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Edited Transcript of Alliance Oil Company Ltd earnings conference call or presentation 28-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Alliance Oil Company Ltd Earnings Call

HAMILTON May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Alliance Oil Company Ltd earnings conference call or presentation Friday, April 28, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* L. L. Bidny

Alliance Oil Company Ltd. - CFO

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Conference Call Participants

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* Ksenia Mishankina

UBS Investment Bank, Research Division - Associate Director and CEEMEA Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. And welcome to today's Alliance Oil Company Consolidated IFRS results for the First Half 2016 conference call (Operator Instructions) I must advise you that this conference is being recorded today, Friday, the 28 of April 2017.

I would now like to turn the conference over to do a host today, Mr. L. L Bidny. Please go ahead, sir.

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L. L. Bidny, Alliance Oil Company Ltd. - CFO [2]

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Thank you so much. Welcome everybody to the Alliance Oil Company IFRS 2016 results conference call.

Let's start with Slide #3, in our presentation. As you can see 2016 is characterized by a continuing fall in the average price of oil (inaudible) crude prices and foreign-exchange rate (inaudible) product price. 2016 is characterized by an average euros price of 17% lower than the average euros price from 2015. 16% lower and exchange rate (inaudible) 10% higher. Our oil products suffered as well. Naphtha grew 19% on average less than 2015. And crude oil was a 21% on average cheaper than it was in 2015. Q4, however, demonstrated a stronger performance as we see in the following slides.

As far as reports of our financial operational results revenue for 2016 is weakest than 2015. And for the fourth quarter of 2016, it was 28% higher than the fourth quarter of the previous year. EBITDA was 16% higher year-on-year, with 31% higher on quarter-on-quarter. Mainly decreased production taxes due to macroeconomic effects and an increase profitability of the downstream segment. The net result was USD 150 million of net profit, and again USD 153 million loss in 2015. Quarter-over-quarter our net profit was USD 43 million in 2016 -- fourth quarter of 2016 as opposed to USD 49 million loss in 2015.

Operational results, production remains stable more or less, USD 1 million growth quarter-on-quarter fell by 9%. Again this is due to generally production plants being idle in order to provide for more sustainable field development. Our refinery volumes increased by 11% both year-on-year and quarter-on-quarter and throughput by 10%, due to efficiency upgrades of our refinery facilities.

On Slide 5, you'll see our crude oil and gas reserve in production. Overall oil reserves stand at approximately 592.5 million barrels of oil equivalent, and 2P gas reserves stand at 57.1 million barrels of oil equivalent. 12 month production for 2016 was 19.5 million barrels oil equivalent with a daily average of 53,197 barrels of oil equivalent per day. And for fourth quarter of 2016, production was 4.7 million barrels of oil equivalent with a daily average of 50,600 barrels of oil equivalent per day.

On Slide 7 you see decrease of our hydrocarbon production. In operations and general Hydrocarbon production fell relevant to data[ph] by 10%. But at the same time it is one of the lowest base production decreases in the Russian Federation. We increased our production in (inaudible), as this is a veteran and right now, we are currently awaiting inspection in order to start our program next year in order to increase production. We implemented 175 well interventions and launched 55 new wells in 12 months of 2016.

On Page 7, you see the results of our crude oil sales, year-on-year with total fell 4%, characterized by an increase 45% in our export volumes due to the export delivery we received on Kolvinskoye oil field. Same characteristics for Q4 2015, and 2016. Basically the overall fall was 6% but the increase in export sales rose by 44%.

On next slide you'll see the Crude Oil Netback prices. Export netback prices increased year-on-year by 26%, whereas domestic netback prices fell by 12% as stated previously. Quarter-on-quarter export prices increased by 30% and domestic prices by 34%.

Next page. You will see our gas sales and gas prices. Overall gas and gas liquid sales -- gas sales fell 9% year-on-year and gas liquid sales fell by 17% year-on-year. Quarter-on-quarter we saw 27% fall in gas sales and 38% fall in the gas liquid sales, which is mostly due to the fact that we are reviewing our cycle for those as well (inaudible) on things in order to, once, again try to increase production by mutual program next year.

