U.S. Markets open in 8 hrs 14 mins

Edited Transcript of SIBN.MZ earnings conference call or presentation 21-May-19 2:00pm GMT

Q1 2019 Gazprom Neft' PAO Earnings Call (IFRS)

Moscow Jun 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Gazprom Neft' PAO earnings conference call or presentation Tuesday, May 21, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alexander Mikheev

PJSC Gazprom Neft - Head of the Department of Economics & Investment of Upstream

* Alexei Viktorovich Yankevich

PJSC Gazprom Neft - CFO, Deputy CEO of Economics & Finance and Member of the Management Board

* Anna Vladimirovna Sidorkina

PJSC Gazprom Neft - Head of IR

* Nikita Anichkin

================================================================================

Conference Call Participants

================================================================================

* Alexander Burgansky

Renaissance Capital, Research Division - MD and Head of Oil & Gas Research

* Andrey Polischuk

Raiffeisen CENTROBANK AG, Research Division - Research Analyst

* Ekaterina Smyk

BofA Merrill Lynch, Research Division - Analyst

* Evgenia Dyshlyuk

Gazprombank (Joint Stock Company), Research Division - Director of Equity Research for Oil and Gas

* Ildar Khaziev

HSBC, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Anna Vladimirovna Sidorkina, PJSC Gazprom Neft - Head of IR [1]

--------------------------------------------------------------------------------

Good afternoon, dear ladies and gentlemen. I'm Anna Sidorkina from Investor Relations department. We are very happy again to welcome you to our conference call dedicated to the performance results of Q1 2019.

And traditionally, please allow me to introduce those in attendance at this call. We will have -- with an introductory part and financial part delivered by Alexei Yankevich who is a member of the management board of the company; the upstream operations, we will hear about from Alexander Mikheev who is in charge of the economics and corporate debt planning department; and then Nikita Anichkin, in charge of the economics and investment in downstream, will be telling us about the refining and sales performance in Q1 2019. And during Q&A, we will be joined by our colleagues from other streams.

Traditionally, before we begin our presentation, please allow me to remind us that this presentation or the comments to it as well as all of the references and statements which are to be made during this conference call may contain and most probably shall contain various statements about the future, which apply to the financial situation and the results of the business operations by Gazprom Neft. And all the statements, except the actual facts, may and should be considered as those of an outlook nature. So such forecast will be statements about future expectations based upon the current situations and various assumptions made by the executives of the company as well as taking into account known and unknown risks and uncertainties which may lead to the fact that the actual results or events may be different from those that have been referred to in the course of this conference call.

Thank you very much. And now please allow me to pass the floor to Alexei Yankevich.

--------------------------------------------------------------------------------

Alexei Viktorovich Yankevich, PJSC Gazprom Neft - CFO, Deputy CEO of Economics & Finance and Member of the Management Board [2]

--------------------------------------------------------------------------------

Dear ladies and gentlemen, greetings to everyone. We are sharing with you today the results of the company's operation, Gazprom Neft's operations in Q1 2019. The first quarter turned out to be quite a successful one for us. The results made us quite happy overall and demonstrated positive trend compared to the previous quarter as well as compared to the last year and overall set a new trend for the forthcoming year and especially we are positively looking at the remainder of the year. Otherwise, our EBITDA reached almost RUB 200 billion in the first quarter 2019. I shall remind us that we have fallen short of achieving RUB 800 billion during the last year, so we're right now in the good groove, so to say. And the net profit year-on-year grew almost by 55%, taking over the RUB 100 billion which is RUB 108 million (sic) [RUB 108 billion] which is a good trendsetter for us in the remainder of the year. And that became possible due to the growing production in the first place, new production from our greenfield projects. For example, the overall output grew by -- in comparison to last year, by 4.7%.

In terms of the refining, we had certain maintenance factor which brought about a slight negative compared to the previous year, and to the previous quarter, we do have a bit of a decline in refining throughput. But overall, the bigger part of the maintenance program is over and we have been able to make it easy for our refining in terms of the maintenance programs expecting every month of a peak demand which is a bit of optimization. So speaking about the comparison to the previous quarter, we have registered EBITDA and net profit growing. EBITDA grew by 7% while net profit grew by 38%. And the refining throughput somewhat went down as I mentioned. But in terms of the hydrocarbon production, we also ended up with a bit of a reduction compared to Q4. But that is related to the OPEC cost reductions and limitations as well as a certain [tenders] persisted due to the fact that during Q1, the -- and our nominal number of days is not as much as in Q4. So with all things being even, we're losing about 2% automatically.

