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Edited Transcript of NVTK.MZ earnings conference call or presentation 27-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Novatek PAO Earnings Call (IFRS)

Tarko-Sale Apr 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Novatek PAO earnings conference call or presentation Thursday, April 27, 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

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Conference Call Participants

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* Alex Kantarovich

JPMorgan - Analyst

* Ronald Smith

Citi - Analyst

* Ksenia Mishankina

UBS - Analyst

* Alex Fak

Sberbank CIB - Analyst

* Henri Patricot

UBS - Analyst

* Karen Kostanian

Bank of America Merrill Lynch - Analyst

* Alexander Kornilov

Aton - Analyst

* Igor Kuzmin

Morgan Stanley - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Novatek first quarter 2017 financial results conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mark Gyetvay. Please go ahead, sir.

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

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Thank you, Sarah. Ladies and gentlemen, shareholders and colleagues good evening and welcome to our first quarter 2017 earnings conference call. Before we begin with the specific conference call details, I would like to refer you to our disclaimer statement as is our 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 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 risk that may influence our results.

We expect commodity markets to remain volatile in 2017. So, it doesn't make too much sense to spend much time on this point, other than state the obvious. We try to manage our business through various macroeconomic cycles and the one we face today is no different from those we have faced in the past. Our aim is to manage our business through these commodity price cycles, both positively and negatively to achieve the highest risk-adjusted margins for our hydrocarbon products stream we market domestically and internationally.

Tonight, I would like to focus my discussion on the declining production output from our legacy assets and explain what we are doing in terms of arresting the current decline rates, as well as providing an update on some of our current development and exploration plans. We have stated before that our mature fields are declining at various rates. This situation has become quite obvious from the recent quarter-on-quarter declines over the past year. It is our firm position that this trend is manageable and not indicative of Novatek going ex-growth.

We have an exciting array of exploration and development projects in the pipeline, but they are geared more towards the end of the decade rather than a quick fix solution. Management has focused an enormous amount of attention over the past couple of years on delivering our Yamal LNG project on time and on budget, and we believe the pivot to providing global markets with LNG is the future of Novatek.

This point was articulated by Mr. Mickelson, when asked about [pending] strategy update. We are also in discussions to potentially acquire producing assets in the general vicinity of our existing asset base, but we can only elaborate on this point once the deal is consummated.

It's premature at this stage to speculate when any M&A deal will be finalized, but we believe we can maintain our current production platform by complementing our existing asset portfolio. It is also important to reiterate this evening that we are moving forward with Arctic LNG 2 and that infrastructure work has already begun on the Kola yard in Murmansk region to support the localization of modular construction. This aspect is important for us as we aim to reduce the cost of new LNG modules built on gravity-based platforms to the maximum localization of production and testing as well as substantially reducing transport cost.

Arctic LNG 2 will be supported by the natural gas produced at our Utrenneye field, located on Gydan peninsula and we continue to achieve great production results from the production wells drilled on the field. We will submit an update to the C1 and C2 reserve base for government approval during the second quarter of 2017, so it's important to wait until this process is completed to provide update resource figures.

I will attempt this evening to provide our investors with a preview of some of the upcoming activities that we are currently working on to stabilize output on our core production regions in the medium term, but I would also like to stress that these work activities extend over a period of several years rather than months. And we ask our investors to remain patient as we believe we have exciting prospects to develop both mid and longer term. In the short term, we will continue to focus on successful launch of the Yamal LNG and bring a new chapter to the company's history.

Our legacy assets began producing in 1996, with the commencement of crude oil production at the East-Tarkosalinskoye field, followed by the commencement of natural gas from this field in 1998, the Khancheyskoye field in 2001 and Yurkharovskoye field in 2003. Our legacy fields have already cumulatively produced more than 550 billion cubic meters of natural gas, with the current recoverable ratio at each of the three fields consistent with our development plan and a prudent exploitation of the field's resources base.

More importantly, these three fields will continue producing for another 15 years to 20 years, albeit at declining output rates and today still represents the major share of our consolidated production. So, what steps do we undertake to stop decline in production at our legacy fields as well as new development activities to bring additional production on stream over the next several years. I would like to highlight some of our main activities.