Next slide, you can see we increased our sales of crude oil and gas and gas liquids. Overall fall 8%, year-on-year, domestic sales fall by 38% but an increase 23% in our export revenues. Same thing quarter-on-quarter -- I'm sorry, not same thing, the opposite is actually quarter-on-quarter. We had a 15% increase in revenues from sales with 82% increase in sales in export sales and 27% fall domestic sales.

Now next slide. You see our Assets and Refining Volumes. Operating retail gas stations were 277, 20 oil depots including 8 oil that are conserved. 3 Marine terminals, 1 jet fuel depot and 1,439 railway tankers. Refining volumes for 12 months of 2016 was at 95,698 barrels per day for 12 months of 2015 it was 86,304 barrels of oil per day, once again is an 11% increase as anticipated earlier.

Q on Q for fourth quarter of 2016, the refining volume was 101,146 oil barrels per day, and for fourth quarter of 2015, it was 91,493 barrels of oil per day, which is also 11% increase. Throughput increased by 10% both year-on-year and quarter-on-quarter.

Next slide. You'll see our downstream operations we covered oil refinery, refining volume, as they said, increased year-on-year by 11% and quarter-on-quarter by 11%. And refining throughput increase both year-on-year and quarter-on-quarter by 10%. Light oil products yield year-on-year was basically along the line and increased 7.5% quarter-on-quarter. You'll see that we produced 36% of oils and fuels, 20% of marine oil, 19% gasoline, 19% diesel fuel and 6% other fuels.

Next slide, Downstream Operations Oil Product sales. Year-on-year we saw 4% increase with retail sales increasing by 5%, wholesale sales remaining stable 7% to 17% increase in bunkering sales and 6% in export sales. This is due to increase in events from bunkering market and higher margins. Quarter-on-quarter, we saw increase of 3% in oil product sales with retail increasing by 7%, wholesale by 3%, bunkering by 9% and export volumes increased by 3%.

Next slide, Oil Products prices. You see year-on-year our export volumes net prices increased by 2%, oil bunkering fell by 21%, wholesale prices fell by 12% and retail by 7%. At the same time, quarter-on-quarter we saw 56% decrease in export net prices and 43% increase in bunkering prices with wholesale and retail(inaudible) remaining stable.

Net slide, Oil Product sales. Revenue from sale of oil products, year-on-year decreased by 7%, 6% export decrease, 7% in bunkering and 12% wholesale, with retail remaining more or less stable. Quarter-on-quarter, as opposed to year-on-year, we saw 20% increase in revenues with 54% increase in revenues from exports, 55% increase in revenues from bunkering, 3% increase in wholesale and 12% increase in retail revenues. Decrease year-on-year was a result of deteriorating macroeconomic conditions in 2016 compared to 2015.

Next slide, you'll see our financial results. You'll see the average exchange rate in Russian ruble increasing RUB 67 per USD from RUB 61 per USD. Urals, average falling from USD 15 per barrel to USD 41.61. It's the increasing revenue we spoke about. Operating income increased from $144 million to approximately $177 million. EBITDA grew to $370 million from $318 million year-on-year. EBIDTA margin for 2016 was 17% as opposed to 15% in 2015. And ForEx gain USD 189 million as opposed to a loss of $149 million for 12 months of 2015. So the profit for 2016 USD 159 million as opposed to loss of USD 153 million in 12 months of 2015. Total assets increased from USD 2,968 million to USD 3,451 million. Cash and cash equivalents fell from USD 355 million to USD 138 million. Total debt slightly increased. Total cash generated from operating activities was USD 109 million in 2016 as opposed to the USD 323 million in 2015. Total cash used for investments was USD 310 million in 2016 as opposed USD 164 million in 2015. And total cash used in financing activities was USD 36 million this year as opposed to USD 61 million in 2015. These trends are true for quarter-on-quarter. The ruble exchange rate almost 66 rubles per USD, from 63, which is an increase on part of euros price an increase quarter-on-quarter from 47.74 from first quarter 2016(inaudible) in fourth quarter 2015. Revenue was USD 671 million in fourth 2016 as opposed to approximately USD 525 million in fourth quarter 2015. Operating income was USD 59 million as opposed to USD 54 million. EBITDA increased to USD 118 million with USD 90 million in fourth quarter of 2015. EBITDA margin pretty much remained stable quarter-on-quarter. ForEx gains USD 37 million as opposed to the loss of USD 83 million in the fourth quarter of 2015. Profit from period of fourth quarter 2016 showed USD 43 million as opposed to loss of USD 49 million in 2015 fourth quarter. Total assets, same numbers. And cash and cash equivalents, same numbers. And lastly, I'm looking at total cash generated from operating activities for fourth quarter 2016 was USD 59 million as opposed to USD 149 million in fourth quarter of 2015. Cash used for investments was USD 59 million in the fourth quarter of 2016, as opposed to USD 33 million in fourth quarter of 2015. Total cash used in financing activities was USD 5 million in fourth of 2016 as opposed to USD 1 million in fourth quarter of 2015.

