us gaap financial and operating results for second quarter...
TRANSCRIPT
US GAAP Financial and Operating Results for Second Quarter 2011
3 August 2011
22
Alexey YankevichHead of Economics and Corporate Planning Directorate
Yuri KalnerHead of Strategic Planning Department
Vladimir KonstantinovHead of Economics and Investment Department
Refining and Marketing Division
Management participating in this call
Boris ZilbermintsDeputy Chairman of the Management Board
Deputy CEO for Exploration and Production
33
Disclaimer
This presentation contains forward-looking statements concerning the financial condition, results of operationsand businesses of Gazprom Neft and its consolidated subsidiaries. All statements other than statements ofhistorical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements arestatements of future expectations that are based on management‟s current expectations and assumptions andinvolve known and unknown risks and uncertainties that could cause actual results, performance or events todiffer materially from those expressed or implied in these statements.
Forward-looking statements include, among other things, statements concerning the potential exposure ofGazprom Neft to market risks and statements expressing management‟s expectations, beliefs, estimates,forecasts, projections and assumptions. These forward-looking statements are identified by their use of termsand phrases such as „„anticipate‟‟, „„believe‟‟, „„could‟‟, „„estimate‟‟, „„expect‟‟, „„intend‟‟, „„may‟‟, „„plan‟‟,„„objectives‟‟, „„outlook‟‟, „„probably‟‟, „„project‟‟, „„will‟‟, „„seek‟‟, „„target‟‟, „„risks‟‟, „„goals‟‟, „„should‟‟ and similarterms and phrases. There are a number of factors that could affect the future operations of Gazprom Neft andcould cause those results to differ materially from those expressed in the forward-looking statements includedin this presentation, inclusively (without limitation): (a) price fluctuations in crude oil and oil products; (b)changes in demand for the Company‟s products; (c) currency fluctuations; (d) drilling and production results;(e) reserve estimates; (f) loss of market and industry competition; (g) environmental and physical risks; (h) risksassociated with the identification of suitable potential acquisition properties and targets, and successfulnegotiation and completion of such transactions; (i) economic and financial market conditions in variouscountries and regions; (j) political risks, project delay or advancement, approvals and cost estimates; and (k)changes in trading conditions.
All forward-looking statements contained in this presentation are expressly qualified in their entirety by thecautionary statements contained or referred to in this section. Readers should not place undue reliance onthese forward-looking statements. Each forward-looking statement speaks only as of the date of thispresentation. Neither Gazprom Neft nor any of its subsidiaries undertake any obligation to publicly update orrevise any forward-looking statement as a result of new information, future events or other information.
44
Highlights
Macro Environment
Upstream
Downstream
Financials
Q & A
Appendix
Overview
55
Financial performance in 1H 2011:
• Revenue: US$ 21,341 mln (+39.3% Y-o-Y)
• EBITDA: US$ 4,945mln (+57.7% Y-o-Y)
• Net Income: US$ 2,604 mln (+73,5% Y-o-Y)
Continued operational progress :
• 7.7% Y-o-Y production increase (boe) as Cenomanian gas
reaches full production
• 12.0% Y-o-Y increase in refining volumes
• Substantial gains in premium channel sales (+38.3% Y-o-Y)
Strategic advances:
• Omsk refinery started production of Class 5 motor fuel in
June 2011
• On July 21, President Dmitry Medvedev signed a law
granting MET relief for the Yamal Nenets AO, increasing the
profitability of Gazprom Neft‟s Messoyakha and
SeverEnergy projects
Strong financial performance while advancing on
2020 strategic goals
66
Macro Environment
Improved domestic product prices, stronger ruble
77
Domestic product prices recover to align with high
global crude price environment