We recently began evaluating the Achimov and Jurassic layers across our asset portfolio to determine whether or not we can extend the production lives of our legacy assets by tapping into these deeper and more liquid rich lower producing horizons. This decision was primarily based on the successes to drill deeper at SeverEnergia and Terneftegas joint ventures. We successfully drilled and are now producing from the deeper Achimov and Jurassic layers. We began drilling well 135 at the West-Yurkharovskoye field last year to specifically target the high pressure Jurassic layers at an average vertical depth of 4,000 meter. We have completed the vertical and horizontal drilling at this well and this week we began the multi-stage fracking to determine the permeability and potential flow rates from this deeper horizon.

I mentioned previously that our geologist have already confirmed production at both the Valanginian and Jurassic layer, but the economic commerciality at the deeper Jurassic layer needs to be confirmed from the multi-stage fracking, as well as development and economically feasible development plan. We remain optimistic that the lower producing horizons will be commercially viable and as such, we will provide more information shortly on this topic.

In addition to targeting the deeper producing horizons, we have begun evaluating concrete remediation steps we can now take to slow these rates of declines, including but not limited to sidetracking, present horizontal sidetracks to capture additional production layers, more use of well-stimulation and hydro fracking and the introduction of plunger lifters to officially move liquids within the gas stream as bottom hole pressures decline.

We can also step up our drilling and aspiration efforts, which was somewhat negated until we are absolutely sure the Yamal LNG financing was appropriately secured. This was essentially achieved in mid-2016. We have stated many times already that our primary goal is to maintain our market share in the Russian domestic market, which we will meet through a combination of equity natural gas production and purchases primarily from our joint ventures. Some of our main options to achieve this goal relates to activities already underway.

We had previously talked about our work activities at the North-Russkoye license area, so tonight, I would like to reiterate some of the things we are currently working on in this area. Specifically, the North-Russkiy block encompasing the in the North-Russkoye, the East-Tazovskoye, Yurkharovskoye, and Yarudeyskoye field with combined production potential of approximately 12 billion cubic meters to 14 billion cubic meters of natural gas and 1.2 million tons of condensate. We anticipate to commence production around late 2019, early 2020 where commercial ramp ups between 2021 and 2023 dependent on a specific field.

Infrastructure construction has already begun on the North-Russkoye and East-Tazavskoye fields with production potential of roughly 7.2 billion cubic meters per annum. At the neighboring Obskiy and Dorogovskoye fields three-dimensional seismic studies have been completed, and a significant increase in hydrocarbon deposits have been discovered. We completed one-stage hydraulic frac in well 305 and achieved commercial flow of gas condensate with preliminary flow rates of 200 million cubic meters of natural gas with a condensate factor of approximately 400 grams per thousand cubic meters from the Jurassic layers. Two additional wells, number 306 and number 307 targeting the Jurassic deposits have been prepared for drilling. We will update you on these results during the year.

At SeverEnergia, we further delineated the Urengoyskoye field on the Samburgskiy license area by discovering a new deposit [Arc-1], which will eventually increase the fields natural gas output by 3 billion cubic meters to 4 billion cubic meters per annum from roughly 14 bcm to under 18 bcm, as well as maintain condensate production levels up to 6 million tons. We will bring this incremental production online around 2020.

We are working on a number of new initiatives that will be discussed later at our strategy update. But I would like to flag some of them this evening to highlight how we see new production coming on stream post 2020 with our planned development program.

Arcticgas formally known as SeverEnergia will play a crucial role and provide an incremental production in terms of natural gas, gas condensate, and crude oil. If you recall, we already mentioned that the first phase of crude oil production of 1.2 million tons will commence at the Yaro-Yakhinskoye field in 2019. We are also commissioning a series of fields for development between 2020 and 2025, such as the Urengoyskoye field at the Yaro-Yakhinskiy license area, with a potential production target of 2.5 bcm of natural gas and 700,000 tons of condensate.

