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Edited Transcript of TATN.MZ earnings conference call or presentation 29-Nov-19 1:00pm GMT

Q3 2019 Tatneft' PAO Earnings Call (IFRS)

Tatarstan Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Tatneft' PAO earnings conference call or presentation Friday, November 29, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Vasiliy Aleksandrovich Mozgovoy

PJSC Tatneft - Assistant To General Director of Corporate Finances

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Conference Call Participants

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* Alexander Burgansky

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

* Ekaterina Smyk

BofA Merrill Lynch, Research Division - Analyst

* Igor Kuzmin

Morgan Stanley, Research Division - Equity Analyst

* Ildar Khaziev

HSBC, Research Division - Analyst

* Olga Danilenko

Prosperity Capital Management Ltd - Director of Oil and Gas

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Tatneft Third Quarter 2019 IFRS Conference. (Operator Instructions) Please also note that this call is being recorded. Ladies and gentlemen, this conference is for analysts and investors. Any members of the media can contact the company offline with any questions.

I would now like to turn the conference over to Vasiliy Mozgovoy. Please go ahead.

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [2]

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Thank you, Chris. Hello, everybody. Thank you for joining today's conference call, and special thanks to Renaissance Capital for hosting us. And I also appreciate those who were waiting for some of our colleagues to join from a peer conference call, and welcome to our call now.

I'm Vasiliy Mozgovoy, Assistant to the General Director of Corporate Finance at Tatneft. And first of all, I would like to draw your attention to our standard legal disclaimer about forward-looking statements, which is contained in our press release published today, 29th of November 2019, in connection with the release of our third quarter 2019 IFRS financial statements and the presentation to investors posted on the company's website.

Before presenting the highlights from our IFRS financial statements for the third quarter, I would like to say a few words about our operational results and investments.

In the third quarter of 2019, we produced 7,523,000 tonnes or 53.6 million barrels of crude oil, including 734,000 tonnes of highly viscous oil. Our crude oil production averaged 582,000 barrels per day in the third quarter of this year. Gas production in the same period was 260 million cubic meters.

Our refinery, TANECO, produced 2,767,000 tonnes of petroleum products in the third quarter of 2019, including 888,000 tonnes of diesel fuel; 564,000 tonnes of middle distillates; 284,000 tonnes of automobile gasoline; 215,000 tonnes of naphtha; 125,000 tonnes of jet fuel.

In the third quarter of this year, we launched the second initial processing and vacuum distillation unit CDU/VDU-6 at TANECO, which contributed to over 18% increase in output quarter-on-quarter. In the third quarter of 2019, we sold 5.5 million tonnes of crude oil to customers, of which 3.6 million tonnes in export markets, both non-CIS and CIS. 56% increase in export sales in the third quarter compared to the second quarter was associated primarily with the crude oil inventory release following the resumption of shipments via our Transneft Druzhba pipeline.

In July to September inclusive, we delivered 90% of our crude oil sold for export through the Druzhba pipeline system. More information on this can be found in the MD&A.

In the third quarter of 2019, we sold 3.2 million tonnes of refined products, of which 1,303,000 tonnes in non-CIS export markets, 1.8 million tonnes in the Russian domestic market and 88,000 tonnes in the CIS. In the same period, we purchased 47,000 tonnes of crude oil and 321,000 tonnes of refined products for trading.

Total additions to property, plant and equipment in the third quarter of 2019 under IFRS were RUB 21.9 billion, out of which 44% and 27% are related to upstream and downstream segments, respectively.

Total CapEx in the 9 month of this year was about RUB 61.4 billion. Our prior guidance for the full year 2019 CapEx is RUB 108 billion. For more details on this, please see our presentation posted on the company's website. However, please note that the information on CapEx plans in the presentation is based on internal accounting, and the numbers may not always and directly correspond to those reported subsequently in the financial statements and the MD&A as additions to property, plant and equipment.

Now I'd like to highlight a few key points relating to our financial results for the third quarter of 2019. Our revenue on nonbanking activities, net of export duties and excise tax, increased by 9% to RUB 241.8 billion from RUB 222.3 billion in the second quarter of 2019. The main drivers of higher sales in the period where the growth in crude oil deliveries following the resumption of shipments through the Druzhba pipeline and the expansion of crude oil processing at TANECO after the launch of the second initial and vacuum distillation processing unit, partly offset by weaker macro environment. Average euros price decreased by almost 10% quarter-on-quarter with average ruble-to-US. dollar exchange rate virtually unchanged between the 2 periods. Export duties and excise tax increased by 61% in the third quarter of 2019 compared to the second quarter on high crude oil and refined product sales.