So with that, let me pass the floor over to my colleagues. We will hear first from Alexander Mikheev who will report about the Upstream results.

--------------------------------------------------------------------------------

Alexander Mikheev, PJSC Gazprom Neft - Head of the Department of Economics & Investment of Upstream [3]

--------------------------------------------------------------------------------

Good evening, ladies and gentlemen. Let me introduce to you the results of the first quarter of the current year with respect to E&P operations. And I shall begin with the development of the resource base during Q1 in the current year. And as far as the Gazprom Neft is concerned including our subsidiaries and joint ventures in [the territories of] Russia, we have registered 10 licenses for the right to develop the hydrocarbon resources for our acreages in Yamalo-Nenets, 3 in Yamalo-Nenets. And so we look at it as 150 billion -- 150 million tonnes of oil equivalent.

Next in terms of the key events, in as far as the remote group of fields is concerned and I shall remind us that this is our major exploration project which includes 6 deposits in the Noyabrsk district. We have produced 1 million tonnes. And we were able to launch 2 drilling pads in this (inaudible) field, very high recovery rate every day. Each of 8 producing wells, on average produces about 350 tonnes practically, [no watts count] though. So Bazhenov Formation, the Bazhenov center has completed its program of development at the Krasnoleninsky and the Khanty-Mansiysk autonomous district. The new geological model for the Bazhenov Formation has been upgraded for the first time during the past 20 years. And we expect that, that would provide the participants of the project with an access to the most contemporary information and thus would improve the efficiency of the development and the technology applications for the unconventional resources in the Bazhenov Formation. In line with the development of the Tazovskoye oil condensate field, we have built 13 high-tech wells including 2 multi-tunnel one, including the 2 -- the length of the horizontal section in each of them in excess of 2,000 meters, including the length of one of them amounting to the record length which is more than 2,600 meters in terms of the technology applications.

We have started drilling the first horizontal well at the Yamburgskoye field. Here, we are going subsequently applying the multi-stage fracking operations and the drilling of wells will similarly be related to us testing new technologies in completing these wells.

Further on, in as far as the production dynamics is concerned, next slide, the production of hydrocarbons during Q1 in the group was 22.2 million tonnes of oil equivalent. This is almost 4.7% growth compared to a similar period of the past year.

Now speaking about the liquid hydrocarbons, the production amounted in Q1 2019 15.3 million tonnes which is 1.5% more than in Q1 2018. The growth leaders in as far as oil production is concerned against the OPEC+ restrictions were our high-efficiency projects such as Novoportovskoye. And we're also noting of the production growth in between our joint ventures at Orenburg assets and similarly in our Middle Eastern projects. Now speaking about gas, this is the right part of the diagram. The share of gas in Q1 2019 was 34% in the total output of hydrocarbons by the company. Within the group during Q1, the amount of production was 9.9 billion cubic meters, which is almost 12% higher than during the similar period last year. The growth leader here was the Novoportovskoye field, again because of launching 2 additional gas pumping stations of the second stage of the Novoportovskoye comprehensive gas treatment facility. And in the similar token, due to the Arcticgas share growing almost by 300 billion cubic meters was the amount that is attributable to us that ultimately grew within this asset.

As far as the average operational expenses are concerned, this is the next slide. Here, we can see growth during Q1 2019 as opposed to the first quarter 2018 by 6.8%. And this value in the first quarter 2018 was 708 meters -- $708 per the tonne of oil equivalent, and that has been conditioned by the low base in the first quarter of 2018 when we were forced in a very speedy way to recover the high water cut reservoir base. And as a result of which we believe that, specifically comparing it with the first quarter in 2018, is not indicative and so the dotted line that you see on the slide demonstrate that the current level of the operation expenses is even lower than what we saw in Q4 2018 when it was RUB 1,962 per the tonne of oil equivalent. We continue to further improve the optimization of our operational leverage cost, which is our key focus in the work done by the management.

Next in as far as the application of new technologies is concerned. Here, we would like to specify that the Gazpromneft-Khantos successfully applied a -- the polymer water flooding project where we used the -- for the hydrofracking liquid on the basis of the polyacrylamide which is an organic stuff which is very easily washed out off the cracks after the hydrofrack which improves the capability of the cracks to conduct also the conductivity and the flow is improved by about 60% compared to the traditional, conventional hydrofracking. So the assessment done after applying this particular solution within this scenario may lead to at least 15% increase in the recovery within the midterm perspective.