The East Urengoyskoye field on Samburgskiy license area with potential production targets of 2.3 bcm of natural gas and 500,000 tons of gas condensate or the North-Tarkosalinskoye field with production potential of 5.3 bcm of natural gas and 200,000 tons of condensate. Arcticgas provides us with an opportunity to sustain production levels post-2020 on a number of interesting development initiatives as well as further exploratory activities. We will purchase natural gas and unstable gas condensate from these joint ventures to support our marketing efforts.

We will also focus more attention on increasing the associated gas production at the Yarudeyskoye field up to 1.8 bcm, Yaro-Yakhinskiy and East-Tarkosalinskoye fields and later we will commence production at North-Russkoye block.

I would like to make a few comments about our largest producing asset the Yurkharovskoye field and some of the possibilities we have to reduce the current decline rates. We have studied various development opportunities to monetize additional reserves on this field as way back as pre-IPO to understand the most efficient way to exploit the field's vast potential.

We decided to drill a series of large diameter horizontal wells and drilling clusters onshore to tap the resources located on the old river. This development process has proved to be largely successful as we managed to cost effectively exploit 314 billion cubic meters of natural gas or 55% of the recoverable reserves, while drilling only 94 production wells. Now, we are studying the possibility of extending the field's reserves and production capacity by developing the eastern part of the field.

Moving forward, I would like to provide a brief update on the activities at Yamal LNG over the past quarter. The overall project completion was 80% as at 31 March, 2017 versus 75% complete at year-end 2016. The first LNG train is now 91% complete and we have begun commissioning work on some of the modules with projected startup of Yamal -- train number one at Yamal in the second half of 2017 as scheduled.

We have also reached the peak labor force and presently there are approximately 31,000 construction workers versus 22,000 in the fourth quarter with about 4,000 construction vehicles on site. There are approximately 13,000 people working on module fabrications at various construction yards. It is a massive undertaking.

We completed and tested six new production wells in the first quarter of 2017 and 81 production wells have now been drilled, significantly exceeding the number of wells required for LNG train number one. Construction of gas gathering lines for the first train are also been finalized. I mentioned on our annual conference call that all 78 modules for LNG train number one were installed and are at various stage of testing, including the placement and installation of the cryogenic heat exchanger for LNG train number one.

The cryogenic heat exchangers for LNG number two and number three, have already been delivered to Sabetta and roughly 33 modules have been completed and are either in the process of being shipped or already have been delivered to the construction site. All remaining modules for LNG trains number two and three will be delivered by year-end.

The most significant news in the first quarter was a successful ice testing of the first Arc-7 Ice-class LNG vessel. The vessel was placed into water fully equipped in 2016 and during the period of November-December 2016 passed the navigation test in the Arctic Ocean. On 24 of January 2017, the vessel docked at Fluxys transshipment facility at Zeebrugge in Belgium to cool down its cargo tanks and load some LNG for fuel and testing.

In February-March 2017, the LNG vessel successfully passed ice test in the Kara Sea and docked at Sabetta on the 30 March, 2017. The ice test results exceeded the design expectations of the vessel as a maximum speed in 1.5 meter-thick ice with seven nautical knot rather than the planned five nautical knots. Seven more LNG vessels are currently being built. As of today, we have received $23.4 billion in overall financing for Yamal LNG project, inclusive of the $13.1 billion, provided by the shareholders. The budget for 2017 is forecast at approximately $6 billion.

Mr. Mickelson mentioned last week at our Annual General Meeting of shareholders that the German and Swedish export credit agencies have decided to take part in the overall financing of the Yamal LNG. We believe this decision is another important step for the project, as we broaden the participation by the international financial community into the overall external financing package and can better optimize the overall cost of financing. The total limit of $19 billion will remain in place.

The first quarter of 2017 was relatively acquired period in terms of exploration and production activities, although we increased the running the 3D seismic works by reduced exploratory and production drilling, most notably at our subsidiary companies. During the quarter we drilled and completed 14 production wells versus 17 production wells in the first quarter of 2016 and 30 production wells in the first quarter of 2015. The trend towards maintenance drilling is clear. We are assessing the development plan that targets deeper-producing horizons such as Achimov and Jurassic layers, which we estimate holds substantial untapped production potential in our portfolio as well as two additional fields in Arcticgas and the North-Russkoye field that I mentioned earlier.