Now next slide, segment performance. You'll see that total MUSD revenues fell by 7% in 12 months of 2015 than 12 months of 2016, suffered due to decrease in netbacks and oil -- crude oil prices the same SG&A increased quarter-on-quarter revenues, which is result of favorable-to-favorable netback prices and strong renewal. Downstream segments decreased as a result of both favorable depreciation and decrease in the prices. In Q-on-Q once again, there were 2 factors contributing to growth, which was higher quotes for exports and bunkering sales.

Slide number 18. You see the EBITDA distribution. Year-on-year you've seen upstream with EBITDA increased by 4%, downstream revenue increased by 20%. Quarter-on-quarter 10% increase in upstream EBITDA and an 18% increase in downstream EBITDA. Same thing basically for same products. Which seems to be production tax rate as stated previously entire 12 months and Q on Q. Upstream EBITDA increased year-on-year with decrease in transportation cost as a result of the connection to ESPO pipeline and higher quotes for exports and bunkering sales as I said previously, Q on Q Now per barrel once again EBITDA year-on-year upstream increased by 9% and less than 3% for downstream segment. And quarter-on-quarter the increase was 22% upstream segment and 16% in the downstream segment.

Next Slide. Upstream economics. Crude oil economics, you'll see that revenues fell by 2% USD per barrel, production cost by 11% year-on-year, and 8% -- increased by 8% quarter-on-quarter. Revenue quarter-on-quarter increased by 28%. Production and other taxes decreased year-on-year by 10% and increased by 36% quarter-on-quarter. Cost of purchased oil increased by 20% year-on-year and 6% quarter-on-quarter. SG&A and other expenses decreased by 14% year-on-year and increased by 16% quarter-on-quarter. EBITDA increased by 11% year-on-year and by 21% quarter-on-quarter. Once again Q on Q economics were affected by higher netbacks in debt prices. As far as gas and gas product economics are concerned, revenue fell year-on-year by 4% and increased by 17% quarter-on-quarter. Production costs more or less remained stable year-on-year and increased by 30% quarter-on-quarter. Production and other taxes increased by 10% year-on-year and by 32% quarter-on-quarter. SG&A and other expenses are same.

Now I'm going to discuss here EBITDA per barrel. Oil equivalent decreased by 13% year-on-year and increased by 13% quarter-on-quarter. Once again, quarter-on-quarter entire performance was affected by stronger goodwill and higher bank demands.

Next slide. You see our downstream economics. You can see dollar per barrel revenue decreasing year-on-year from USD 55.52 to USD 49.81 per barrel. Quarter-on-quarter it was slightly increased from USD 48.75 per barrel in the fourth quarter of 2015 to USD 56.48 to USD 48.75 in the fourth quarter of 2016. Refining costs fell from USD 2.90 in 12 months of 2015 to USD 2.7 in the 12 months of 2016. In the fourth quarter 2016, they increased from USD 2.66 in the fourth 2015 to USD 2.74 in the fourth quarter of 2016. Crude oil transportation cost decreased year-on-year from USD 7.85 per barrel in 12 months of 2015 to USD 3.89 per barrel in 12 months of 2016. Quarter-on-quarter, we saw an increase from USD 3.46 per barrel in the fourth quarter of 2015, to USD 4 even in fourth quarter of 2016. Cost of crude oil fell year-on-year from USD 27.48 per barrel to USD 26.18 for the year 2016 quarter-on-quarter with increase from USD 25 per barrel to USD 30 per barrel in fourth quarter of 2015. Excise and other taxes we saw increase both year-on-year and quarter-on-quarter. Year-on-year from USD 3.12 to USD 4.66 and quarter-on-quarter from USD 2.48 to USD 5 even. For oil purchased for resale we saw decreased in year-on-year numbers from USD 3.81 in 2015 to USD 1.12 in 2016. Quarter-on-quarter, associated dynamics, fourth quarter 2015 oil products purchased for resale USD 3.45 in the fourth quarter of 2016 with and USD 0.87 per barrel. SG&A and other expenses remained stable year-on-year. In terms of quarter-on-quarter slightly increased from USD 4.70 per barrel to USD 5.83 per barrel. EBITDA per barrel increased year-on-year from USD 5.66 to USD 6.56 and quarter-on-quarter from USD 6.94 to USD 8 even.

