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Edited Transcript of NVTK.MM earnings conference call or presentation 30-Jul-20 1:00pm GMT

·44 min read

Half Year 2020 Novatek PAO Earnings Call (IFRS) Tarko-Sale Sep 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Novatek PAO earnings conference call or presentation Thursday, July 30, 2020 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Mark Anthony Gyetvay PAO NOVATEK - Deputy Chairman of the Management Board & CFO ================================================================================ Conference Call Participants ================================================================================ * Alexander Burgansky Renaissance Capital, Research Division - MD and Head of Oil & Gas Research * Angelina Glazova JPMorgan Chase & Co, Research Division - Research Analyst * Henri Jerome Dieudonne Marie Patricot UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst * Olga Danilenko Prosperity Capital Management Ltd - Director of Oil and Gas * Ronald Smith;BCS;Sr. Oil & Gas Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the NOVATEK Second Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mark Gyetvay. Please go ahead, sir. -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [2] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, shareholders and colleagues, good evening and welcome to our second quarter and first half earnings conference call. We would like to thank everyone for taking your valuable time to join us this evening. Before we begin with the specific conference call details, I would like to refer you to our disclaimer statement as of normal practice. During this conference call, we may make reference to forward-looking statements by using words such as plans, objectives, goals, strategies and other similar words, which are other than statements of historical facts. Actual results may differ materially from those implied by such forward-looking statements due to known and unknown risks and uncertainties and reflect our views at 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 (technical difficulty) 31st of December 2019, as well as any of our earnings press releases and documents throughout the past year for more descriptions of the risks that may influence our results. The spread of the COVID-19 virus in the first half of 2020 has caused much financial and economic stress to the global markets. It has led to lower demand for crude oil, natural gas and oil products, which, combined with the increase in the supply of crude oil due to the cancellation of the OPEC+ production agreement in March 2020, has led to a precipitous decline in energy commodity prices that has negatively impacted all companies in the sector. Our financial results were negatively impacted by this decline in commodity prices as our average natural gas prices declined by 20%, while our average liquids prices declined by 38% during the first 6 months of 2020. Despite this fact, we did see a notable rebound in benchmark crude oil prices from the average lows of $16 per barrel reached in April 2020 to $36 per barrel at the end of the reporting period, representing an increase of more than 100%. Brent crude oil is currently trading at $43 per barrel, so actually a very nice price recovery from the lows reached in April. Unfortunately, natural gas prices at key gas hubs still remain at historical lows, but the forward curve for the upcoming winter months looks promising for the sector. We began to see some economic recovery in the second quarter following the partial removals of restriction (technical difficulty) management took necessary precautions to protect the safety and well-being of our employees, our contractors and their families against the infectious spread of COVID-19 while maintaining our commitment to deliver clean-burning natural gas to our customers. We work closely with federal, regional and local authorities as well as our partners to contain the spread of the virus and will take appropriate action, where necessary, to minimize possible disruptions to our operations. It is important to unequivocally state that we place the health, well-being and safety of our employees above profits. The second quarter 2020 was a very challenging quarter, but we managed to deliver a reasonable set of financial and operational results despite the sharp declines in crude oil and natural gas prices globally, the seasonal reduction in natural gas sales and the economic disruptions caused by the COVID-19 pandemic. Many oil and gas companies have reported billions of dollars of impairment write-offs, cargo cancellations, bankruptcies and debt defaults as well as recent staff layoffs. We had none of these negative impacts during the reporting period. No impairments, no cargo cancellations, no staff reductions. Global LNG imports were approximately 88 million tons or roughly comparable to the second quarter 2019. China imported approximately 17 million tons, representing an increase of 21% as compared to the prior year. And we see reasonable strength in Chinese LNG imports through the remainder of 2020 as the country's economic activities steadily improve. The European Union imported 21 million tons of LNG, representing less than 1% growth year-on-year, but the lockdowns and stagnant economic growth in key importing markets as well as higher than historical inventory levels at this time of the year will limit the region's flexibility to import more LNG cargoes. This situation, combined with negative margins due to weak European gas prices, has led to significant U.S. LNG cargo cancellations in June, July and August. But a slowdown in cargo cancellations for September deliveries is expected as the forward curve gas prices improve as we enter the upcoming winter season. So far, the COVID-19 pandemic has had limited impact on natural gas demand in China in 2020 despite the country's severe lockdown at the start of the outbreak. LNG imports declined by 7.2% year-on-year in February, but by mid-March, LNG imports were restored and started to rise. Chinese gas demand is now forecasted to increase about 4% year-on-year, with LNG imports expected to reach approximately 65 million tons. In contrast, Europe remains the most liquid market with its ability to consume additional LNG volumes. But high inventory levels will constrain natural gas prices throughout the third quarter and up to the start of the traditional winter season. Although LNG imports in the first half 2020 were up 13%, slightly more than 44 million tons, we saw the first signs of relative weakness in the June LNG imports. This leads us to believe that LNG