The focus will drive investment decisions over the coming years, as we shift our asset portfolio and consider potential M&A activities in our core region of operations. Longer-term, our strategic focus will center on analyzing and evaluating potential new licenses to complement our present portfolio of assets, particularly where we believe we can maximize our synergies for developing in LNG Center of Excellence in the Yamal and Gydan peninsulas.

As Mr. Mickelson mentioned on the Q&A session during our full-year conference call, the plan to more than double our LNG output is a strategic plan, and we will elaborate more on this vision in our upcoming strategy update in the latter part of this year.

Looking specifically at the first quarter 2017, we spent approximately RUB4.7 billion in our capital program on a cash basis versus RUB8.1 billion in the corresponding year, represented a 47% period-on-period decline. Most notably was declines in capital spend at the Yarudeyskoye and Yurkharovskoye field, and shift towards capital spending at the West-Yurkharovskoye and Utrenneye field as well as a North-Russkoye block.

Overall, we plan to invest about [RUB40 billion] in capital expenditures in 2017, allocating funds between legacy assets, new development activities, and infrastructure work for new LNG projects. The comparability of financial results year-on-year is challenging largely due to the increase in commodity prices between the reporting periods, as well as the volatility and foreign exchange between the Russian rouble and the US dollar. As a result, I will focus most of my discussion on quarter-on-quarter comparatives and illustrative year-on-year.

Total oil and gas revenues in the first quarter 2017 was [RUB154 billion], representing an increase of both year-on-year and quarter-on-quarter comparatives of roughly 11% and 7% respectively. This growth was largely driven by a substantial increase in commodity prices year-on-year for our liquids revenue on lower volumes sold and the corresponding translation of these foreign earnings to Russian rouble. Our volumes sold declined by 11% year-on-year, largely due to decreased gas condensate sales and weather disruption at the port loading facility for crude oil. The decline in liquid output was mainly attributable to the Yurkharovskoye field, but also the production output for this current period was affected by the differences and the number of days producing between the first quarter of 2016 and 2017.

Our liquid output declined by 2,300 tons or by 6.5% for the differences in days and output declines going between the reporting periods. We also had a larger change in inventory balances are roughly 208,000 tons in the first quarter of 2016. It is also important to note that declines in output from the producing fields did not affect our ability to maximize risk-adjusted margins, at the Ust-Luga Complex, as this facility continue to operate at 117% of its nameplate capacity on an annualized basis. We are maximizing revenues from this facility as sales of naphtha and other refined products were strong year-on-year and quarter-on-quarter.

Our liquid sales increased quarter-on-quarter by roughly 12%, which were impacted by a combination of factors, including increased volumes sold by 228,000 tons, slightly better commodity prices across a slate of our product range and a reversal in inventory movements by roughly 366,000 tons. Inventory balances will fluctuate period-on-period, due largely to load in schedules and time to destination.

Natural gas revenues between the respective reported periods were reasonably strong, increasing year-on-year and quarter-on-quarter by 10% and 2% respectively. The increase in natural gas revenues were driven largely by increased volumes sold, a shift more towards end customer sales, a change in geographical mix and seasonal withdrawals from storage.

Our average sales on a netback basis taking a consideration of transportation and customer mix, increased by 6% and 4% year-on-year and quarter-on-quarter, respectively. Average natural gas prices to end consumers increased by 3.9% year-on-year, largely due to the geographical mix of our sales and more distant locations, which in essence also increased our average transport tariffs by 10%, and resulted in a slight increase in our average netbacks.

Conversely, we improved our average netbacks quarter-on-quarter by 2.1% on slightly higher sales volumes. Our liquid revenues accounted for 56% of our total revenues in the first quarter of 2016 and 2017 and 54% in the fourth quarter 2016. Natural gas volumes sold to end customers remain slightly more than 92% with the remaining 8% sold ex-field. Liquid sales remained geographically averse with Europe and the Asia Pacific region as the primary markets, with a notable increase in stable gas condensate and naphtha sold to North America.

