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Edited Transcript of NVTK.MZ earnings conference call or presentation 22-Feb-17 1:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Novatek PAO Earnings Call (IFRS)

Tarko-Sale Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Novatek PAO earnings conference call or presentation Wednesday, February 22, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Anthony Gyetvay

Novatek PAO - Deputy Chairman of the Management Board

* Leonid Mikhelson

Novatek PAO - Chairman of the Management Board & Member of the Board of Directors

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Conference Call Participants

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* Karen Kostanian

Bank of America - Analyst

* Ron Smith

Citi - Analyst

* Ildar Davletshin

Ren Cap - Analyst

* Pavel Kushnir

Deutsche Bank - Analyst

* Ildar Khaziev

HSBC - Analyst

* Evgeniy Khilinskiy

Gazprombank - Analyst

* Susan Wisialko

GMO - Analyst

* Igor Kuzmin

Morgan Stanley - Analyst

* Henri Patricot

UBS - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Novatek 2016 financial results conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to Mark Gyetvay, please go ahead.

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [2]

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Thank you. Ladies and gentlemen, shareholders and colleagues, good evening and welcome to our full-year and fourth quarter 2016 earnings conference call. I would like to thank everyone for joining us this evening. Mr. Leonid Mikhelson, Chairman of the Management Board and a Member of the Board of Directors will join me during the Q&A session and at such time, we will revert to the dual languages of Russian and English. So please bear this in mind when asking questions for the convenience and respect of other investors. We have allotted sufficient time to address all of your questions.

Before we begin with the specific conference call details, I would like to refer you to our disclaimer statement as it is a 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 risk and uncertainties and reflect our views as of the date of this presentation. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Please refer to our regulatory filings including our Annual Review for the year ended December 31, [2016] 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.

2016 was another difficult year for the oil and gas industry with volatile commodity prices and concerns about weakening global demand and an oversupply of crude oil. The cyclicality and benchmark commodity prices negatively impacted capital programs throughout the past year as well as cost of postponement or cancellations of many large-scale projects.

Bankruptcies and credit defaults persisted and large asset and reserve impairments have already occurred and are expected to continue throughout the reporting season. As we look back, 2016 was a year of difficult headwinds and a tough macro environment. So it's important to review our financial and operational results under these circumstances.

We heard many concerns voiced by shareholders and analysts throughout 2016 mostly capturing the general themes of price volatility and oversupply especially as it related to LNG and as we have stated many times in the past, we believe we have a robust operating model to withstand these cyclical downturns and actually thrive in these markets. And more importantly, as a low-cost producer, we're able to withstand these headwinds and deliver hydrocarbon products to markets that create sustainable shareholder value to the Company.

Our financial results demonstrate this robustness and when compared to the broader global oil and gas results, we had a very solid year and delivered a strong set of financial and operational results despite operating in a challenging environment. We achieved significant operational success in 2016 by effectively and efficiently monetizing our resource base and expanding our liquid production. Our Yarudeyskoye field reached full production capacity in January 2016 and combined with the full-year production run rates of launches commissioned in 2015, we reported another impressive year of 37% growth in liquids production over the corresponding year. Highlighting some of our successes in 2016, we increased our SEC proved reserves by 2.8% year-on-year excluding the decrease in the Company's proportional share in the Yamal LNG joint venture and maintained a respectable reserve-to-production life of 24 years based on current year production. We achieved an organic reserve replacement rate of 168% due to successful exploration works in drilling, and accordingly, our proved plus probable reserves under the PRMS reserve methodology including our proportionate share in joint ventures totaled 22.8 billion barrels of oil equivalent. We significantly increased our hydrocarbon reserve base and obtained the exploration rights for seven new license areas which support our strategic objective aimed at expanding our resource base in the hydrocarbon rich Yamal and Gydan peninsulas as we actively evaluate the region's vast geological potential for implementing future LNG projects.