Our profit attributable to group shareholders increased by 8% in the third quarter of 2019 compared to the second quarter of 2019, reaching RUB 58.4 billion. The profit margin, therefore, in the third quarter of 2019 was 24.2%.

EBITDA in the third quarter of 2019 was RUB 83.7 billion with an EBITDA margin of 35%. Please see our MD&A or the presentation for the calculation of EBITDA as this is a non-IFRS standard measure.

With respect to the costs, total cost and other deductions on nonbanking activities increased by 10% quarter-on-quarter to RUB 168.3 billion. Comparing the third quarter of 2019 to the second, we saw the following dynamics: operating expenses and transportation cost increased by 12.6% and 25.2%, respectively, mainly due to higher volumes sold during the third quarter. While lifting expenses in the third quarter of 2019 increased to RUB 257.7 per barrel from RUB 243.7 per barrel in the second quarter, the average per barrel lifting expense in the 9 month of this year of RUB 246.2 was 3.1% lower than in the same period of 2018. However, the main reason behind this decline in lifting cost in the 9 month were the changes in accounting for leases under the new standard IFRS 16 effective from 1st of January 2019. Please see the MD&A for more information on this.

The refining expense decreased from RUB 1,684 per tonne of product output in the second quarter of 2019 to RUB 1,564 per tonne in the third quarter of this year. In the third quarter, our SG&A increased by 6.1 quarter-on-quarter to RUB 13.6 billion mainly due to higher consulting, information and legal services purchased as well as charitable expenses during the period. Increase in taxes other than income tax by 9.5% was mostly due to higher mineral extraction tax costs.

Impairment loss on property, plant and equipment and other nonfinancial assets net of reversal of RUB 1.6 billion in the third quarter of 2019 was associated with the write-downs in certain historical investments into real estate not associated with our core production and some related to the development of TANECO's petrochemical plant.

Also notable was higher depreciation charge of RUB 8.7 billion in the third quarter in comparison to the second quarter of this year, some 22.6% increase quarter-on-quarter. The rise in ED&A charge was associated in part with the launch of new production units at TANECO.

In our banking sector, represented by Bank ZENIT, total net interest fee and commission and other operating results from banking activities increased to RUB 1.6 billion in the third quarter of 2019 compared to RUB 395 million in the second quarter of this year.

Net cash provided by nonbanking operating activities before income tax and interest in the 9 month of this year was RUB 249.6 billion with total net cash of RUB 204.8 billion provided by operating activities, including from banking and after income taxes paid. Our free cash flow reached RUB 85 billion in the third quarter of 2019 and RUB 143.4 billion in the 9 month of this year.

Before starting the Q&A session, I would also like to mention the completion of our 2 M&A transactions, the corporate action relating to the 9-month interim dividends and some plans for 2020, which were communicated today.

The group completed [the purchase of] petrochemical facilities located in Samara region in Russia through the purchase of 100% interest in LLC SIBUR Togliatti, now rebranded as Togliattikauchuk, and JSC Togliattisintez from SIBUR Holding for a cash consideration of RUB 12.9 billion, which includes cash and accounts adjustment of RUB 1.6 billion. These petrochemical facilities are focusing on the production of synthetic rubber used in tire manufacturing. And with this acquisition, we aim to achieve synergies within our petrochemical sector, lowering costs and increasing earnings.

The group also completed the acquisition of fuel retail business consisting of 75 fuel stations and a terminal in St. Petersburg region through the purchase of 100% interest in LLC Neste Saint Petersburg from Neste corporation for a cash consideration of RUB 10.8 billion, which includes cash and accounts and working capital adjustment of RUB 1.4 billion. This acquisition strengthens our presence in a high-margin market with increasing demand for high-quality fuels produced by the company. The impact of these transactions will be assessed and reflected in the consolidated financial statements for the full year 2019.

In November, our Board of Directors recommended to approve interim dividends for the 9 month of 2019 in the amount of RUB 64.47 per each preference and ordinary share, taking into account the earlier paid interim dividends for the 6 month of the year in the amount of RUB 40.11 per each share. The decision on payment of interim dividends for the 9 month will be taken by the extraordinary shareholders meeting held by proxy voting on 19th of December. We encourage all shareholders to participate in the meeting and approve the interim dividends. The voting for ADR holders is closing at noon, New York time, on 12th of December. The dividend entitlement holder of record date will be 30th of December.