At 31 March, 2017, we had 93,000 tons of naphtha in transit to the Asian-Pacific region, which was consistent with the prior year but 60,000 tons higher than year-end. Total liquids in storage were 813,000 tons. We finished the reporting period with 130 million cubic meters of natural gas in underground storage, a decrease of 704 million cubic meters from year-end, reflecting stronger seasonal demand in the current quarter.

Our operating expenses were again consistent with our overall business trends and we do not have any major surprises in our expense categories during the reporting period. Our operating expenses increased relative to the growth in our business, representing an increase of approximately 13% year-on-year and 4% quarter-on-quarter.

The most significant increase in our operating expenses year-on-year related to the purchases of hydrocarbons, as we continue to purchase both unstable gas condensate and natural gas from our joint ventures. This trend will continue as we meet our customer demand through a combination of equity production from our subsidiaries and purchases from our joint ventures.

Purchases of hydrocarbons represented 38% of our total operating expenses during the quarter. Taxes other than income increased effective January 1 for both crude oil and gas condensate as the base rates increased by 21% and 18% respectively.

Our SG&A increased during the reporting period, largely due to growth in headcount, combined with our annual salary indexation on base salaries and the corresponding increase in sulfur contributions. Other major cost trends were relatively similar on a comparative basis with the large swing between reporting periods, representing a change in inventory balances between periods with the withdrawal of natural gas in the period and the recognition of sales from liquids in transit.

Our balance sheet in liquidity position remained positive in the first quarter 2017 and all of our credit metrics continued to improve. Free cash flow generation of [RUB44 billion], remained very strong, despite a drop in operating cash flows of 10% as well as a 47% decrease in capital expenditures.

We have sufficient cash flows to fund our operations and pay our obligations and debt service as they become due. We decreased our net debt position by 44% to [RUB114 billion], as we repay debt according to repayment schedules or before maturity. In conclusion, we have shown without doubt the cash generating nature of our business over the past several years, and we have turned a major corner in the allocation of capital from legacy assets to our pivot towards the global LNG market.

We understand the concerns voiced recently by analysts over the production declines in the core legacy assets, but part of this decline was a combination of over-production at the Yurkharovskoye field for two years. As I had mentioned on one of my prior conference calls, when we reduced the plateau levels at a field, as well as the need to conserve cash until such time as external financing for Yamal LNG was secured.

Tonight, I provided a glimpse into some of our current development and exploration projects, because I felt it was important to provide this preview prior to our strategy update later this year, which will be a more comprehensive picture of our strategic plans for the next 10 plus years. We have many opportunities to consider, including potential M&A deals or license acquisitions which first must be concluded before we can provide context into how these new operations fit into our broader strategy.

Moreover, our strategic decision to pivot towards LNG is supported by growing demand and the need to transition away from solely pipeline gas, to more flexible delivery options. LNG growth in 2016 was roughly 7.3% and initial data so far in 2017 shows continued demand growth. First quarter of 2017 volumes were about 74 million tons or approximately 10% higher as compared to the corresponding period in 2016.

China alone has increased LNG import by 17% in March, and we see more and more countries opening up as potential demand points. We understand that the LNG is presently a buyer's market for the next several years and quite frankly, we do not feel that this is a bad situation. The more consumers are comfortable with the pricing the supply choices, the faster the LNG market will crystallize for suppliers. These developments underscore our decision to begin designing and construction work at the Kola yard in Murmansk region to make LNG proposition more competitive in the current market conditions. We see the emerging LNG markets as an opportunity for Novatek to be a formidable player and we will work extremely hard to ensure our future projects are competitive and compete with the likes of the Qatari projects.

There was an announcement yesterday by the Australian government to unveil the Australian domestic gas security mechanism that will impose export controls on LNG, if there is a forecasted shortfall in natural gas earmarked for domestic consumptions. This obviously puts pressure on LNG exporters and project in Australia, but I also believe it calls into question the perception of country risk and the need to reassess the analyst country risk assessment of Russia generally and our Yamal LNG project, specifically.