imports will be lower in the summer months, including possibly September, than LNG volumes imported in 2019. Underground gas storage are now full at a record high of 83% in mid-July. And for reference purposes, mid-July 2019 storage levels were approximately 77% full, which also represented a record high at that time. We expect full year 2020 LNG imports into Europe will be comparable to the prior year volumes of about 80 million tons or potentially slightly higher. Currently, natural gas prices in key gas hubs are weak and are trading at less than $2 per MMBTU, but the forward curves for the upcoming months looks encouraging for the gas industry. We expect that natural gas prices will rebound in the fourth quarter, but the rebound will be limited by the resumption of U.S. LNG exports. If the winter is cold, we could see a significant rebound in gas prices, but the arbitrage between Europe and Asia or the Atlantic and Pacific basins will most likely not exceed $1 per MMBTU. Our Yamal LNG project loaded and dispatched 61 cargoes or 4.5 million tons of LNG in the second quarter of 2020, of which 35 cargoes or 57% were long-term contracts, and the remaining 26 cargoes or 43% were spot sales. This represents a decline in our long-term contract sales from 72% in the first quarter 2020, largely as a result of the planned maintenance work on 2 LNG trains in the second quarter; the plant running above its nameplate capacity; and the seasonal divergence of long-term offtake contracts. Yamal LNG also dispatched 6 cargoes of gas condensate, totaling 249,000 tons. All counterparties fulfilled their respective obligations within their agreed contractual time frame. And at the balance sheet, there were no force majeure notification events with our customers. Yamal LNG's liquefaction train operated above its nameplate capacity at 109% despite the maintenance work and temporary shutdowns of LNG trains #2 and #3 in the second quarter. LNG train #2 was fully shut down for 10.8 days from the 21st of May, while LNG train #3 was stopped for 9.2 days from the 4th of June. All planned maintenance work was performed without problems. The number of LNG cargoes since inception, as of the 30th of June, 2020, totaled 497 cargoes of LNG for the total volume of slightly more than 36 million tons, along with 85 shipments of stable gas condensate, totaling approximately 2.5 million tons. On the 5th of July 2020, Yamal LNG offloaded its 500th cargo of LNG in 2 years and 7 months since the project's first LNG shipment in December of 2017, setting an industry record and making Yamal LNG the fastest LNG project globally to reach this milestone. The 500th cargo was loaded on to the Arc7 LNG tanker Fedor Litke. In addition, the Arc7 LNG tanker, Christophe de Margerie, successfully transited to eastbound ice-covered part of the Northern Sea Route and reached the Bering Strait in only 12 days while transversing 2,563 nautical miles. This voyage officially opened up the 2020 navigation season and was completed 1 month ahead of the traditional start of the summer navigation period. We are actively working on optimizing our logistical model to improve our netback margins to the growing Asia Pacific region. This early voyage to start the summer navigation season is one step towards our goal. We will expand the eastbound navigation season for the Northern Sea Route and look forward to further state support for this trade route by increasing ice-breaking capabilities as well as full-scale navigation and hydrographic assistance for shipping. It's important to reiterate that this early voyage is not connected to climate change as this shipment is in line with our strategy of expanding the Northern Sea Route navigation season and was a result of excellent logistical planning by NOVATEK as well as the exceptional performance characteristics of our unique Arc7 tanker fleet. We made 4 eastbound cargoes in 2018; 17 cargoes in 2019; and we plan to send at least 25 cargoes in 2020. It is very important that Arctic LNG 2 is being realized despite massive delays and cancellations of other global LNG projects. With the delays and cancellation of other LNG projects, we are seeing an increased interest in securing Arctic LNG 2 volumes, which represents a very good marketing opportunity for us. We have been marketing LNG volumes since 2019 and have already signed some heads of agreement in the name of our wholly owned subsidiary, NOVATEK Gas and Power. We will continue these marketing efforts in earnest, but there is no rush to execute long-term contracts at today's LNG prices. We will focus our highlights on the Arctic LNG 2 project as there is no new information on train #4 at Yamal, and no decision has been made yet on the Obskiy LNG project. We continue to move along on the construction of train #4 and expect the completion of this work in the fourth quarter with commissioning shortly thereafter. Engineering work is proceeding forward on the Obskiy LNG project as we previously advised, but there is really no new information to report on this project at this time. We will keep everyone apprised of any changes and further progress. At the end of June '20, the overall progress for Arctic LNG 2 is estimated at 21%. This percentage essentially corresponds to the press release issued in early June when the CEOs virtually met to discuss the project's overall progress. The first train's overall progress, including platform construction, module fabrication and facilities on-site, is slightly more than 29% completed. In particular, the progress of casting concrete for the first GBS platform is roughly 45% complete. And in early July, we commenced pouring of concrete for the second GBS platform at Dry Dock #2. We drilled 5 production wells in the second quarter for a combined total of 11 production wells drilled to date. This represents approximately 16% of the field development drilling plan. Work at the field is being performed by 3 drilling rigs for production drilling as well as 1 drilling rig for exploration. Two additional drilling rigs are being mobilized for production drilling, commencing from the beginning of 2021, and then an additional 2 drilling rigs will be deployed for drilling exploratory wells for the upcoming 2020-2021 exploration program. We do not anticipate delays in the delivery of modules as the shipyards were able to eliminate the slight lag associated with the temporary shutdowns of the shipyards in the first quarter with the introduction of quarantines. For many of the modules, including the main technological molecules of GBS #1, the work being performed today is slightly ahead of schedule. We expect the