Yamal LNG remains our flagship project and significant progress on many fronts was achieved throughout 2016. At year-end, construction of the first LNG train was approximately 87% complete versus 45% at the end of 2015, putting us on track to launch the project on schedule in 2017. Overall project completion was 75% as of the December 31 versus 69% at Q3. We successfully concluded the external financing package for Yamal LNG, achieving a very important milestone for the project. As was previously reported, loan agreements were signed with Russian banks Sberbank and Gazprombank, China Development Bank, and The Export-Import Bank of China, the Italian bank, Intesa Sanpaolo with insurance coverage by the Italian credit agency SACE, and the French export credit agency COFACE and with the Japan Bank for International Cooperation or JBIC. Participation by international banks and export credit agencies demonstrates the global significance of the Yamal LNG project and also sends a strong message about their willingness to finance future LNG projects in this hydrocarbon rich area and their commitment and support for this project.

Another important event was the closing of the sale of a 9.9% equity stake in the Yamal LNG project to China's Silk Road Fund, allowing us to reach the targeted shareholder structure with Novatek retaining a 50.1% equity stake. We actively drilled at the South-Tambeyskoye field throughout 2016 and have now completed 77 production wells at the end of January versus 44 production wells drilled by the end of 2015, substantially exceeding the 58 production wells required for the launch of the first LNG production train.

Nine out of 19 well pads are prepared for drilling versus seven well pads were prepared at the end of Q3. All 78 modules for LNG train number one were delivered to the project site and installed by year-end and we have begun some testing of the modules and equipment. We reiterated our plans to start commissioning works in the first half of 2017 and commenced LNG production in the second half of the year. 12 modules for LNG trains two and three were completed and either shipped from the shipyards or delivered to the construction site. We expect all remaining modules for LNG trains two and three to be delivered by approximately the third quarter 2017 providing us with the possibility to move forward the commissioning of the third train earlier in 2019. The main LNG cryogenic heat exchangers for LNG trains two and three are already onsite. In 2016, we delivered approximately 6 million tons of equipment and construction materials to the Sabetta port, representing a two-fold increase as compared to 2015.

We have about 22,000 construction workers onsite and regular flight service at the Sabetta International Airport served approximately 365,000 passengers during 2016. The first ARC7 ice-class vessel named after Christophe de Margerie was commissioned for waterborne voyages and fully equipped, and by year-end 2016, the LNG vessel successfully passed sea acceptance tests and is prepared for navigation and ice tests in the Arctic. During 2016, we conducted full-scale exploration works at our license areas located on the Gydan peninsula and offshore in the Gulf of Ob to properly assess the resource potential of this strategically important region. The Gydan peninsula represents a significant growth area for us in the next decade and we're currently assessing various options to exploit and monetize these assets for future LNG projects.

Exploration is key to discover new sources of hydrocarbons and in 2016 we completed the running and processing of roughly 1,000 square kilometers of 3D seismic as well as drilled approximately 10,000 meters of exploration drilling. We discovered one new gas condensate deposit in the [mid-Jurassic layer] at the Yarudeyskoye gas condensate field and nine new gas condensate deposits at the Utrenneye, South-Tambeyskoye, and Yaro-Yakhinskoye fields.

We also expanded the gas condensate potential of the Achimov layers at the Urengoyskoye field of Arcticgas and confirmed the crude oil potential at the Yarudeyskoye and East-Tarkosalinskoye fields as well as confirmed the natural gas potential at the Malo-Yamalskoye field. Our geological assessments of the deeper Achimov and Jurassic layers are presently ongoing but not complete at this time. However, we remain optimistic that this geological testing will yield positive results.

We are also optimistic about the hydrocarbon resource potential of the Adriatic Sea offshore Montenegro and accordingly signed a concession contract with the government of Montenegro for the exploration and production of hydrocarbons on four offshore blocks in partnership with the Italian energy company, Eni, who was subsequently designated as the operator of this joint venture. We are early in the exploration process, but these are the types of international opportunities we seek, representing limited capital spending, but huge upside potential. On the Gydan peninsula, we drilled five exploration wells at the Utrenneye field from 2014 to 2016 and the results of these exploration wells allowed us to increase our appraised reserves and confirm higher well flows at the field thus confirming the production potential for our next LNG project, Arctic LNG number two.