I believe we have delivered another set of strong financial results and hopefully I provided a glimpse into some of the concrete steps we have presently taken to reduce the production declines on our legacy assets. Our strategy team met yesterday for several hours to discuss the final steps in presenting the updated strategy to the Management Board for review and approval. There is an internal process that we must adhere to, but in general, our strategy will be aimed towards sustaining our domestic market share as well as full utilization of our processing capacities.

We will consider gas chemistry projects, expand debt of our refining capacity and expand our global LNG footprint. I would like to thank everyone for attending tonight's conference call now and 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). Alex Kantarovich, JPMorgan.

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Alex Kantarovich, JPMorgan - Analyst [2]

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If I may -- could you please share with us your expectations about total production growth for the full year on an annual basis 2017 versus 2016?

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [3]

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Yes. I think if we look at the full-year results, I suspect that we will -- we showed production decline shall not being higher than 10%. We will show some decline in this year, but it should not be higher than 10%.

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Alex Kantarovich, JPMorgan - Analyst [4]

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All right. And for the next several years how the (multiple speakers).

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [5]

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Well will discuss that at the Strategy presentation.

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Alex Kantarovich, JPMorgan - Analyst [6]

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Right. And also on the license acquisition, I appreciate that it's not complete and you will provide an update, but how reasonable it is to assume that those will also come to conclusion and which potential targets are we discussing?

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [7]

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Now, when you talk about the license acquisition, are you talking about primarily Gazprom fields?

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Alex Kantarovich, JPMorgan - Analyst [8]

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Yes, correct.

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [9]

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As I mentioned before, we do not disclose deals until they're finished. I can just basically say at this point in time, we are in negotiation process with Gazprom. Price (inaudible) deal is one of the points for negotiation. We are considering joint development of these fields with Gazprom, although it is premature to give you any particular guidance at this particular point. As for licenses in the general term from the state, we will continue participating as we have done in the normal course of our business.

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Operator [10]

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Ronald Smith, Citi.

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Ronald Smith, Citi - Analyst [11]

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Thanks for the presentation, you mentioned several times about the strategy presentation that you're getting prepared to publish it. Could you give us a little more idea of the timing or did I misunderstand, is it we're talking to summer, this fall, about when could we put that in a calendar?

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [12]

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I think we're aiming to do it as soon as possible, but I believe it will be more towards the fall period. We talked about this many times in the past already and I think it's important that everybody should understand that our strategy is going to be LNG. We have already -- we have the second LNG project that we're going to do, as I mentioned the Arctic LNG will come on stream and together these two projects account for about half of the Qatari production right now. So, I would say that it's best if you are going to put on a calendar, it will be in the fall period of 2017. And I think even probably towards the -- probably in the latter part of the fall.

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Operator [13]

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Alex Fak, Sberbank CIB.

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Alex Fak, Sberbank CIB - Analyst [14]

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Two questions from me, first concerning SeverEnergia. You mentioned some of the developments there. I was just wondering, overall production last year was 25.5 billion cubic meters for the entire asset and 8.1 million tons of condensate. Where can we expect to see the peak of gas and condensate production at SeverEnergia, at what levels?

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [15]

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I believe the gas is about 34 billion cubic meters of natural gas, roughly in that line and I believe it's about [8 to 10] in liquids.

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Alex Fak, Sberbank CIB - Analyst [16]

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And that includes crude oil?

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [17]

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And that includes crude oil.

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Alex Fak, Sberbank CIB - Analyst [18]

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Okay, thanks. My second question is, are there any plans for any joint ventures with that Qatari, the Russian ambassador to Qatar, a couple of months ago was talking about Qatar is investing in some of your projects or in Novatek itself, it was kind of hazy. So I just wanted to follow up on that?

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [19]

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I believe it's still hazy as we speak.

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Alex Fak, Sberbank CIB - Analyst [20]

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Okay.

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [21]

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I have no comments.

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Operator [22]

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(Operator Instructions). Ksenia Mishankina, UBS.

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Ksenia Mishankina, UBS - Analyst [23]

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Hi, thank you for the presentation. Could you please indicate what portion of short-term debt, do you plan to repay and what portion do you plan to refinance? And what is your CapEx guidance for this year? Thanks.