first modules for GBS #1 will arrive to Murmansk in September 2021. Accordingly, the launch of GBS #1 is scheduled for 2023, and we see no delays in meeting this target. GBS #2 and #3 will also be launched in 2024 and 2026, respectively, according to our projected commissioning schedule. As of June 30, about 23% of the total project's capital program has already been financed by the shareholders, and we already contracted more than 81% of the project's total capital expenditures. Work is still underway to secure the project's external financing, and we believe this will be completed in 2021. With the recent closing of the Mozambique LNG financing, we are confident there is sufficient interest from international financial institutions to finance large-scale quality LNG projects like Arctic LNG 2. There are currently 3,580 people working at the Utrenneye field, and we estimate the completion rate of the field infrastructure facilities for the first stage at approximately 23%. Work activities underway include the living camp for 3,500 construction workers; the Rotational Residential Complex to house 1,500 operating personnels; the water and sewage treatment plants; a fuel and lubricants warehouse; a 48-megawatt gas turbine plant, an emergency rescue center; the industrial and firefighting water supply facilities; construction of power lines to well pads and infrastructure facilities; and the construction of the technical facilities for gas and gas condensate treatment unit #1, to name a few. Work is also underway with the construction of the airport terminal and runway. Construction progress at the Utrenniy terminal at the end of June is approximately 48% completed, including ongoing construction works on the administrative area. Moreover, work activities with the dredging and construction of ice protection structures for the terminal under the state contract is also underway. We are presently on schedule for all construction activities at the Utrenniy terminal. At Cryogas-Vysotsk, we produced 113,000 tons of LNG during the reporting period, or roughly 60% of its capacity utilization. The market for bunkering fuel in the Baltic region has been impacted by COVID-19, and this situation will most likely remain stagnant for several quarters. However, it is becoming more relevant on a global scale as many countries are adopting LNG to replace fuel oil for marine transit. Shell just recently published an interesting study on decarbonizing shipping, which highlights many of the challenges ahead to meet the IMO 2020 standards. It's an interesting read for those wanting more information on this particular topic. We will define our niche within this market space and eventually link our marketing strategy with the construction of the Rostock terminal in Germany and the build-out of retail LNG stations in Poland and Germany as well as our small-scale LNG projects inside of Russia. We had an active first half 2020 in our exploration and development drilling program. We essentially doubled our exploration drilling to over 28,000 meters and ran 5,400 square kilometers of 3-dimensional seismic. A majority of the seismic activity was performed on the Utrenneye fields as well as other license areas recently acquired to support our future LNG projects. Wells drilled -- our second -- we also drilled our second exploration well at the Nyakhartinskoye field, which was confirmed as a productive well. And we will finalize our exploration program on this field by drilling another exploration well in 2021. In addition, we continued our exploration and production drilling at the Samburgskiy license area to expand production of wet gas from the Achimov levels of the Urengoyskoye field. All exploration work for the 2019, 2020 season was fully completed as planned. We maintained our development drilling program throughout the reporting, but had a slight decline in the total number of wells drilled and completed during the period. We drilled and completed 62 production wells in the period, which was 9 wells less than drilled than the prior year. The decline was largely focused on reducing well drills for crude oil and some slowdown in work activities due to the coronavirus. We remain focused on developing the North-Russkoye cluster, and good progress was made to ready the various fields' deals commissionings over the next 2 years. We have not revised our previously announced production guidance and remain committed to increasing natural gas production by approximately 2% or slightly higher while remaining relatively flat with our liquids production. We complied with the OPEC+ production agreement by decreasing our crude oil production starting in the 1st of May by 18%. As mentioned on my last conference call, our gas condensate production is not impacted by the OPEC+ production agreements, and we will increase our gas condensate output this year, theoretically offsetting the majority of the declines in our crude oil output. As always, our primary goal is to ensure that our processing facilities run at 100% of their respective operating capacities. We will maintain plateau levels at both our Purovsky Processing Plant and the Ust-Luga Complex. The second quarter and first half 2020 financial results were mainly impacted by weaker commodity prices and a weak macro environment. The main issues with our financial results was a significant price declines in our whole range of hydrocarbon products and, to a lesser extent, the seasonal fluctuations in domestic gas volumes sold, a warmer winter and a shift in the purchases of spot LNG volumes from Yamal LNG. Brent crude oil prices declined by 57% year-on-year from an average of $69 per barrel to just under $30 per barrel, whereas our benchmark natural gas prices like the National Balancing Point or the Title Transfer Facility, both declined by 61%, respectively, during the quarter. On the other hand, the Russian domestic gas tariffs increased year-on-year by approximately 1.4%, and this increase positively impacts our revenues and netbacks achieved for gas sold domestically via the Unified Gas Supply System despite the seasonal reduction in volumes sold quarter-on-quarter. Our Russian domestic business remains quite stable and profitable and represents a critical part of our revenues and operating cash flows. During the reporting period, sales of natural gas domestically accounted for 79% and 76% of our revenues in the second quarter and the first half 2020, respectively, as compared to 62% and 60% in the prior year. The change is largely attributable to the drop in our spot LNG volumes sold at Yamal LNG as they commenced more long-term contracts and the