Our prolific hydrocarbon resource base, the successful implementation of the Yamal LNG project, and our experience in navigating the northern sea routes creates a great platform for developing mutual beneficial cooperation on future LNG projects. As a demonstration of this interest, in 2016, we concluded Memorandums of Understandings with Japanese companies Mitsubishi, Mitsui, and Marubeni aimed at establishing strategic cooperation for implementing LNG projects in Russia as well as supplying LNG and liquid hydrocarbons. We also signed a Memorandum of Understanding for a strategic partnership with JBIC confirming our joint intentions to cooperate in implementing Novatek's LNG projects including financing and investment. A MoU was also signed with PTT of Thailand aimed at exploring and producing hydrocarbons, implementing LNG projects, supplying LNG and developing LNG markets, as well as supplying liquid hydrocarbons. We were very busy in 2016 signing MoU's with mainly Asian Pacific companies and conducting very fruitful discussions centered on our plans to increase our LNG capacity in the Arctic region of Russia. To facilitate our future LNG ambitions, we also signed strategic cooperation agreements with Saipem, Nuovo Pignone, and Linde to localize the technological and technical solutions to maximum extent, as well as construct and processing modules and respective sourcing of equipment for future Novatek's LNG projects in Russia. LNG represents the largest share of future natural gas growth globally, and Novatek has the hydrocarbon resource base in the Yamal and Gydan peninsulas to capitalize on these opportunities and become a major player in the global LNG markets.

We have seen many forecasts and analysis of the potential LNG markets, and Shell this past week issued their first LNG outlook highlighting that natural gas is expected to increase 2% per annum between 2015 and 2030 with LNG demand expected to rise at twice the rate at 4% to 5% annually. These projections support those of other LNG projections by major industry players and consulting groups that this trend or shift towards LNG has already begun and our assessments on demographic and population shifts, climate change initiatives, future energy mix, economic developments as well as shifts from coal to natural gas, transitioning of marine and transport fuels, renewables and other sources of energy, and the significant increase in new LNG markets around the world underscores our strategic pivot towards LNG and the future direction of Novatek. We mentioned many times in the past that we have successfully concluded the investment cycle on our core areas of operations and that we are fast approaching the maintenance cycle of our capital program.

After successfully launching several major projects, our capital expenditure program declined by 32% to approximately RUB34 billion on a strictly cash basis. We achieved our mid-term strategic goals in [2015] and accordingly, we plan to further reduce our capital expenditures for our legacy assets in 2017. At the same time, we will enter a new phase of growth for the Company and we plan to start investing in new projects in 2017 and beyond. Our capital expenditure program in 2017 is estimated at roughly RUB40 billion, but we are proactively evaluating new investment opportunities and as already confirmed in the press, we are negotiating on a number of potential merger and acquisition deals.

The successful conclusion of any deals would obviously impact our capital expenditure guidance. I would like to reiterate that we don't provide commentary on ongoing deals before they are completed. If and when an M&A deal is consummated, we will make the appropriate announcement to the investment community. Our total oil and gas revenues in the fourth quarter of 2016 were relatively strong against both the year-on-year and quarter-on-quarter comparatives. We increased our oil and gas revenues by [9.5% year-on-year and 14% quarter-on-quarter] largely driven by seasonal increases in our natural gas sales volumes as well as average prices for the majority of our liquids projects consistent with positive movement in benchmark reference prices.

Our liquid revenues accounted for 57% of our total revenues versus 53% in 2015. We sold approximately 64.7 billion cubic meters of natural gas versus 62.5 bcm in 2015. Despite changes in our customer base, we increased both natural gas sales volumes and netbacks, reiterating our ability to market natural gas and generate sustainable margins. Weather played a crucial role in our natural gas [sales] volumes in the fourth quarter as colder winter temperatures across Russia supported robust volumes sold and significant inventory movements.