At the East Messoyakha field, we've built 2 wells with autonomous in-flow control units. These technologies had been applied for the first time by Gazprom Neft. Its main task is to minimize the risk of water and gas finding their way into the production well. This is a system of vents which are built into the tailing during the drilling. And the high-viscosity oil easily flows through this channel which when gas appears is being closed. Assessed by our experts, this new methodology will enable us to increase the production from wells by about 20%.

At the East Messoyakha field, we've built a unique in the industry multi-tunnel wells, with 8 sidetracks which has been down. Equivalent to the fishbone technology, the length of the productive track amounted to about 5.1 kilometers, so the total drilling was about 9.1 kilometers. So it was not -- about 12 meters was the pay zone. And so this kind of a construction improves the productivity of the well by about 40% compared to a conventional horizontal well enabling average track to be drilled into an individual base zone without allowing it to be mixed with the gas and water. And finally in terms of the 2-column well construction, the first 2 column well was built by Gazpromneft-Khantos at the south acreage of the Priobskoye field. This is the area with a fluctuating well pressure which is used to recover the tight hydrocarbons. This particular methodology envisages the drilling and reduces it from 38 days to 19 days of drilling. This is a universal technology. And after having optimized some of the applied solutions, it can be cascaded and replicated in other areas where the company encounters different subsurface characteristics.

With that, thank you very much for your attention.

--------------------------------------------------------------------------------

Nikita Anichkin, [4]

--------------------------------------------------------------------------------

Good afternoon, dear ladies and gentlemen. I would like to introduce to your attention the results of the downstream operations during Q1 2019. And let me begin with Slide #11.

And I will describe the environment for the downstream operations in the first quarter, which was characterized by the reduction of the average Brent barrel in terms of price as opposed to Q4 2018 the average by about $5.7 per barrel or about 8%. It is necessary to note here that the positive evolution in terms of the oil pricing did not lead to the export netbacks decline which in the first place were brought about by changes in the tax legislation and as far as the oil export duty was concerned. Apart from this particular change, as of January 1, 2019, there was a whole number of adjustments introduced into the taxes and levies, such as the classified gasoline excise diesel grew by about 5%, and the average distillates grew by about 40% and negative excise was introduced for the -- all good resources and the dampening mechanisms. Also the agreement with the Ministry of Energy in Russia was extended about measures to stabilize the development of the domestic refining product market. In this way, under the resulting environment, the main negative driver in the refining margin was the surplus of the gasoline field in the domestic market, which led to the sales of the motor fuels with discount as opposed to the export alternative. I meant to say against this backdrop, the gasoline component in the dampening mechanism turned out to be a negative one. So effectively, the Gazprom Neft had to additionally pay to the government budget for additional tonne of produced motor fuels which affected negatively in the margins.

Next, what else what I wanted to say was that the overall demand for the oil resources in Q1 2019 grew as opposed to Q1 2018 by about 2.4%, which was conditioned by the growing exports of the Arctic oil within the current environment and the price environment as well.

Next a few words I would like to say about Russia concerning the Arctic oil. So the growth of shipments principally became possible, amongst other things, thanks to the digitalization of the planning processes, optimization of the supply chain system within the digital system of managing the Arctic logistics, which is branded by the name of Captain. The Captain system enables one to combine a great number of external and internal factors which is about 6,000 parameters which leads to the following significant fact: a very [applied] and well evened out system of deliveries and shipments, the better efficiency in using the ice tankers as well as maintaining the speed of operations and the consumption of fuel, which positively affects the financial performance of the company. In this way, the Captain system totally enables one to provide for the shipment of oil that are produced but in the same token to reduce the cost of the Arctic logistics within the framework of the supply chain system from end to finish. Thinking about the refining volumes and the depth of refining, one should note a slight decline in first quarter of 2019 as opposed to quarter 1 2018 mainly because of the maintenance work at various refineries of the company. But at the same time, as Alexei Yankevich mentioned previously, the maintenance done would enable one to optimize the time frame for the autumn and spring maintenance which will affect the ability to provide the domestic market with the sufficient number of refining product during the traditional peak demand season.

Next slide is dedicated to the efficiency of our retail network. And here, it is worth noting a fact they have considerable input from the new technology solutions and development of the flexible retail network management system and with the participation of our partners and the possibility to optimize the cost structure. The next steps to achieve the goal to improve further efficiency is to select the optimum way of managing our retails as well as cascading the Gazprom Neft solutions to our partners. So in December 2019 -- 2020, we plan to achieve by more than 400 locations to cover them with our partnership management system. While differences of various flexibilities that we can achieve are represented in the slides, [so I will not go over all of it.] And now let's go over to the next slide.