Brent, $/bbl Average exchange rate Inflation (PPI), %
Growth in global crude and product prices
New export duties on gasoline and naphtha
Improved domestic prices and strong demand
Government policy and FAS activity focused on
maintaining consumer affordability
Continued ruble appreciation against US$
$/tonne
Omsk refinery netback prices
for unleaded 92 petrol
150
250
350
450
550
650
jan.11 feb.11 mar.11 apr.11 may.11 jun.11
Domestic price (taxes excluded)
Export netback
Gasoline export duties
88
Upstream
New projects on track, upgrading production base
99
Legacy Assets
Cenomanian gas: produce 3.2 MMtoe
Messoyakha: complete development plan,
exploration drilling
Orenburg: beginning of drilling program
realization, the asset is controlled by GPN
Novoport: well re-entry, further study;
preparation for developing long term strategy of
project
SeverEnergy: gas and condensate transportation
infrastructure construction
Continue to develop new technologies
Maintain production levels
Badrah: complete seismic and first stage
infrastructure; begin de-mining (phase 2) begin
drilling (7 wells)
Equatorial Guinea: selected sites for
exploration drilling
Venezuela: organizational activity and
stratigraphic drilling, preparation for on-shore
infrastructure
Cuba: preparatory work and drill first well
New projects driving domestic growth while international expansion continues
Cenomanian gas: full scale production
Messoyakha: seismic complete; drilling
exploration wells; preparation for test
production
Orenburg/Novoport: preparation to
transfer licenses
Novoport: reappraisal identified premium
quality crude oil; marine transport plan
approved; preparation for test production
SeverEnergy: Long term strategy
submitted for Board of Directors approval
1Н11 Key Events: 2011 Major Goals:
Badrah: de-mining complete (phase 1); 3D
seismic complete; infrastructure work in
progress (phase 1 complete); drilling
contractors approved
Equatorial Guinea: completed 3D seismic
on Blocks T and U
Venezuela: planning; well permitting
agreement; make a decision about „Early
Production‟
Cuba: signed JV agreement (July 2011)
NIS: Hydrocarbon production increase
(+25% Y-o-Y)
New Source
International
Tomskneft compressor station startup
Removal of unprofitable wells from
operations
Intensified E&P activity
Priobskoye field added 8% Y-o-Y
Zimnee field added 56% Y-o-Y
1010
KboepdMMToe
Group hydrocarbon production
kMMtoe
+8%+1%
SPD was a key contributor to production
from equity affiliates, growing by 2.7% Q-o-
Q and 10.3% Y-o-Y
Tomskneft Q-o-Q gas production increased
by 25.1% due to completion of maintenance
at the Luginetskaya gas compressor station
Total Group hydrocarbon production increased by
1.2% Q-o-Q and 7.7% Y-o-Y
Crude oil production by consolidated subsidiaries
increased 0.9% Q-o-Q and 0.1% Y-o-Y, driven by
seasonal factors and increased development
activity in 2Q11 vs. 1Q11:
Drilling
Hydrofracking
Production growth continues for fourth straight
quarter
1111
▪ Gazprom Neft and Schlumberger signed a
technology cooperation agreement to
increase E&P efficiency in Gazprom Neft‟s
domestic and international operations
▪ Weatherford partnership will accelerate
technology application (in the stage of
preparation the drilling program of multilateral
wells with coil tubing application)
▪ Specific projects include
• Completing production test of foam fracking
technology at Priobskoye field
• Preparing well coverage optimization plan for
Priobskoye field
• Evaluating experimental use of nitrified foam
fracking at Vingapurovskoe field
• Developed plan to test horizontal drilling and
multi-stage foam fracking at Vingapurovskoe
field
• Continued testing new technologies for
remedial cementing of producing and injection
wells
Modern technology will drive improved recovery at
older fields
Planning multi-stage completion
program using Weatherford coiled
tubing technology
Application of modern technology
will increase production and
improve recovery from older fields
1212
MET relief significantly improves economics