Our fourth quarter natural gas sales volumes were especially strong increasing by 27% quarter-on-quarter and to meet our customer demand, we withdrew more than 1.7 bcm of gas from underground gas storage facilities on back of this strong seasonal demand. We sold 16.9 million tons of liquids, representing a 31% increase over the prior year. The average price we received in dollar terms was lower across our product range because of the decline in international commodity reference prices, but this decrease was partially compensated by the depreciation of the Russian ruble versus the US dollar.

During the fourth quarter, we decreased our liquid sales volumes by 299,000 tons or by 7% largely due to a build-up of inventory balances, which will be released in early 2017. The volatility of commodity prices underlying our liquid sales was well published in 2016, but I would like to highlight that our average commodity prices received during the fourth quarter for our product range were relatively strong as compared to the third quarter 2016 on the back of positive international reference price dynamics.

Our operating expenses continued to grow year-on-year and quarter-on-quarter relative to growth in our business, increasing by 15% and 12% respectively. This cost trend has been reasonably consistent over the past several years as operating expenses increased to support our business operations as well as an increase in personnel and the corresponding adjustments to salary indexation and social payments. The most significant increase in our operating expenses year-on-year related to the purchase of hydrocarbons followed by increases in the both transportation and taxes other than income. Our purchases of the hydrocarbons increased by RUB6 billion and RUB8 billion year-on-year and quarter-on-quarter respectively largely driven by prices and volumes of purchased gas condensate from our joint ventures and to a lesser extent purchases of natural gas. All of our major cost trends remained relatively consistent with the quarter-on-quarter comparisons, but we marginally increased salaries and bonuses paid in our general and administrative category during the fourth quarter.

Overall, there were no major surprises in our operating expenses throughout the reporting periods. Our balance sheet and liquidity position improved significantly in 2016 and remained very strong throughout the reporting period. We generated exceptionally strong free cash flow of RUB139 billion in 2016 versus RUB82 billion in the prior year based on an increase in our operating cash flows of 31% and a corresponding reduction in our capital expenditures by 32%. We have sufficient cash flows to fund our operations and pay our obligations and debt service as they become due. We announced last night that we repaid our RUB14 billion ruble-denominated Eurobond tranche according to the bond's maturity schedule. Our strong balance sheet and liquidity metrics as well as our strong operating cash flows was recognized by our credit rating agencies. In November 2016, we successfully restored our credit rating to investment grade from S&P.

In conclusion, we again demonstrated the robustness of our operating model in a challenging macro environment largely due to our keen focus on cost control, successful project execution, and an enviable position as one of the lowest cost producers in the global oil and gas universe. In a recent edition of the IHS Global Upstream Performance Review dated October 2016, Novatek ranked Number 2 under the reserve replacement cost category and Number 3 for lifting costs amongst global oil and gas companies, both results over the three-year period of 2013 to 2015.

We achieved a series of key milestones at our Yamal LNG project during the past year, reducing some of the perceived risk ascribed to this project by the analytical community although we continue to argue that the risk ascribed to our cash flow stream is still way too high given our demonstrable track record of successful project execution, substantial conventional gas reserves, our low-cost vis-a-vis our global competitors, and the export nature of this particular project. I would like to end tonight's conference call as I began by reiterating that 2016 was a very challenging year for the oil and gas industry, but with the recent stability in benchmark commodity prices and a renewed effort to balance supply and demand fundamentals, we remain committed to creating shareholder value while maintaining the highest standards of corporate governance and sustainable development practices. We are proud of what we have accomplished this past year and believe that our financial and operational results demonstrate our commitment to our strategic goals. LNG is the future of Novatek and the main driver of growth in the natural gas industry.