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [24]

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CapEx guidance for this year is, as I already said RUB40 billion. And in terms of short-term financing, I don't believe we have any specific short-term financing that need to be repaid this year. The financing that we will continue to pay in 2017 will be in the quarterly installments on the syndicated loan and that's about RUB115 million each quarter. We just paid back RUB14 billion financing. So I think it's just going to -- it's about $115 million per quarter. And that runs in about mid-2018.

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Ksenia Mishankina, UBS - Analyst [25]

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So, you will be repaying that (inaudible)?

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [26]

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We have been -- we have been paying and we will continue to pay.

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Operator [27]

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Henri Patricot, UBS.

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Henri Patricot, UBS - Analyst [28]

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Just couple questions on your LNG project. Assuming what's your latest thinking around the start-up of the second train and third train that came out given the progress of the project; and then secondly, some idea of the timing for FID on Novatek LNG? Thank you.

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [29]

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On progress on the second train and third train, as we've already stated before, we stated at the annual conference call, it will be the second half of 2018 for train number two and given that all the equipment is on site, there is a possibility that we may be able to move up the third train earlier in 2019. That's really all I can say at this particular time. In terms of FID decision, I don't -- we're still -- we're looking to aim, we're looking to sign the FEED -- Front End Engineering Design contract, surely this year, right. And then once that's done, it usually takes about 18 months of work activities to go through the FEED before we make an investment -- a final investment decision. So, if you look at 2017, 18 months, you kind of get an indicative time, so you're talk about 2018 -- latter part of 2018, early 2019 will be the earliest we can make an FID decision, I think on Arctic LNG 2.

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Operator [30]

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[Katrina Smith], Bank of America Merrill Lynch.

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Karen Kostanian, Bank of America Merrill Lynch - Analyst [31]

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Hi, Mark, this is Karen Kostanian from Bank of America. Thank you very much for presentation. You mentioned something interesting here that, the Swedish and German credit agencies have agreed to finance Yamal. I have more of a theoretical question. In your high-level question -- in your negotiations on the funding and partnership for your future LNG project, have you seen a general shift in attitude from those export credit agencies and also from potential Western and Eastern partners for LNG project, compared to one, two years ago when the sanctions were imposed?

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [32]

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But, let me make it absolutely clear to everybody that I myself as US citizens are not participating in the finance and discussions, as a result of the sanctions. So, I'm going to give you information -- I'm only going to give you information on the second hand discussions I have with my team. Okay, you understand that?

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Karen Kostanian, Bank of America Merrill Lynch - Analyst [33]

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Yes.

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [34]

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I would say that, the financing coming from German and Swedish export credit agencies, as I mentioned is positive. I think it's a realization and most people are looking at the merits of the project as a stand-alone basis and we have received discussions and financing commitment from [J-Peck] earlier and J-Peck has specifically talked about not only financing and contributed to Yamal LNG, but also working with our for partner and finance on our production of next project, which was the Arctic LNG 2. So I believe at this stage that is probably safe to assume that we will still get participation in the future from the export credit agencies for our Artic LNG 2. But I think it's also important that everybody understands from this perspective is that as we move forward with the completion of Yamal LNG, we now have a benchmark project that we can discuss with partners.

Because if you go back in time, as you say -- you want to say take it back three, four years ago, there was no analogies project for us to actually sit there and discuss with partners. So now we do, we have a project that is coming on stream, we have interest coming from various Eastern and Western partners that are now talking to us about Arctic LNG 2. So, I think it's a little premature to state specifically where these discussions and what geographical regions could may these discussion are coming from, but I would say that there is strong interest.

And I believe that given the fact that Yamal LNG has moved to the state where it is today, the fact that we have now demonstrated the market inside of the project with the tankers expected to go both to the eastern and western markets. I think it's a question now that we will begin the dialog with potential Western partners. But I also like to mention to that's important is that up until that point of time Novatek will continue to funding Arctic LNG 2 at 100% of our own cost. Until such time as we get the project into the shape and form what we believe we can maximize the sell down for our shareholders.

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Operator [35]

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Alexander Kornilov, Aton.