In the area of sales of premium business segment in the first quarter, we have achieved a good set of growth compared to first quarter 2018. This kind of a growth of sales in the first place is the result of the work done by the management to expand its retail network and its product line. But particularly, I would like to note almost 1/4 increase in terms of the bunkering for fuel sales as well as high sales of -- for jet fuel amongst other things through growing number of airports where the company is present by almost 13 places, which is 265 airport locations currently.

In terms of the bitumen projects in the first quarter in 2019, we have entered into an agreements of cooperations with several major Russian regions which broadens our opportunities in the premium business segments in the future.

In conclusion, I would like to say that taking into account all of the particulars and factors of the work that has been done during the Q1, the result of the stream performance can be assessed as positive ones. Thank you very much for your attention.

--------------------------------------------------------------------------------

Alexei Viktorovich Yankevich, PJSC Gazprom Neft - CFO, Deputy CEO of Economics & Finance and Member of the Management Board [5]

--------------------------------------------------------------------------------

Dear colleagues, now going back to the financials. Traditionally, commenting on the way our performance was going while we do the fact analysis and try and elaborate on the changes and the reasons. So let me move over to the next slide immediately because here you can see -- I mean obviously so the EBITDA evolution and its changes compared to similar quarter last year -- I mean this year's first quarter. And here we see quite a contribution into the increase of the price environment and the number of changes coming from changes in the taxation system and similarly the results of the work that we were doing to improve efficiency in our core streams like operation production and sales which made a major contribution into a better financial performance which includes current optimization as well as growing output from greenfield projects. Next slide.

Now as far as the previous quarter dynamics concerned comparisons were -- in terms of comparison, major contribution was made by the external environment as well as the price environment and various taxation effects. In as far as the remainder of the factors are concerned, apart from the positive external environment, we note certain negative things, principally speaking, related to the fact that -- are out of the control of the company, I mean a different number of recurring days because the first quarter automatically turns to be a little bit worse than the previous Q4. And the OPEC+ agreement also did a bit of an effect as well as our internal optimization in our maintenance programs which is about us trying on a larger scale of things to run our maintenance during the low demand period which is through winter so as to try and compensate for it during the spring/summer season when the demand is at its highest, when we can meet the demand from the market and do good for the market as well as come out with a good profit results. So quarter-on-quarter, you do a bit of a negative thing coming from OPEC+ and the maintenance program.

But overall this effect, it has been reversed in the subsequent quarters. First of all, following our statistics, you can definitely note that the production has been growing, that the output is currently much above the first quarter daily statistics which basically shows that this situation is going to be turned around in terms of the number of days of active production as well as the maintenance will disappear, the market will stabilize and the refining margin will also continue growing. Next slide, please.

Our cash flows. Here, I would like to mention quite a considerable free cash flow which we were able to generate like I've mentioned to our investors and analysts who are covering us that the company switched and went into the area and the zone of the stable and sustainable free cash flow generation. Then in an explanation or I should mention that the first quarter was a bit of a difficult one because apart from classical CapEx that do affect free cash flow, there was a number of acquisitions, primarily various acreages, that Alexander Mikheev previously described to you. There have been various incomes from the divestiture from the various [assets] which you also saw in our report about cash flow. Also dividends were paid as you know. And there was a certain movement in our deposits which basically, in terms of our cash reports, so the result in 1 came down to about 0. But overall, I shall underscore it again, it's quite a good sustainable generation of the free cash flow.

Next slide is dedicated to our investment performance. Investments into our -- the main ones are being the CapEx spent year-on-year. This growth is a modest one. We used to say that our target is to maintain a stable level, give or take certain quarterly fluctuations and year-on-year, like I used to say, maybe slightly different but not considerably so. So 8.5% speaking is not quite a big growth. And it is conditioned by the schedule of our refineries, more the upgrading program, which currently moves into an active phase and so this year and the next year, I suppose, are going to be quite active in this sense. And that basically brought about the growing investments specifically in the downstream segment where investments grew by 46%, which is our modernization program per se. But in terms of other things are concerned, dynamics is stable. But apart from the classic CapEx, I shall emphasize it again, in our cash flow report and in our MD&A, we'll see 11 billion, which is basically in the license acquisition. So if you take a look at the total figure, so you need to add 11% of a -- I mean, speaking about the investment cash flow.