New markets for the delivery and consumption of LNG are opening at a rapid pace and we aim to participate in this growth across the whole LNG value chain, if we believe we can achieve meaningful market penetration and attractive, sustainable margins. It is also important to reiterate that we remain focused on securing our domestic market share while considering other domestic investment opportunities to further enhance our margins and our business prospects. Novatek is in a unique position to capitalize on our high-quality resource base, our onshore conventional natural gas, and our low-cost position to further expand our operational footprint. We have focused our primary attention over the past several years on delivering our Yamal LNG project on time and on budget. Now it is time to begin looking forward to the next wave of value creating growth for the Company and we are confident this next growth phase will be well received by the investment community and our shareholders. I would like to thank everyone for attending tonight's conference call and for your continued support of Novatek. I would now like to open up tonight's session to questions and answers. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Karen Kostanian, Bank of America.

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Karen Kostanian, Bank of America - Analyst [2]

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Good morning gentlemen, thank you so much for the presentation and congratulations on good results. I have two questions. My first question is that during prior conference calls you mentioned fields of Dorogovskoye and North-Urengoyskoye and East-Tazovskoye as the potential next phases of the domestic growth. I was wondering if you could probably provide an update in terms of where you stand in the development or the exploration of those fields. And my second question is regarding Arctic LNG-2, could you at this point of time provide any metrics in terms of the size, the financing structure, and the potential output of Arctic LNG-2 or is it too early at this stage. Thank you.

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [3]

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(interpreted) Hello to all participants on this call, I would like to mention this upfront, sometimes investors and analysts would ask large number of questions altogether and I would appreciate the fact that you only asked a couple, hence it's easy to focus and respond.

Speaking on your first question, indeed, we disclosed our opportunities in the [Samburgskiy] block with significant exploration already undertaken. We are finalizing the development projects for these fields and by the end of the year, we'll move over to the investment phase. The [Samburgskiy block is comprised of three fields, that's Dorogovskoye Vostochno-Tazovskoye and Severo-Purovskoye]. Once these have achieved flat production, we expect gas to reach 8 billion cubic meters whereas gas condensate would be around 800,000 tons.

Speaking about your second question, the Company has the full title Arctic LNG-2. We are undertaking a significant volume of exploration work there and a significant volume what [Utrenneye field] with five exploration wells already drilled.

In 2016, Utrenneye field has already contributed to the increase in our resource base. Current reserves allow us to plan LNG capacity by 10 to 15, larger than the Yamal LNG we currently have. Investment required into development of the field is pretty much on par and fair assessment to the one required for the Yuzhno-Tambeyskoye field as part of Yamal LNG project. At the same time, we would like to cut significantly our costs for the construction of the liquefaction facilities of trains per se. That's why the coal branch is considered for this project. We would like to undertake significant exploration and design into that and that's why we have no rush in making the final decision. I think it would be right to start with a full completion and launch of the Yamal LNG project, then consider contracting future LNG volumes and identify partners for the new project. However, I would like to reconfirm the commissioning timeframe, which lies between 2022 and 2024. Thank you.

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Operator [4]

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(Operator Instructions) Ron Smith, Citi.

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Ron Smith, Citi - Analyst [5]

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Yes, good evening. Thank you gentlemen for the call. Let's follow-up on Arctic LNG-2 first. Are you planning on using gas from the Gydan peninsula regardless or in the event that Novatek should get the four Gazprom fields, would you look to substitute those for Arctic LNG and use Gydan for later follow-on projects. That's the first question. And second, when might we see the strategic presentation? I know that you have talked about it at times in the past and it's been delayed a few times. I think the market would like to see it. Thank you very much.

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [6]

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(interpreted) There is no link between the commencement of Arctic LNG-2 project on the one hand and discussions around fields in the north of the Yamal peninsula currently held by Gazprom. The Arctic LNG-2 project is based on reserves within Utrenneye field and we are implementing that as part of the same government decree that endorses the Yamal LNG project.

Regarding our strategy now, I can tell you the following as of today and I think you must know that yourself, our strategy is going to be targeted at first and foremost an increase in our share in the LNG market. If you consider our second LNG projects contribution, that would be on par in total in terms of our capacity as one half of total LNG capacity in Qatar. So in volume wise or in terms of scale that's pretty much a strategy already.

