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Yes, we do that for the annual accounts and for the international downstream. We haven't done that on a quarterly basis especially within Russian and financial refining because of the certain volatility in results. So we'll try to think how we can give you more information about this going forward.
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Artem Konchin, Otkritie Capital - Analyst [23]
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Maybe then I can sort of aim it from a different angle. This benchmark refining margin that you saw, right, and how does that stack against your refining margin? What is this benchmark that you are referring to?
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [24]
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There is certain information on page 11 of our presentation, which can give you some feeling in terms of the profitability of our Russian refining segment. The benchmark margin is the benchmark of what the average Russian refinery does and it's been one of the worst quarters for the average Russian refinery but since our refineries are not average but one of the best refineries in the country, we're still generating positive refining margins and you can take a guess based on the chart in page 11.
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Artem Konchin, Otkritie Capital - Analyst [25]
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That's a good point. Thank you very much.
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [26]
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And talking about passing the excise taxes to the consumer. Well, I guess nobody can pass those taxes to the consumer immediately. There is always a lag in any economy, but all oil producers are trying to do it and consumers are not interested, but authorities are pushing that. So this is the process.
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Operator [27]
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Koszenya Miszenkina, UBS
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Koszenya Miszenkina, UBS - Analyst [28]
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Hi, thank you for the presentation. Could you please tell me what portion of short-term debt do you plan to refinance if any?
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [29]
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Well, to answer this question is that we have a very small amount of short-term debt during this year. It's immaterial compared to current cash position. So talking about our plans for external financing, for the moment we haven't made a decision to go to the market. If the conditions are attractive and we have the needs, we will consider this at the time, but for the moment there is no news on the financing side.
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Operator [30]
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Thank you. And we have no further questions coming through from the telephone lines.
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Pavel Zhdanov, NK Lukoil PAO - Director, Capital Markets & M&A [31]
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Okay. We believe we also answered the questions that we received through the Internet. So since we have no further questions, before we conclude this call, I would like to summarize our key messages for today. To recap, first we are about to launch two new major fields, which would substantially enhance our daily production rate, EBITDA per barrel of production and cash flow generation. Second, we have enough profitable drilling slots in West Siberia to reduce production decline rates and we have already started ramping up production drilling in the region. Then, we have completed our major refinery upgrade program and are reducing CapEx in the segments. We currently have one of the best refining portfolios in Russia, which results in higher than average refining margin and contributes to our EBITDA per barrel of oil production throughout our vertically integrated chain. We expect our product slate to further enhance in 2017. We are substantially reducing our capital expenditures in international exploration and moving our focus to Russian upstream. Our new progressive dividend policy gives our investors and shareholders exposure to at least the CPI rate dividend growth and even higher growth rate in dollar terms in case of further oil price recovery and corresponding ruble appreciation. Our current and estimated free cash flow generation and strong balance sheet guarantee the smooth implementation of our new dividend policy. So assuming the above mentioned factors and low multiples, we believe that Lukoil today is a unique investment preposition. Thank you very much for listening. Good bye.
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Operator [32]
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Thank you ladies and gentlemen for joining today's conference. You may now replace your handsets, thank you.
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