Next slide. In as far as our debt is concerned and our financial resilience, I can only state here that our indicators are improving because the financial stability, the net debt-to-EBITDA ratio reached 0.59. And basically speaking to us this is practically a record low because it's been for quite some time that we were able to demonstrate this. So we feel ourselves quite comfortable in terms of the stability and in terms of the repayment profile. And what's particularly important is that we also work over our portfolio. And here we also specify that based on results of Q1 our ruble that the value reached 7.9% which is the lowest level of the cost of our ruble borrowings throughout the whole company history. This is a very good level indeed. So overall, the share of the ruble, that is growing. But if you count it in the equivalent unit, somehow theoretically you stop and see we'll end up having very good rate, which is not worse maybe even better, than what we used to have in the past in terms of the level of our loan portfolio.

With that, let me finish our presentation and once again summarize. We're quite happy with the results because they do set a good trend. And overall, we do hope for a positive dynamics and a very good 2019.

Thank you very much for your attention. We're ready to answer your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

[Interpreted] Ladies and gentlemen, the Q&A session will be translated into English.

(Operator Instructions)

Ekaterina Smyk, Bank of America.

--------------------------------------------------------------------------------

Ekaterina Smyk, BofA Merrill Lynch, Research Division - Analyst [2]

--------------------------------------------------------------------------------

[Interpreted] I have 2 questions. The first one, could you please comment on the current situation in the refined product market in Russia? And I mean, in terms of the prices for gasoline do remain much lower than the export netbacks. And so the question is, is there any country agreement in place with the government about the ones that are supposed to be offered to the domestic market? As far as I understand, this restriction of the volumes is about 3% year-on-year, and it was entered into in last year's November and December and they stay in effect until the end of the first quarter. So does this agreement remain in place? And if yes, for how long is it going to be extended? My second question, about the production capacities. Theoretically, by how much you can grow your production if the OPEC+ agreement restrictions are to be suspended.

--------------------------------------------------------------------------------

Unidentified Company Representative, [3]

--------------------------------------------------------------------------------

[Interpreted] Ekaterina, thank you very much for your question. As far as the domestic market is concerned, let me answer it this way. Currently, the market has stabilized. And so I suppose that you are slightly exaggerating the pricing environment the way I see it. But again, I'm not ready to give you full details and comments through and through, although I can simply say that the situation is currently stable. One Way or another, we feel ourselves quite comfortable with our refining margin. The situation is improving. We may not be ultimately happy, but I think it's taking the right course. We're maintaining a very good constructive dialogue amongst other parties, with the regulators and with the Minister of Finance specifically in as far as all these dampening adjustments are concerned.

In as far as the OPEC+ agreement is concerned, we're not party to it. There are many other parties to it. So I'm not in position to comment. So this is something that I would suggest one should contact the government authorities for. So sorry for answering it this way. The most important thing that is important and significant to our analysts and investors that the company has attained a very good level. And we believe that the market is currently stable and moving in the right direction. So overall, we do hope that the market will reach equilibrium.

And Ekaterina, as far as your second question is concerned, let me put it this way. We do have a possibility to increase our output. I'm not in the position to quote an exact figure. It would all depend upon how and which way the OPEC+ agreement is going to be suspended and when it may happen. So we do have the capacity to do that, and it's quite considerable. So if these restrictions are over, we may come out with a very good growth compared to the last year's. Even now, if you take a look at our daily output, we are demonstrating growth compared to the last year.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Evgenia Dyshlyuk, Gazprombank.

--------------------------------------------------------------------------------

Evgenia Dyshlyuk, Gazprombank (Joint Stock Company), Research Division - Director of Equity Research for Oil and Gas [5]

--------------------------------------------------------------------------------

[Interpreted] I would like to congratulate you on your good results. I have 2 questions, maybe even 3. The first question, could you possibly specify what was your total dampening amount in totality for diesel and motor fuels and where is it being included in your P&L? Is it part of an excise or not? And what is the amount of the reverse excise for refining these 2 figures, please? So just to be able to understand the correctness of our modeling. This is my first question.

And my second question, I wanted to ask you, what does this RUB 68 billion means on your -- on our balance? Is it about the risk -- risky operatorship contracts that Gazprom Neft recently announced, that Gazprom is passing these various fields to you for subsequent development and, as such, a contract arrangement? If you could possibly comment on this somehow. Will there be new certain fields in the course of the year transferred over to you in the same manner? Are you going to bring in any Russian or foreign investors into this project? Is it possible to expect the selling of minority shares in these oil assets that Gazprom is passing to Gazprom Neft?