At the same time, our strategy is going to target -- I would like to keep our market share in the domestic market. And also, we would like to increase capacity utilization on our liquid hydrocarbon processing facilities. At the same time, we are looking into gas processing projects for chemical product manufacturing as well as increasing the conversion ratio of our gas condensate. As you can understand, all these projects require a thorough analysis and also analysis of the investment required. I believe that in the nearest future, we will have completed this assessment and disclose the result to the investment community. Thank you.

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Operator [7]

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Ildar Davletshin, Ren Cap.

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Ildar Davletshin, Ren Cap - Analyst [8]

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(interpreted) Good afternoon and thank you for this opportunity to ask questions. I'll do that in Russian. I'll be brief as well with just a couple of questions. My first question refers to your dividend. You had some positive impacts on to your earnings based on the sale of the Yamal LNG stake and FX movements as well. Are you going to include those two effects into your dividend base? And my second question concerns your Yamal LNG project financing side, I understand that financing has already been completed rather successfully, but at the same time, should we consider the geopolitical situation improved and sanctions removed against Russia or against some individual businesses, would you envisage a reduction in your interest, let's say should Russian banks loans be replaced or potential facilities extended, what's your vision?

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [9]

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(interpreted) I believe that we have a well-balanced and right dividend policy. We pay no less than 30% of [adjusted IFRS net income]. This policy enables the Company to develop its business on the one hand while increasing the dividend payout at the same time. I don't believe that the huge free cash flow in 2016 [was a] major benefit for the Company, it could be somewhat of a hurdle as well. In part that could be related to the second part of your question, indeed it was very important for Novatek to complete the financing of the project in full.

I believe and more than that I'm confident that we have obtained some very good facilities in terms of their maturity, interest, and also terms. We have obtained the facilities in full with a little bit more than [22 billion] -- we have invested about $22 billion into the project and to a significant degree that includes external financing. The project does not have any need to involve any extra loans on top of what we have already obtained. And then again, speaking on the dividend side, I'm a shareholder of Novatek myself and I'm equally interested in increased dividend yield. I'm confident that the dividend is going to grow with Novatek with every year. Thank you.

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Operator [10]

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Pavel Kushnir, Deutsche Bank.

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Pavel Kushnir, Deutsche Bank - Analyst [11]

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(interpreted) Good day and thank you for this presentation. My question is very straightforward, many LNG projects globally were commissioned with delays, what gives Novatek and its partners confidence that your current project will have been commissioned by the end of 2017 with no significant delays. Thank you.

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [12]

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(interpreted) It's somewhat challenging to answer your question. My confidence is boosted by what I see whenever I visit the site. I see how much progress is achieved in implementing the project when it comes to the first train in particular, which gives me confidence and I'm sharing that with you that the first train will be launched this year. Thank you.

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Operator [13]

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Ildar Khaziev, HSBC.

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Ildar Khaziev, HSBC - Analyst [14]

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(interpreted) Thank you, I have very quick question on Yamal LNG. What's the total investment expected by year-end. Do I understand it correctly that the amount could [exceed RUB27 billion].

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [15]

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(interpreted) We have confirmed a number of times and we are reconfirming now that we are fully in line with our CapEx budget, which stays at [RUB27 billion]. I have already mentioned the number already invested by now and the CapEx budget for 2017 is [around $6 billion]. When we produce the number of [RUB27 billion] of CapEx, this does not include any interest payable on the loans and does not include maintenance of Yamal LNG per se. I would like to emphasize it yet again because it's so very important to us, we are completely in line with the budget originally approved in [2013]. Thank you.

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Operator [16]

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Karen Kostanian, Bank of America.

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Karen Kostanian, Bank of America - Analyst [17]

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(interpreted) Mr. Mikhelson, thank you for this other opportunity. Apologies for getting back again. I have a question right on the financing side again. You have expressed confidence in the future of your new LNG projects. However, let's take it to account the fact that Yamal LNG's success was based to a great degree on your unique capability to attract financing in most difficult market conditions. Hopefully, the sanctions will be going away soon and the conditions will improve. At the same time, while discussing with your partners with potential creditors and other stakeholders to be involved in new projects, you cannot help but take into account the current environment and the current conditions. I'm wondering what your partners and other stakeholders think of the current situations, are they happy to be involved even with the sanctions in place and what do they think of the financing terms in this environment? Thank you.