of SeverEnergy and Messoyakha fields:
• Total economic benefit over 10 years
>130 bln rubles
• Allows Gazprom Neft to start
immediate development of oil
component
But Messoyakha needs oil prices >US
$100/bbl to recoup investment
Additional stimulus is therefore needed:
• Crude oil export duty exemption
• Reformed oil sector tax system
Further decision-making in the region will
require additional tax reductions beyond
Yamal MET relief
Novoport
Messoyakha
YNAO
– Messoyakha
– Gazprom
– Sever Energy
– Unlicensed federal resources
Exploration
“Zapolyarye Purpe” pipeline
– Exploration area (after 2020)
– Projected pipeline
Yamal peninsula Gydan
MET relief raises profitability of Projects in YNAO, but further tax reforms still necessary
Company Field Accumulated
Production*
Tax relief
effect**
Messoyakha 50 MMTonnes 98.6 bln RUB
SeverEnergy 33.3 MMTonnes 33.4 bln RUB
Total GPN 83.3 MMTonnes 132 bln RUB
* Total project production applicable to MET tax exempt
** Attributable to GPN
1313
• 100% (Gazprom transfer)
• Reserves: 404 MmToe
• Startup: 2014
• Peak: 13.1 MmToe at 2021
• + US$ 0.4 bln to GPN value
Novoport
• 50% (JV with TNK-BP)
• Reserves: 513 MmToe
• Startup: 2015
• Peak: 33.4 MmToe at 2025
• + US$ 2.1 bln to GPN value
Messoyakha
• 25.5% (JV with NOVATEK)
• Reserves: 1,177 MmToe
• Startup” 2012
• Peak: 35 MmToe at 2024
• + US$ 0.7 bln to GPN value
Sever Energy
• 50% (JV with TNK-BP)
• Reserves: 420 MmToe
• Startup: 2016-2018
• Peak: 15 MmToe at 2022
• + US$ 0.4 bln to GPN value
Kuyumba
New projects gain significant value under new tax incentives
2012-2021 MET relief (approved 21 July)
and “60-66” tax regime adds ~16% to
Gazprom Neft market cap
1414
Downstream
Fuel quality upgrades and increase in marginal sales add value to
industry-leading portfolio
1515
Begin construction of isomerization
units at Moscow and Yaroslavl
refineries to improve gasoline quality
Upgrade and construct fuel quality-
focused units (hydrotreaters) at all
refineries to achieve EU
environmental standards
Continue NIS refinery modernization
plan, including construction of
MHC/DHT unit, allowing transition to
Euro-5 product output in 2012
Premium sales development in Serbia
Growing sales volumes at
Gazpromneft Lubricants Italia
Complete retail station rebranding and
introduce customer loyalty programs
Optimize network to increase average
per-site throughputs and related
products and services sales
Continue premium sales growth
Refining volumes up 19% 2Q
2010/2Q 2011
Omsk started production of
Class-5 motor fuel in June
In June Omsk refined its
billionth ton of oil
Test refining of gas condensate
from SeverEnergy
2Q11 Key Events: 2011 Major Goals:
Premium sales volume up 45%
2Q11 / 2Q10
Rebranding campaign well
underway due to Sibir Energy
retail network
Increased Euro-quality fuel
output at NIS
Entered new international
bunkering markets
Refining
Premium Sales
International
Refinery modernization raises fuel quality, drive
continued premium sales growth
1616
4.675.24
4.62
1.65
2.73
2.57
1.65
1.68
1.740.71
0.67
0.518.68
10.32
9.43
0
2
4
6
8
10
12
2Q10 2Q11 1Q11
MMTonnes
Omsk Moscow Yaroslavl NIS
+18.9%+9.4%
70%
30%
82%
6%
12%
21%
68%
11%
72%
28%
Gazprom Neft refining throughput Gazprom Neft gasoline and diesel yields
(MMTonnes)
Gasoline
Upgraded fuel quality adds value to increased
refining runs
Refinery throughputs rise due to increased demand
Moscow refining volume up 65% Y-o-Y due to
consolidation of third party processing and
difference in maintenance cycles Q-o-Q and Y-o-Y
High-octane gasoline production up 33% Y-o-Y:
-Excise taxes differentiation
-Increase in Moscow Refinery throughput
-Following streaming of Omsk Isomalk-2 unit
Diesel
2.5
1.6
2.8
2.1
= < Class 3
= Class 3
= Class 4 & 5
2Q10 2Q11
1717
Gazprom Neft average netbacksGazprom Neft Crude mix
2070
Refining netbacks remain strong
Crude export profitability down from March 2011 highs due to:
- Lag in crude oil export duty
- Stabilizing oil price environment
Higher domestic and CIS sales driven by buoyant post-crisis demand and prices