significant decrease in our average global LNG prices as well as our benchmark liquid prices. Our natural gas revenues declined 24% year-on-year and 23% quarter-on-quarter, which was largely driven by declines in international gas revenues of 57% and 36%, respectively, as well as the traditional seasonal declines quarter-on-quarter from peak winter months. We sold 14.4 billion cubic meters of natural gas on the Russian domestic market and 2.5 billion cubic meters of equivalent LNG sales during our reporting period, accounting for a combined net decrease of 1.9 billion cubic meters or almost 10%. On a quarter-on-quarter basis, our volumes sold on the domestic market decreased by 21%, representing the seasonal winter declines as well as the consumption of more hydro power generation because of high water flows and by less than 1% for our international sales volumes. For your information, hydro power will always take precedent when available and abundant. Our total LNG revenues declined year-on-year by RUB 21.6 billion, which resulted mainly from a 32% reduction in volumes sold and a 43% reduction in LNG prices. Domestically, our combined sales volumes from end customers and wholesale traders decreased by 680 million cubic meters, resulting in our domestic revenues declining by RUB 2.1 billion or by 3.4%. LNG sales on international markets represented 15% of our total natural gas sales volumes and accounted for 21% of our natural gas revenues for the second quarter '21, 13%, and 24%, respectively, in the first half of 2020. Our average netback remained more than 2.4x higher for LNG volumes sold internationally than netbacks received on the domestic market, although this netback ratio in the second quarter was the lowest ratio since we commenced LNG sales and was reflective of the steep decline in our average realized prices. Even with these weak spot prices, LNG volumes sold international contributed positively to our revenues and netback for natural gas. We see LNG prices improve in the latter part of this year, and we believe this will also improve our netback ratio from the current low. We sold 4.2 million tons of liquids in the reporting period, representing a year-on-year increase of less than 1% and a quarter-on-quarter increase of 4%. For the first half of 2020, we sold 8.2 million tons, representing an increase of just under 1% as compared to the prior period. We exported 60% of our total liquid volumes during the period, which is consistent year-on-year, but 4% more than the first quarter. Our total liquids sales decreased year-on-year and quarter-on-quarter by 45% and 28%, respectively, driven by significant decreases in essentially all of our liquid hydrocarbon prices, but this decline in sales was slightly offset by higher liquid volumes sold. Although underlying Brent crude oil prices have recovered from the lows of roughly $16 per barrel in April to $43 per barrel today or by 1.7x, they are still forecasted to remain somewhat depressed throughout the year, largely resulting from an excess of global oil supplies and lower global demand from the pandemic. Our operating expenses during the reporting period declined by RUB 41 billion or by 26% due to the significant reduction in purchases from joint ventures as a result of lower commodity prices. Purchases declined by approximately RUB 37 billion or by roughly 45%, representing about 90% of the reduction in our operating expenses during the reporting period. This trend was consistent with that reported in the first quarter 2020 as purchases declined by RUB 20 billion or by 31%. Most of the remaining operating expenses, including G&A, was consistent with our expectations for the reporting periods and seasonal adjustments. We spent RUB 61 billion in cash on our capital program, representing an increase of RUB 30 billion or 97% versus prior year and an increase of RUB 20 billion or 49% quarter-on-quarter. The majority of our capital program remains focused on our future LNG projects, Murmansk LNG construction yard, Obskiy LNG as well as capital spend to prepare future LNG fields. We also allocated investment capital on the North-Russkoye license area and to complete our ongoing administrative projects. Considering the present macro environment, we will again revise our capital expenditure guidance downward by another 15% in addition to the 20% reduction already announced. We are revising our capital program to approximately RUB 170 billion or roughly RUB 80 billion reduction from originally planned. It is important in this macro environment that we remain flexible in deciding whether or not to revise upward or downward our capital program. More importantly, we remain committed with our investment decision to fully fund our future LNG programs and key domestic-related production projects. Our normalized EBITDA totaled RUB 71 billion for the second quarter 2020, decreasing by 39% over the prior year. We had relatively consistent EBITDA contributions from Yamal despite the weaker global LNG prices and despite having sold more LNG volumes on the spot market during the quarter. EBITDA contributions from both subsidiaries and joint ventures were lower as liquid sales were negatively impacted by the lower commodity prices. We generated negative free cash flows of RUB 57 billion, which is our first quarter of reporting negative free cash flows since 2013. As previously mentioned, we increased our capital spending by 97%, but the main underlying reasons for the negative free cash flows was the significant reduction in our operating cash flows. The net cash provided by our operating activities increased 96% year-on-year and 93% quarter-on-quarter, representing one of the weakest quarterly operating cash flows we have historically reported. Despite this fact, we generated sufficient operating cash flows to fully fund our capital program, fully service any debt payments or liabilities as they become due and disperse a 24% increase in our semi-annual dividends paid to shareholders. Our balance sheet remains strong during the first half of 2020. Our fundamental credit metrics support our international and domestic credit ratings. And we continue to believe that a sound and conservative financial position is important in these tough economic times, particularly when we see a significant increases in bankruptcies and debt defaults. As you can anticipate, it will be a weak reporting season for the upstream oil and gas industry. And our weaker-than-normal financial results highlight the difficult market conditions we, as an industry, faced in the first half of 2020. Despite this fact, we remain profitable, demonstrating our operational