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Alexander Kornilov, Aton - Analyst [36]

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My question relates to your Yarudeyskoye field. You have mentioned during the call that you're undertaking some steps towards dealing with the natural production declines there. So you mentioned that you are currently targeting the eastern part of the field going forward. Could you please clarify what kind of incremental production we could expect from there from both gas and condensate?

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [37]

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I don't know -- I wouldn't say that we're -- it's not looking at it increase in production. I think it's really maintaining the plateau levels on the field. So, I don't want to provide you with any guidance until such time, as we determine how we're going to do that, because there are various steps that we have discussed internally about how we can target at Eastern portion of the reserve base, but a decision has not been made yet on what is the most cost-effective way. But I think the plan would be to sustain production levels, not to really grow production levels.

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Operator [38]

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(Operator Instructions). Igor Kuzmin, Morgan Stanley.

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Igor Kuzmin, Morgan Stanley - Analyst [39]

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Mark, couple of questions from me please. One question on the sort of the volume purchases from JVs, is that possible to maybe indicate the trend that we potentially might see in 2017 in terms of the volumes of purchases from SeverEnergia and of gas? And the second question is in regards to the developments around the sort of pilot liberalization, if bakes in the domestic market -- gas markets, and I was just wondering -- in my understanding basically, not much is happening. But maybe there is some news that you can share in terms of whether the discussions have now been halted altogether, because that's what I've picked up from the media, most recently and are there any developments in terms of either determination of how the transportation tariffs are set and is there any -- some sort of event that potentially we might would be looking forward to for some clarity? Thank you.

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [40]

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On the first of the question, I don't want to give you a specific number, other than let's say that we have the rights to purchase volumes from our joint ventures. And we will continue to supplement our core production with the purchases from the joint ventures. And we will continue buying as much of the joint ventures; we need to meet our marketing requirements. So, I don't want to specifically give you a number other than the fact that option is available to us. We're taking advantage of it and if we need to go up to 100%, we will go up 100%. But I don't want to give you a specific number at this particular point in time.

Your second question, I obviously, is a much broader question. And as we have said in the past, when I think for us for Novatek, we've always advocated that the Russian government should look at the gas market in its total form. We don't want to continue going down these paths where we look only at price liberalization or transportation or storage. We believe that a solution to the overall gas market needs to be formulated by looking at all these factors, because the model that the gas market has been built upon is based on an old vision of what Gazprom looked like in the past and that market has changed as the growth of the independents like ourselves and Rosneft et cetera have emerged.

So, I think it's important that we look at all these factors into consideration. If I was going to take and distill it back down to Novatek specifically, we've already stated that for us the most important thing that we would like to see is clarity on the transportation costs. I think we have already had determined with our own assessments inside Novatek that the current transport tariff rates are not justified given the current structure of the pipeline structure here in Russia. And we believe that we pay a high-transport rate per 1,000 cubic meters.

So, we would like to see some movement in that regards, because we think that will be beneficial to us. But right now, we see no logic in these discussions that are going on, as you rightly mentioned. We wanted to point out -- we like to point out that decisions are taken by the government, not by the federal anti-monopoly service. We have a decision already from the Presidential Commission on energy, which states that transport towards is more economically justified decision making process on gas tariffs, transportation tariffs, underground storage charges, which was not executed.

We insisted to be executed first, which goes back to my point earlier to talk about how we view the market. We need to really assess these changes in a more holistic approach rather than focusing solely on each of the component parts. And I don't have -- I don't think anybody can give you a definitive time, but that's our position as we lobby and discuss this point with the Russian government.

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Operator [41]

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(Operator Instructions). There are no further questions at this time over the telephone.

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Mark Anthony Gyetvay, Novatek PAO - Deputy Chairman of the Management Board [42]

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Okay, thank you very much. We appreciate your support and we look forward to update you on the second quarter as well as seeing you at investor conferences and meetings. As soon as we define a date for the strategy update presentation, we will provide that as well as any news from the developments that I talked about today, we will provide it either through a press release and or through discussions we have with our investors on a regular basis or through the same form like tonight on a conference call. But again, thank you very much for your participation.

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Operator [43]

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This concludes today's call. Thank you for your participation, you may now disconnect.