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [18]

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(interpreted) Well, naturally, we cannot base our strategy when it comes to new LNG projects on the assumption that some elements related to sanctions could be changed or the market could have recovered. Even though all these factors were in place as we attracted financing for Yamal LNG, I would like to reiterate it and further emphasize the fact that we did manage to attract financing on very good market terms.

You could recollect yourself and think of how many people within the investment community, how many investors and broadly analysts believed in the possibility of successful implementation of Yamal LNG just a few years ago whereas currently, I think everyone believes that similar projects in the Arctic area with no infrastructure in place still can be implemented. We have changed the structure of our new projects using liquefaction platforms, which would further reduce the implementation risks.

What's most important about these new LNG projects is the fact that we would like to reduce very significantly the CapEx required into liquefaction trains per se, thus making our new LNG projects competitive in any market. And you hear from us that we are already discussing some substantial elements with potential partners who would like to get onboard on our new projects and I don't expect significant difficulties as was the case with Yamal LNG to be part of our future projects. Thank you.

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Operator [19]

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(Operator Instructions) Susan Wisialko, GMO.

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Susan Wisialko, GMO - Analyst [20]

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Thank you very much for the call gentlemen and congratulations on the excellent results. I had a question, just one question please, on the global LNG demand/supply balance. Your projections are for significant growth. Could you talk a little bit about how you see the global LNG demand/supply balance changing and/or the pricing trends with regard to potential new supply coming from the Israeli gas fields, Iran, and other parts of the Middle East to the new Egyptian fields that were founded and also potential North American supply. Do you think that LNG market will converge from three different regional LNG markets to a more global price? Thank you.

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [21]

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(interpreted) We are thoroughly studying market opportunities and particular plans available to the investment community when it comes to LNG market development. If you consider the numbers, 2015 saw total consumption of LNG at 248 million tons whereas 2016 just last year, that number stood at 266 million tons, which is more than 7% increase. Some believe that the LNG market of today demonstrates excessive supply, hence it's the buyers' market, which is going to remain the case for some long time to come and you know (inaudible), we agreed to that, but we don't see anything wrong about it. The more confident is the buyer in this particular market, the quicker this will generate new demand.

If you consider the global situation and no one is questioning the growth of China, India by the year of 2030, some even believe there is more than two-fold growth. Other countries such as Malaysia and Indonesia are set to start importing LNG as well probably in significant volumes. Thailand and Pakistan are set to see some several-fold growth whereas Bangladesh and the Philippines as well as other new markets are also emerging. Electric power is in demand in any location and the fastest pace of growth is to be expected from the developing countries.

New infrastructure in these developing countries is sure to create new demand for decades to come whereas construction of float and re-gasification facilities has definitely changed the access to these markets. Another major driver is combating against pollution there and in that regard, with the current pricing environment especially, liquefied natural gas is going to take a major market share based on that driver.

If you consider ferry's in Europe or cruise ships, they are moving to LNG bunkering to a significant degree whereas the global potential is just immense. Woodside estimates the number of [200 million tons] which is potential new demand should all sea vessels be converted to LNG bunkering. I believe that's a joint effort by both suppliers and offtakers of gas in this market in the coming years is going to enable access to dozens of millions of people to gas and electric power. I [feel to share your view] when you are saying that in the coming years, the LNG market is going to become more global and that is more resembling that of the oil market. Novatek sees its objective as follows, we would like to be competitive in that new global market at any price level. Thank you.

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Operator [22]

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Evgeniy Khilinskiy, Gazprombank.

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Evgeniy Khilinskiy, Gazprombank - Analyst [23]

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(interpreted) Good day and thank you for the presentation and the opportunity to ask a question. My question is related to your strategy. I'm talking about your two JVs, SeverEnergia and Northgas, when would these companies be likely to pay dividend to you and how significant would that dividend be in terms of your operating cash flow?