--------------------------------------------------------------------------------

Unidentified Company Representative, [6]

--------------------------------------------------------------------------------

[Interpreted] Evgenia, thank you very much for your questions. I will first answer the first and the second question immediately. And after the translator -- I mean, my answers are translated, I will respond to the third question. So in as far as the negative excise and the dampening value are concerned, these 2 amounts can be found with a negative value in the excise line. But the exact figure, we will send to you additionally. Now in as far as the RUB 68 billion is concerned in terms of the leasing entitlements, that is the result of the application of IFRS standard number 16, where the leasing rights and the various liabilities are being recorded in a very symmetrical way. You will be able to find the figure in the leasing part because there is a long-term leasing and a short-term leasing. So on the balance, you will be able to detect that. This is a bit of methodological peculiarity over the way these particular standards are being applied which leads to them appearing various assets and liabilities and the changes in the amortization value, you will be able to see that. This will similarly happen in the case of all the industry players. So this is a technical thing which doesn't have any relationship with what you've mentioned about the risky operatorship contract, which is something that I will elaborate later on.

And in as far as the third question is concerned about the risk-related operatorship contracts is concerned, yes, indeed, this is our new instrument. And principally speaking, this is the information which we have disclosed in the past. It already contains quite a list of what we disclosed, about where we intend to develop this mechanism, which is quite a substantial schedule of work. So overall, I can tell you that this is the work that we shall sustain in the future. I cannot quote to you specifically what is expected in the immediate future. This is what we're going to do. And so quite possibly, one should expect certain other assets to be brought into it.

In as far as bringing in partners is concerned, we believe this is a very effective instrument, having partners join us in order to develop new assets in the new class of fields. But that applies to all the project categories. I cannot comment specifically in terms of which partners we are bringing to which project, which is commercial information and is related to negotiations. But I can just say that we believe this instrument to have a very good potential in the future.

--------------------------------------------------------------------------------

Evgenia Dyshlyuk, Gazprombank (Joint Stock Company), Research Division - Director of Equity Research for Oil and Gas [7]

--------------------------------------------------------------------------------

[Interpreted] And I would like to additionally ask, if I may, about the timing. Would it be possible for you to let us know when, principally speaking, one should expect any news from you about your new strategy that you've mentioned during the Investor Day presentations? Specifically, you mentioned that the company was developing it then. So that would also cover the strategy and relationship to the Gazprom's oil assets. Are we to expect it this year or next year so as to basically see the potential?

--------------------------------------------------------------------------------

Unidentified Company Representative, [8]

--------------------------------------------------------------------------------

[Interpreted] Evgenia, thank you very much for this next question because you almost hit the bull's eye. Indeed, there is strategy in place and we are going to communicate it. That is something that we're getting ready to do this year and in not so distant future. This year, I would say, in some very immediate future, maybe within the next week or 2, we will mail out invitations to everyone. We will hold a separate session, which we're going to hold specifically for the media representatives and as well as for the investors and analysts. So we're going to familiarize everyone with our strategy. Thank you very much for the reminder.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Ildar Khaziev, HSBC.

--------------------------------------------------------------------------------

Ildar Khaziev, HSBC, Research Division - Analyst [10]

--------------------------------------------------------------------------------

[Interpreted] I wanted to ask the question about the Novoportovskoye. What is the way the taxation system works currently in application to it? That was my first question. Second question is about the Lakhta business center. Are you planning to get relocated there? And if not, do you need to have your own some kind of a big guy in the business center? And the third question is about the downstream. I wanted to understand a little bit better. When you are saying that the situation have become stable, do you mean that the price growth, which have occurred over the past several weeks for -- as far as I understand some of the exchanges as well as the refineries sales also grew, is that what you had in mind? And I also wanted to understand a bit better because it seemed to me that during first quarter, the margin in Russia, [refining margin] was much lower. And so how are you able to grow your EBITDA? Is it the result of the fact that the market operators have withdrew their small wholesale discounts?

--------------------------------------------------------------------------------

Unidentified Company Representative, [11]

--------------------------------------------------------------------------------

[Interpreted] Thank you very much for your questions. I will respond to them by order of appearance, and after they are translated I will continue. So as far as Novoport field is concerned, it entered into the new windfall taxation system. We mentioned it in the past, there are no surprises. It happened exactly as was expected.