and financial resiliency, and we are optimistic that better times for the sector lie ahead. Over the last several quarters, we discussed the importance of our Russian domestic gas business in terms of stable volumes sold and less volatile prices. In the second quarter, 85% of our total volumes sold or 14.4 billion cubic meters was sold on the Russian domestic market that was not negatively impacted by the decrease in the global spot prices. Our sales volumes represented a seasonal decline of 2.7% quarter-on-quarter, but a 5% increase year-on-year. We believe our Russian domestic gas business insulates us from severe volatility in the global markets and, more importantly, was not impacted to any significant degree from the lockdowns caused by the COVID-19 pandemic, but more so from the reduction in sales volumes from the warmer winter weather. The COVID-19 lockdowns, however, put short to medium-term pressure on all of our core export markets, but LNG imports in key consumer markets like China has resumed. We have seen a 7.4% increase year-to-date June 2020 in global LNG imports, even though many of these major consuming regions were impacted by the pandemic. LNG imports totaled 189 million tons in the first half of 2020 versus 176 million tons in the corresponding period. We recognize that this growth figure is lower than original pre-COVID forecast, but nonetheless, they are still positive. Most industry forecasts call for a 3.2% to 3.5% reduction in LNG imports pre and post COVID-19, but it is difficult to give any precise forecast as lower gas prices, for example, has recently stimulated seasonal demand growth above the 5-year average in Europe, helping to alleviate the region's storage injections. The only major importing country that showed a negative import trend in the first half 2020 was Japan with a decrease of 1.4 million tons or 4%. Interestingly, we just reported our first eastbound spot cargo of LNG to Japan using our Arc7 ice class tankers. This shipment demonstrates our ability to use our tanker fleet to deliver future volumes of LNG to the Japanese market. We understand the challenges we face in the near term and the uncertainties that may require some revisions to our long-term strategies and capital projects. These challenges will require a more flexible approach to business dealings and a renewed interest on cost control and project execution. Accordingly, we have focused our attention on our Arctic LNG project as well as getting some of the preparatory work done on our future LNG platform. The decision to focus mainly on Arctic LNG 2 is important as our ability to cost-competitively construct and build the gravity-based structures will also serve as the LNG platforms for Arctic LNG 1 and Arctic LNG 3. We remain committed to furthering our engineering and work on our Arctic Cascade liquefaction technology, and we will continue to move forward with our Obskiy LNG project in due course. Despite a quarter of negative free cash flows, we have built a robust business that is resilient to periods of economic stress and a business that generates sufficient cash flows to achieve our long-term strategic goals and objectives. We have no doubts that the future of natural gas looks promising. Natural gas is the only fossil fuel that is projected to grow with increasing demand across all scenarios for upcoming decades. Natural gas plays a pivotal role towards an environmentally sustainable future with LNG as a key driver in future global demand growth. Our focus is to become a leader during this energy transition by implementing our future LNG projects. Our corporate strategy favors clean-burning natural gas, and this fuel already accounts for 83% of NOVATEK'S combined hydrocarbon production. Many of our global competitors are trying to move their business model more towards natural gas. We already have a significant impact on energy transition with our current and future natural gas platform. Climate change is the defining issue of this generation. Obviously, the oil and gas industry are at the forefront of this debate, and we must ensure that our collective efforts remain focused and our voices are heard. The LNG we produce at NOVATEK has one of the lowest carbon footprints in the industry: the cold Artic climate and our high-quality reserve base as well as the advanced liquefaction technologies that provides approximately 20% higher efficiency of LNG produced as compared to LNG projects located in warmer climates. Equally important, NOVATEK controls the total LNG supply chain, from upstream production to the end consumer delivery. This fact allows us to successfully participate in low-carbon, clean-energy LNG tenders, similar to the recent tender announced by Pavilion Energy, which requires the tender winner to cut their carbon footprint of LNG supplies. Our LNG projects are not only one of the most cost-competitive, but also low carbon emissions-competitive. We will strive to be a leader in providing affordable, secure and sustainable energy to consuming nations for many years. In July, NOVATEK's management Board approved a number of ecological and climate change goals within our long-term business strategy. And in August, these goals will be presented to the Board of Directors and then published. We will also publish our 13th sustainability report in the latter part of August. Yesterday, we were informed that we have maintained our FTSE4Good Index rating after the completion of the committee's review in June, which again confirms our commitment to maintaining our ESG global rankings. It's been a very difficult year for the oil and gas industry, but we will survive and prosper as we believe we have reached the bottom in commodity prices. We have achieved all our operational targets in the first half of 2020 despite the looming threat of the COVID-19 lockdowns and the spread of the virus at our construction site in Murmansk and at the fabrication yards in China. Moreover, the past 3 quarters have been plagued by significant weaknesses in benchmark crude oil prices and natural gas prices at key gas hubs. Ultimately, this cannot be controlled by the company. As we have said last quarter, we will get through this unprecedented time in our history as a much more determined company, more resilient and more resolved to reach our strategic goals and objectives. We will develop our LNG platform as outlined in our corporate strategy, and we will study alternative fuels, like hydrogen, which we believe will play a significant role in the future energy mix. We already produced hydrogen for our own internal needs, and we are presently studying the most economically