Annual downstream economics were overall positively affected by considerable saving in transportation costs due to connection to ESPO. Q-on-Q economics were positively affected by higher quotes for export and bunkering sales.

Next slide. Our debt portfolio. Seems pretty much changing debt maturity profile. As far as our net that EBITDA, it shows the leverage dynamics. We've almost achieved goals of Q4 2015. Net debt EBITDA is at 5.29 as opposed to 5.23 in fourth quarter of 2015. This results in restriction on additional loans and borrowing, but once again with our current leverage on total debt, this is distributed as follows: 29% will be RUB bonds and bank loans, 32% in USD bank loans. 97% of our debt is unsecured 3% secured. Cash on balance grew to USD 138 million. Total debt of USD 2,093 million net debt of USD 1,955 million. As far as capital expenditures are concerned you'll see a trend -- falling trend from 2015 and 2016. And trend quarter-on-quarter you'll see a fall in the CapEx for the downstream segment. This comes as a result of Q4 2015 we're finishing your transition and ended up the CapEx from downstream financial right now.

So as a result going forwards downstream CapEx should remain stable around USD 6 million per quarter or about USD 30 million for year.

So I guess that concludes our presentation. So I'll turn it over to Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes the line of Ksenia Mishankina with UBS Investment.

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Ksenia Mishankina, UBS Investment Bank, Research Division - Associate Director and CEEMEA Analyst [2]

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You have USD 460 million of debts. What portion do you plan to refinance and how? And also what is your optimal leverage level and when do you plan to achieve it?

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L. L. Bidny, Alliance Oil Company Ltd. - CFO [3]

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Okay, yes, USD 460 million in debts. We're refinancing so the first quarter of 2017 we had refinanced our revolving debt facility of 11 billion under Russian rubles and another USD 3 billion in March. So it's an ongoing process. As far as optimal leverage is concerned 3x EBITDA would probably be the best for company of our size and our operating criteria.

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Ksenia Mishankina, UBS Investment Bank, Research Division - Associate Director and CEEMEA Analyst [4]

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And how do you plan to achieve it and when?

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L. L. Bidny, Alliance Oil Company Ltd. - CFO [5]

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We're optimizing our development schemes for our most perspective assets, that you mentioned, which will be the best route to achieve and decrease net debt to EBITDA. That's one way optimization of our expenses. And the second way will be basically that's -- other reason would be CapEx expenditures -- we're lowering our CapEx expenditure to date to be most effective in terms of payback. And basically, we are also thinking of increasing our refining volumes.

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Ksenia Mishankina, UBS Investment Bank, Research Division - Associate Director and CEEMEA Analyst [6]

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Okay, and by roughly how much?

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L. L. Bidny, Alliance Oil Company Ltd. - CFO [7]

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I can't give you that estimate right now. That would be forecast. I'm not comfortable giving forecast.

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Ksenia Mishankina, UBS Investment Bank, Research Division - Associate Director and CEEMEA Analyst [8]

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What is your CapEx guidance for 2017?

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L. L. Bidny, Alliance Oil Company Ltd. - CFO [9]

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Pretty much in line with numbers for 2016. Downstream definitely will be same at around RUB 1.9 billion. As far as CapEx in the upstream segment business, highly depend on the work that we're doing on reprocessing seismic for several of our fields. Once again, if we show our perspective place that we did well, and additional exposure of the count depending on the CapEx will be higher. If not then it would pretty much remain the same as 2016.

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L. L. Bidny, Alliance Oil Company Ltd. - CFO [10]

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So we're done. Okay. Thank you very much for all of your continued interest. And thank you very much. Take care.

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Operator [11]

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That does conclude conference for today. Thank you for participating. You may all disconnect.