As far as the second question is concerned about the relocation, let me not comment on this because, principally speaking, there's been so much news out, no doubt. And so if you read attentively, it will be easy to understand what it's all about.

And in as far as the refining is concerned, yes, again, the market has stabilized. And generally speaking, as I have mentioned, we have conducted a number of optimization activities including the optimization of our maintenance program as well as we have a number of other activities which we were running to optimize our operational refining performance results, its operational readiness and other things. So altogether, that has been quite conducive to the downstream refining margin growing. It's not about discounts. I can definitely tell you, this is not in discounts.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Andrey Polischuk, Raiffeisen CENTROBANK.

--------------------------------------------------------------------------------

Andrey Polischuk, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

[Interpreted] I have 2 questions. The first one is about your production growth in case OPEC+ is suspended. You said that you may expect a considerable growth. How that may affect your capital spending? Will it remain at the level of last year? Or should one expect in this case your capital spend to spend -- to grow this year as well?

And second question about the dividend. Considering the fact that the Gazprom management proposes to raise the dividend payout of Gazprom itself, will it affect you as well? I mean to say that you will have to also try and attain the level of 50% payment from net profit faster than you've previously planned.

--------------------------------------------------------------------------------

Unidentified Company Representative, [14]

--------------------------------------------------------------------------------

[Interpreted] Thank you very much for your questions. In as far as the production growth is concerned, but I have basically already spoken about it. In as far as the capital investments are concerned, we are not expecting any serious growth here because we do have certain instruments we're using which we can ramp up our production. And these tools does include additional optimizations and technology application. But that won't bring about any considerable growth.

And in as far as the dividends are concerned, and to be fair to us in terms of not lagging behind from our parent company, indeed, Gazprom has considerably increased its dividends, and we will do so. If you remember how much we paid in 2018 -- 2017, that was RUB 15 per share. So respectfully, as far as 2018 is concerned, we will pay, and we have announced this already and will be in the Annual Shareholders' Meeting, which I hope we'll pass this decision, there will be RUB 30 per share, which is a twofold growth. I mean I understand that it will never be enough so respectively. But generally speaking, one should concede that we are demonstrating quite a considerable growth in absolute dividend payment.

And as far as our payout is concerned, again, like I previously stated, we are quite positive in terms of the trend that we are going to achieve. This is first thing. And second thing, we are taking quite a firm commitment to demonstrate a positive dividend payment dynamics year-on-year. So respectively, within the midterm outlook, shareholders may definitely count upon further dividend per share growth, which is going to be conditioned by a better financial performance and better business deliveries. And this is something that our strategy is gearing for. So there will be definitely positive things happening in terms of the future payout. I would also like to note that we shall continue the interim dividend payment practices. You can definitely count on it from dividends this year as well. Thank you.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Alexander Burgansky, Renaissance Capital.

--------------------------------------------------------------------------------

Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [16]

--------------------------------------------------------------------------------

[Interpreted] I have 3 questions. First of all, in as far as the additional taxation is concerned, the windfall tax, could you give us a few more details in terms of which major fields of yours you are going to convert to this particular taxation mode? Novoport, for example, could you specify as of which date it is under this particular tax? And the East Messoyakha, have you already done it? Or -- and when, if not, are you going to do it this year?

The second question was about RUB 87 billion in terms of the divestiture from fixed assets, I mean, the sales of the Lakhta center. Could you confirm that this is the total amount of money that is due to you and that you're going to receive it this quarter? Or will there be any amount from this particular thing coming to you in the third quarter?

The third question is -- [Creaking noise. I didn't understand it, sorry.]

Yes. And the third question was about the -- whether the recent incident with pollution of the Druzhba pipeline. Has it affected Gazprom Neft in any way? And if so, could you please explain?

--------------------------------------------------------------------------------

Unidentified Company Representative, [17]

--------------------------------------------------------------------------------

[Interpreted] Thank you very much for your questions. So in as far as the fields which are content of the windfall tax are concerned, we are going to send you a full list so as not to confuse things. So there is all these stock fields which have been converted into this new system. It has brownfields and greenfields as well.

And then your second question was about the Lakhta center. Well, look, again, I do not want to comment beyond what has already been written and mentioned because if you look at the -- in the MD&A, you will see there was the cash flow information and the financial disclosure. You can judge from it because there's nothing to be additionally judged, everything has been there in the report, everything was shown there. There are certain additions to cash flow and there is also a separate special note dedicated to the passing of this asset.