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [24]

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(interpreted) Speaking of Northgas, we expect dividends to be paid based on the results of 2017 as early as that and the amount will depend on the macro environment. Speaking of Arcticgas now, we are looking into different possibilities to develop the company at present and looking into new investment opportunities which may require financing. Following that assessment exercise, we will make our dividend decision. Thank you.

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Operator [25]

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Igor Kuzmin, [Gazprombank].

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [26]

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(interpreted) I think the questions have been exhausted. Mark's presentation was so detailed that it doesn't lead to any further questions based on that.

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Igor Kuzmin, Morgan Stanley - Analyst [27]

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Hello, can you hear me.

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [28]

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(interpreted) Yes we can hear you.

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Igor Kuzmin, Morgan Stanley - Analyst [29]

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Okay, sorry, I don't know why my line was blocked probably in the beginning. Igor Kuzmin, Morgan Stanley. (interpreted) Thank you. My question refers to the deregulation of prices of tariff such the domestic wholesale market, discussions are ongoing as far as I understand, so what's your position and what are your expectations. Thank you.

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [30]

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(interpreted) Our position remains unchanged, which is reflected in government decrees. And the same position is also reflected in resolutions adopted in 2015 by the President's commission for fuel and energy markets. The domestic market is to have the same conditions put forth for all market players with a fair transportation tariff. We have filed our proposition to the Federal Anti-Monopoly Service, which is the tariff regulator at this time. We think that our position will be heard and the corresponding correct decisions will be made based on that. Once these decisions have been taken and a few years have passed with the new arrangement on the market, it would be the time to speak of the deregulation. Thank you.

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Operator [31]

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There are no further questions from the phone. (Operator Instructions) (inaudible).

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Unidentified Participant [32]

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(interpreted) Thank you for this opportunity to ask question. I'm asking, I would like to ask about your gas processing and further reduction of petrochemicals. I'm interested in the product lines, potential integration is that only about gas processing or is it also about production of [monies], please explain?

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [33]

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(interpreted) When I commented on our strategy, I explained that as part of our strategy we are considering potential projects related to gas processing, petrochemistry, higher conversion ratio in gas processing and higher processing depth. We are now looking into markets for particular product. We are also looking into technologies required to manufacture those. I expect preliminary decisions to be made on some of those in the course of 2017. I would like to emphasize that those are going to be preliminary, but so far, I don't have anything further for you. Thank you.

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Operator [34]

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Henri Patricot, UBS.

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Henri Patricot, UBS - Analyst [35]

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Yes, hello everyone, thank you for the presentation. Just one question to follow up on the comments you made on LNG demand earlier. Just wondering if you would consider investing further down the chain in re-gasification capacity to accelerate this demand growth from new countries and [potentially in infrastructure or transport demand] as well. Thank you.

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [36]

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(interpreted) I believe that is feasible for us. We are considering minor investments that would enable Novatek to buildup competences within the global LNG market. We are interested to be involved in projects across the full value chain of LNG. This would enable Novatek to have a better access to regional markets in the world. Thank you.

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Operator [37]

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There are no further questions from the phone. (Operator Instructions).

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Leonid Mikhelson, Novatek PAO - Chairman of the Management Board & Member of the Board of Directors [38]

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(interpreted) I would like to thank all participants on this call which have been numerous today. Thank you for interest in developments with Novatek to our plans and also our results. In fact, 2017 is going to be a very important year for Novatek. We'll be penetrating into the global LNG market and we are going to base our strategy on that to a great degree.

I believe it is our duty to make all proper assessments on our strategy side and then disclose that and bring home to the investment community, but again we target [not] a major growth of dividend side, but rather developing the Company at large and we have all the capabilities to effect that. We are going to build up on our resource base which we started already back in 2016. One of the main achievements of Novatek throughout its years is a very professional management which has been put in place and which will help to drive the Company further at the same pace. Thank you.

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Operator [39]

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That will conclude today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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Editor [40]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.