MMTonnes
Utilizing higher netbacks by channeling crude to Refining
$/bbl
1818
Y-o-Y 2Q premium*
sales increase
Expanded refueling operations
to 11 civil and 11 military
airports in Russia and 26
abroad
Entered new bunkering markets
in Klaipeda, Tallinn and Leipaja
internationally and Nizhniy
Novgorod domestically
Increased G-Family lubricants
international sales volume by
2.7 times Y-o-Y
G-Drive premium branded
motor fuel achieved 16% share
of high octane market in Saint
Petersburg
Market share**
Lubricants
•premium sales include retail and small wholesale
**Market shares are retail market shares for retail fuels and lubricants, overall national market shares for aviation and bunkering
High growth premium channels continue strong
performance
Retail
Aviation
Bunker
37%
51%
45%
Bunkering
1919
Financials
Strong results on higher volumes and prices
2020
RevenuesUS$ mln
EBITDA*US$ mln
Net IncomeUS$ mln
*EBITDA includes share of affiliates’ EBITDA
Increased sales volume and higher crude and petroleum prices drove 16.3% revenue increase Average Urals price
increased10.8% Q-o-Q and 42% Y-o-Y
Strong revenue performance as well as improved sales mix driving 58% Y-on-Y growth in 6M EBITDA
Duty lag effect and ruble appreciation dampened Q-o-Q EBITDA increase
58% Y-o-Y EBITDA increase, gain from sale of investments drove 74% rise in net income
Net income fell 19% Q-o-Q due to increase in DD&A and changes in fair value of foreign currency derivative contracts
- US$ 198 mln charge to reserve for FAS penalties
Volume and pricing strength leverage 74%
net income expansion Y-o-Y
2121
Y-o-Y EBITDA growth driven by price, volume and improved sales mix
Changes in Net price = 1 386
3,136
4,945
OPEX = - 172
SG&A = - 29
Exploration expenses = 11
Management effectiveness = 405
2222
Volumes and tariffs growth lead to larger Opex
2323
US$ mlnCash reconciliation:. 1H11 vs. YE2010
Free cash flow boosted due to working capital
stabilization
Fre
e c
ash flo
w
2424
555
631
495
111
191
75
55
67
26
14
4
16
735
893
612
2Q10 2Q11 1Q11
Exploration and production Refining
Marketing and distribution Others
13,7%
72,1%
21,5%45,9%
27,5%
154,7%
157,7%+21,8%
Capex Comparisons (US$ mln)
Growth and improvement program continues to drive
capex
Capital spending program continues to focus
on growth and competitive improvement
Quarterly E&P capex up 27.5% vs. 1Q due to
28.4% increase in production drilling
Refining capex up 154.7% Q-o-Q due to
construction of catalytic cracking
hydrotreatment and diesel fuel
hydrotreatment units at Omsk refinery; light
naphtha isomerization unit at Moscow refinery
and other projects
Marketing and distribution capex up 157.7%
as service station rebranding program
focuses on integration and rebranding of Sibir
Energy assets, doubling presence in Moscow
region
2525
Continued commitment to capital discipline and
debt optimization
Net debt/EBITDA 0.8 vs. target < 1.5
Share of short term debt decreased by 10.3
p.p. Q-o-Q and 25.6 p.p. Y-o-Y
Average interest rate decreased 1% p.p. Y-o-Y
Gearing ratio and maturity mix
Signed US$ 600 mln unsecured 5 year
club deal in April 2011
Average debt maturity increased by
7.4% from 2.41 to 2.59 years Q-o-Q and
50,5% Y-o-Y
Debt by currency
2626
Questions & Answers
2727
Appendix
2828
2,467
Changes in Net Price = -49
2,478
Q-o-Q EBITDA growth was tempered by duty lag effect
Management
effectiveness = 164
OPEX = -10
SG&A = 78
Exploration
expenses = 11
2929
Q-o-Q Opex growth driven by real Ruble appreciation
and increase in upstream activity
3030
bbl barrel
boe barrel of oil equivalent
tonne metric ton
toe tonnes of oil equivalent
MMTonnes million tonnes
MMbbl million barrels
MMboe million barrels of oil equivalent
Mmtoe million tonnes of oil equivalent
bcm billion cubic metres
mcm thousand cubic metres
MMm3 million cubic metres
bcf billion cubic feet
kbpd thousand barrels per day
kboepd thousand barrels of oil equivalent per day
ktpd thousand tonnes per day
tonnes/day tonnes per day
For additional definitions:
http://ir.gazprom-neft.com/
Units