efficient projects for commercial-scale hydrogen production. Before we can make any big decisions on hydrogen, it is important to understand not only how to produce hydrogen, but also we need to consider the project -- product's demand and its future market perspective. We will provide more details in this area on future calls. And finally, we are committed to increase our dividend payment. And we'll increase (sic) [address] this question at our upcoming Board of Director meeting. We have passed all the requisite DSU completion test in April as previously reported, but are still waiting on the formal release of documents from financial institutions. We are working diligently to get this process completed as quickly as possible. But rest assured, we will raise the dividend payout. We would like to thank everyone again for attending tonight's conference call and for your continued support of NOVATEK. It has been a tumultuous period for everyone, but we will emerge stronger as a company and are even more determined to meet our long-term goals of delivering up to 70 million tons of LNG by 2030. It is the right strategic decision. We hope everyone remains safe and healthy. And now we are ready to open tonight's session to questions and answers. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We'll take our first question from Ron Smith of BCS. -------------------------------------------------------------------------------- Ronald Smith;BCS;Sr. Oil & Gas Analyst, [2] -------------------------------------------------------------------------------- Yes. Got a question regarding the LNG market. I'm curious about NOVATEK's general attitude that it's encountering in its negotiations and talks to potential customers. You had stated something earlier on the call to the effect that NOVATEK is seeing interest in Arctic LNG 2 contracts, but that you don't want to sign contracts at today's prices. Therefore, from your vantage point, when do you forecast the LNG market coming back into balance sufficiently to allow such contract signings to take place at reasonable prices to both parties? -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [3] -------------------------------------------------------------------------------- Thank you, Ron, and welcome back to the Moscow oil and gas side again. -------------------------------------------------------------------------------- Ronald Smith;BCS;Sr. Oil & Gas Analyst, [4] -------------------------------------------------------------------------------- Good to be here. -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [5] -------------------------------------------------------------------------------- Yes. I think it's important to understand, first of all, when we look at Arctic LNG 2 as a project itself, all the -- it's already presold. All the volumes are already presold. We've agreed that our shareholders will off-take their respective share of LNG. We have signed hedge of agreements with all our project shareholders with terms basically of FOB Murmansk and FOB Kamchatka and with agreed pricing formula. So now, really, what it means is that we as an off-taker at NOVATEK will need to go out and market gas. And we've already -- like I said, we've already have signed some particular contracts and hedge of agreement with our NOVATEK Gas and Power. I think the most important thing, Ron, is that we see tenders that are being in the market today and I -- 2, in particular. I think there's one that was recently done by PETRONET of India. And then I think it was one that was recently announced by Sinopec that are actually looking for long-term contracts. But I think it's impossible today for a producer, a project sponsor, to even consider these long-term contracts at these particular prices. So I think we really -- we have this buyer-seller sort of expectation gap that needs to close. And I think we're -- I think everybody really understands that in order for these projects to move forward, we have to have a reasonable sort of price for both the seller of the projects like NOVATEK. And also, we understand that the buyer is trying to secure at a low price. So I think you're right. I mean at these lower spot prices, which are near historical lows, this is making a contract process very, very complicated. Sellers are not willing to fix current low prices. They're not willing to commit to long-term contracts because we all know that the prices will eventually increase. And I think we have to understand that, like I said, there's certain returns. Because we don't have the certain returns on these particular projects, they're not going to move forward. And I think this is going to stress a lot of these higher-cost projects to be able to meet this. So I think it's just this expectation gap that needs to be solved. And so at NOVATEK, we don't really need to go out and, like I said, secure long-term contract at this particular point in time. But we are actively working, and we believe we will get through this expectation gap. So I think it's just a matter of time, and we'll report back when we do sign some more contracts. But right now, I just think there is this expectation gap, and sellers are not willing to commit to these -- at these historical low prices. And buyers, obviously, are trying to secure, but realize that that is not realistic to think that you're going to get a 10-year contract at these current prices. So I think we just need to wait a little longer. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- We'll go next to Henri Patricot at UBS. -------------------------------------------------------------------------------- Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [7] -------------------------------------------------------------------------------- A couple of questions for me. Just wanted to come back to the comments you made around on the CapEx and the first cut of 15%. So I was just wondering if you can give us some details as to what is driving that cut. And secondly, good to hear that Arctic LNG 2 is on track. I wanted to ask about Obskiy LNG, as I understand there is no update to make today. But can you give us an update on the timing as to when you think you could take FID, and perhaps when you see the earliest the project could start up? -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [8] -------------------------------------------------------------------------------- I mean the CapEx is, like I said, we're reducing it another 15%. And it's going to be dispersed mostly on some of the ancillary projects that we work on in terms of upgrading facilities, et cetera. So I think it was just a decision that was