And your last question was about the polluted oil. And we are currently trying to assess the consequences. It's too early to quote any figures. But I can definitely tell that there's not going to be any critical effect upon us. It won't change our financial standing. But just generally speaking, we're currently going through this assessment. And so, we're not in the position to quote to you any conclusions. Thank you.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

(inaudible)

--------------------------------------------------------------------------------

Unidentified Analyst, [19]

--------------------------------------------------------------------------------

[Interpreted] I have 3 questions. The first one is, could you be more specific in terms of the total effect from switching into the windfall tax during the first quarter? The second quarter, you demonstrated the reduction of the net debt in Q1. So are you having any plans about what you intend to do with the thus released funds? And the third question, can you update us about how your discussion is going on with Gazprom about the increase of the free float that was debated some time ago, the increase of the free float by Gazprom Neft?

--------------------------------------------------------------------------------

Unidentified Company Representative, [20]

--------------------------------------------------------------------------------

[Interpreted] Thank you very much for your questions. I shall begin by answering the third question. Every so often we hear this question raised to us. But what I can say, this is the authority of the shareholders. And so any decision that shareholders are going to pass is something that we would accept readily. But it's up to them what will happen to our free float.

And as far as your next question was concerned, the one that I would like to comment upon, it was about the net debt. Yes, it is true that our net debt went down, and I already commented on it, but it led into a better net debt-to-EBITDA ratio now. The way we're going to use it, in a very conventional way, investments and dividends. So basically speaking, by going to try and search for a balance between efficient projects and shareholder interest. And that is why I already gave you a hint that we're going to continue our practice of interim dividend. And you may continue this line of thinking the way you see fit, so projects and shareholders.

Now in as far as the windfall tax effect is concerned, I would rather send you a detailed calculation so as not to confuse you with various figures because there are certain differences in terms of the effects where the older methodology was being applied for some fields where exemptions were staying in effect. So I will send you a bit of a table and you will be able to see everything there. Thank you.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Ildar Khaziev, HSBC.

--------------------------------------------------------------------------------

Ildar Khaziev, HSBC, Research Division - Analyst [22]

--------------------------------------------------------------------------------

[Interpreted] So could you please specify as far as Novoport field is concerned, if I understand correctly, as far as windfall tax is concerned that as far as the system function roughly speaking, your M&T expenses naturally came down. And so your production tax is going to be carried forward until the active phase of investments, the first question. And the second question in terms of the -- more on Articgas. Could you comment in terms of the cash on the balance? Because if we understand it correctly, and I say it is public information, is it going to be dedicated there -- that money that was written here that would be -- that we might be seeing, will it be dedicated to the dividend payments?

--------------------------------------------------------------------------------

Unidentified Company Representative, [23]

--------------------------------------------------------------------------------

[Interpreted] Well, as far as the better part of -- pleasant parts, I mean the dividends for Arcticgas, yes, indeed. One should expect dividends and the money that you referred to is going to be applied to dividend payment. And our partners respectively also made such an announcement. So we're in full agreement about it. So as far -- that was about the Arcticgas dividends. And as far as the windfall tax is concerned, it is quite a complex system in as far as this new tax is concerned. It's impossible to describe it in a couple of words. We have a special presentation which was particularly prepared for investors and analysts. We shall forward it to you again and there you will be able to see and understand the way this new tax is going to work, when is it going to be higher, at which point in time it is going to be lower. As far as the presentation of that report is concerned, you will find it exactly in the place where you previously could see MET. So you will be able to see it all there. Thank you very much.

--------------------------------------------------------------------------------

Unidentified Company Representative, [24]

--------------------------------------------------------------------------------

[Interpreted] Ladies and gentlemen, I would like to personally thank all of you and apologize in advance for the fact that I was not able to respond to all of the questions because there are quite a few follow-up questions this time around of quite a fundamental nature. And again on my personal behalf, I would like to say that we definitely have written everything down, and we will share with you additional explanations in terms of the figures that we were not able to quote. We will send all of them to those who are asking -- were asking questions. There were quite a few questions about taxation, so principally speaking we have a separate special session last year in the form of a conference call where we try to explain this new taxation system. So we believe it is necessary. We can again hold it with our lead analysts so as to try and explain how it is operating, how it is working this year. So we will duplicate. Again, we will send you this presentation which we specifically put together for this new taxation, how it works, what are the fields that it is being applied to in our case. So once again, I'm quite grateful to all of you for your questions. Thank you very much.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

(foreign language)

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]