made by the management Board after looking at the macro environment and figuring that we don't really need to spend certain capital at this particular point on projects that we think that we can wait a year or so down the line. So it was just a decision based on the current forecast of crude oil prices and looking at the forward curve and gas prices that we figure that we can least delay some of these projects to a little later. And nothing magical about that. And I think we will continue to look at the market. And like I said, we have the right to go back and revise either downward or upward even further. There could be a reversion to this upward if we see things improve. On your second question, right, Arctic LNG 2, yes, I mean, it's moving according to schedule, so we don't really see any delays. But when you ask about Obskiy LNG and the FID decision, I don't think we have made that decision yet because we're still doing engineering work. And I don't think there's really a big push right now to make a decision in this particular market spot until after we get all this engineering work done. So I don't have a decision, a date to give you when the decision will be made. I know we're constantly discussing Obskiy LNG, and we're still investing capital in Obskiy LNG, as you can note in our spending for the first half of the year. So I think it's just one of those areas you just need to wait a little bit until we make that decision. But I suspect that when we said before, we'll keep to it, we look into launch the expected date of launch, the first train at Obskiy LNG was pushed back 1 year to 2024. And that's really about all I can tell you at this particular moment. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- We'll go next to Angelina Glazova at JPMorgan. -------------------------------------------------------------------------------- Angelina Glazova, JPMorgan Chase & Co, Research Division - Research Analyst [10] -------------------------------------------------------------------------------- I have a question, a clarifying question on Yamal LNG. So on the first quarter conference call, you mentioned that you expect that maximum 25% of sales will be on spot basis. And now given that the share of spot exceeded 40% in the second quarter, does this guidance still stand? -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [11] -------------------------------------------------------------------------------- Our target is to achieve a level of, like I said, 75% long term, 25% spot. And that's on an annualized basis, that number was given to you. And I tried to explain that given that we had the maintenance work in the second quarter, we -- basically, there was more spot sales than long term, and it was the ability to have some seasonal adjustments in sales. But the overall goal is to get up to about a 75-25 ratio, considering that we are operating at least 110% expected over the year over the nameplate capacity. So all volumes that we sell over the nameplate capacity is obviously sold on spot. And this ratio will also change again once we launch train #4 because as we speak right now, I mean, train #4 might go spot. And so we may have to adjust this ratio again in 2021, but the overall plan is -- for the year was 75%-25%, as you correctly stated. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- (Operator Instructions) We'll go next to Olga Danilenko at Prosperity. -------------------------------------------------------------------------------- Olga Danilenko, Prosperity Capital Management Ltd - Director of Oil and Gas [13] -------------------------------------------------------------------------------- I have some follow-up questions, actually 2. Can you please elaborate in a little bit more details on the interest rate dynamics since there have been quite a material downward movements in the rates on your debt, is it directly linked? Or do you have any fixed rates? So are you benefiting in full from the recent dynamics in the rates? And my second question will be a bit of a follow-up on the current contracting, actually 2 of them. The first one, do you see any pressure on your particular contracts right now in terms of potential renegotiations from the customers? And secondly, I wonder if you can give a bit more details on what are the most recent demands by the customers on the pricing, if you can comment at the slope rate versus Brent for examples, so has it decreased materially? What's the dynamics? -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [14] -------------------------------------------------------------------------------- Okay. On the interest rate, I'm just trying to find -- in our financial statements, we show what is fixed rates and variable rates. And you can see on this particular quarter and on Note 17 in the financial statements, that the majority of the interest expense is actually on fixed rate there. Okay. So we have a combination of both fixed and flexible rates. And I'm just trying to see where I can direct you in that particular area. But I think we'll get -- on a -- I'll have somebody get back with you on where that table is because I don't have all this information in front of me, but it's a combination of both fixed and flexible rates. -------------------------------------------------------------------------------- Olga Danilenko, Prosperity Capital Management Ltd - Director of Oil and Gas [15] -------------------------------------------------------------------------------- Can I follow-up? No, no, I would -- with you -- even without any particular date on the combination of fixed and variable, in the circumstances, like we have right now, do you think that it is possible for you to renegotiate your fixed towards a lower variable-linked contracts? Or -- and do you think it's a necessary profitable? Or what's your view? -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [16] -------------------------------------------------------------------------------- You're talking about on the debt side, right? I mean that's -- if I understand your question correctly. -------------------------------------------------------------------------------- Olga Danilenko, Prosperity Capital Management Ltd - Director of Oil and Gas [17] -------------------------------------------------------------------------------- Correct, correct. So I'm thinking maybe your fixed rates can be on the high side right now. And if NOVATEK may be willing to renegotiate down in the current circumstances, maybe the banks would accept it. I just don't know. I'm asking. -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [18] -------------------------------------------------------------------------------- I mean I would just say, in general, is that we're always -- we're in contact with the banking community on a regular basis. And if there's any scope of reducing the interest rates on any of our debt by refinancing, we do that. But I can't give you a general answer or even a specific answer to your question because it's too hypothetical right now. And I would just say that we do have that opportunity from time to time, and we do we take advantage of that when it's available to us. On the second one -- on your second question in terms of contract in stage. Your first part of the question was on renegotiations. And the answer is no. We don't have any renegotiations coming up at this particular point in terms of our contracts. We don't expect any of our off-takers to renegotiate contracts at this particular moment in time. So I think we're pretty safe on that one. And I didn't get -- what was the second part of that second question? One with renegotiation, what was the second part of your question? -------------------------------------------------------------------------------- Olga Danilenko, Prosperity Capital Management Ltd - Director of Oil and Gas [19] -------------------------------------------------------------------------------- Yes. Can you comment, what is the most recent pricing being demanded by the customers? -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [20] -------------------------------------------------------------------------------- Well, I mean it's -- I mean, let's look at -- I mean, we weren't involved in this deal, but just look at the deal that just happened recently, right? Look at -- and it's ridiculously low. Look at the Pakistan LNG deal, all right? I mean we had a supplier who was willing to go Brent slope at about 5.5% roughly, which would make the spot vessel a little more than $2, $2.20, $2.30, whatever it is, per MMBTU. If you look at the competition, I think it was listed, on the 3 bidders for that particular project, I mean, that was clearly the lowest one. And the slope was more in line with 10% and 7.5%. But I think even at 10% today, people are reluctant to execute contracts or -- without at least that level of slope. So that was just the most recent contract. I mean I'm not going to be talking about anything within our contract because, obviously, it's commercial secrets, but that was recently published on Pakistan's first foray back into the market and its first spot cargo in, I think, more than a year. And I think I said it was Brent with a slope of about 5.5%. And that was what we consider to be would be ridiculously low. And we wouldn't even bother participating in that tender. But Olga, I think that's an isolated case. I mean that sounds like someone is just trying to jump the cargo, and we wouldn't do that. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- And we'll move next to Alexander Burgansky at Renaissance Capital. -------------------------------------------------------------------------------- Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [22] -------------------------------------------------------------------------------- I just have a follow-up question on your comments on dividends. You said in your prepared remarks that you would like to raise your dividends on one occasion. And then you said that you would like to raise your dividend payout ratio. I mean there's a lot of unusually exclusive statements. But can I just clarify what exactly you would like to do? Are you planning to raise the dividend payout ratio, the net of policy? Or are you also suggesting that absolute dividend payment could increase this year? -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [23] -------------------------------------------------------------------------------- Well, we have a decision -- we have a Board meeting coming up in August, as I mentioned on another point. And at the Board meeting in August, we're also going to talk about the dividend payments. So I think it's better to wait to see what the outcome is from that discussions that we're going to have at the Board level. But as I mentioned many, many times before, and I'll reiterate it again, I mean, it is our intention as a company to increase our dividend payouts based on our results and based on the macro environment. And so I believe that once we get this process done with receiving the formal paperwork, I mean we've met the requirements of the DSU, and it's been confirmed we met the requirements. So whether or not this means a change in the dividend policy itself, that will be discussed. And so I believe it's best to wait until next month when we formally make the announcement from the results of the Board meeting because this is what -- this is a topic on one of the agenda items. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- And at this time, we have no further questions in the queue. Mark, I'll turn the conference back over to you for any closing remarks. -------------------------------------------------------------------------------- Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [25] -------------------------------------------------------------------------------- Okay. Well, again, I just want to say thank you to everybody. And as I mentioned, it has been an extremely difficult year so far for the oil and gas industry. But looking at the forward curves, as I mentioned, it does give us some hope that things will start recovering in the winter months. I think really, the only major concern, that most people have as I see the spread here of the virus again in the United States, is whether or not we'll go back to any sort of lockdowns and maybe a second wave of the pandemic. But right now, I think we're pretty much moving all our operations according to our plans. And I wanted to stress that, is that despite the economic environment, we did meet all our requirements that we proposed to do in the first half of the year. So we look forward to addressing you again for the third quarter results. I know you'll hear the outcome of the Board presentation and meetings we're going to have in August. That will address some of the questions that was asked tonight. And so we look forward and to -- whether seeing you at a future conference or one-on-one meetings, et cetera. And again, as I mentioned, everybody remains (inaudible) on this period of the pandemic. Again, thank you very much for your support, and we look forward to addressing you again in the future. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- And that does conclude today's conference. Again, thank you for your participation.