In our investor presentation posted on the website today, we announced our base crude oil production plan for 2020 at the level of 29.5 million tonnes, which assumes that the existing OPEC+ restrictions will remain in effect throughout the whole year. We expect highly viscous oil production to reach 3.3 million tonnes next year regardless of the debt aggregate production level by the group. The net crude oil processing in 2020 is projected at 11.5 million tonnes with an output of over 12 million tonnes of refined products. Total CapEx for next year is planned at RUB 121.5 billion. Additional information on this projections and plans is available on the presentation.

Thank you for your attention, and now, we will be happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Ekaterina Smyk of Bank of America Merrill Lynch.

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

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I have a couple of questions. One of them is on your refining guidance for 2020. What are the key units you need to launch to reach this target output? Or is it just the ramp-up of already launched units? And what could be the potential downside to that number?

And then the second question is on your -- the downstream performance this quarter. Can you please -- it seems that there was sort of limited improvement both quarter-over-quarter and year-over-year in the segment's earnings while there was substantial growth in volumes. Then also there was the marked improvement of domestic refining market in the third quarter, and also international market growth was kind of good. Can you please elaborate more on the performance of your downstream segment this quarter?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [3]

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Thank you, Ekaterina, for your questions. First of all, on the production configuration of TANECO next year. In 2020, it's predominantly the effect of ramp-up associated with the launch of second CDU-VDU that I mentioned in the presentation. Although in the course of next year, of course, we plan to launch a cat cracker, which is being completed. And that's going to be the main addition in the course of next year. However, by the end of 2020, we also expect currently to have the completion of aromatics complex, hydrotreatment of middle distillates and a small hydro conversion unit. But the effect of those will be more visible in 2021.

With respect to overall earnings and performance of downstream sector, in fairness, we're quite pleased with the results. There is, of course, to an extent depending on the marketing strategy, delay of some anticipated effect due to the dynamics in the market, and to an extent that might be sort of reflected in full year accounts and both for the fourth quarter. But as a matter of what we expected and what we see as a result, without taking into account any difference in volumes that we initially anticipated compared to what we actually produced and sold, we haven't seen any negative surprises.

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Operator [4]

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The next question is from Alexander Burgansky of Renaissance Capital.

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Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [5]

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I have 2 questions. First of all, just to follow up on the refining side. Given your focus on Page 5 of the presentation in the growing output of other products, given the launch of the new CDU-VDU unit, can you please confirm whether you are producing any fuel oil at the moment or whether you plan to produce fuel oil next year if you are to meet this production targets as stated on Page 5?

And the second question. If you could perhaps update us on your potential to increase production in case of OPEC+ constraints were to be lifted? And so what's the additional level of production you can achieve in 2020? And how quickly will that production level can be achieved?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [6]

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Thanks for your questions. On the refining side, yes -- no, unfortunately, as we expand and have higher production level, whatever falls in the other category increases and it becomes quite significant next year. It's a mixture of products. They would be some volumes, but entirely negligible, to be honest, of fuel oil that would be produced, that would be in the range of around 200,000 tonnes on an annual basis. I guess that will be depending on changes and configuration accommodated internally for further processing in the future. But as a matter of other products sitting there, it ranges, including quite significant relatively within that category, volumes of gas that would be coming out as a result of operational, predominantly cat cracker once it's launched. So the overall sort of light product yield is a reflection of the mixture and still output of some heavy product, of course. Hence, it's projected at 82.3% for next year.

On the upstream ramp-up, as we've been communicating earlier, in case there is a termination of restriction under the OPEC+ arrangement, we believe we would be able to ramp up fairly quickly and add approximately another 30,000 barrels per day production in case we see the restriction lifted, let's say, in spring of next year.

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Operator [7]

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The next question is from Igor Kuzmin of Morgan Stanley.

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Igor Kuzmin, Morgan Stanley, Research Division - Equity Analyst [8]

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Would you mind actualizing the CapEx guidance for 2019 and 2020, please?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [9]

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Sorry, Igor, just to repeat the guidance?

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Igor Kuzmin, Morgan Stanley, Research Division - Equity Analyst [10]

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Yes. Just maybe just an update on what CapEx do you expect in 2019 on the back of the full year and 2020, please?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [11]

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Yes. For the full year, we currently expect exact numbers as presented in the presentation that I mentioned: RUB 107.9 billion for the full year 2019. And the forecast for 2020 is RUB 121.5 billion. I would just refer you and the others to the presentation for the split between various projects and -- in both upstream and downstream and other segment. But the overall distribution between those categories would remain as at historical levels, but the majority split, approximately 50-50 between upstream and downstream, but with a little bit of tilt next year toward highly viscous oil within the portfolio, of course, on the upstream side.

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Operator [12]

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The next question is from Ildar Khaziev of HSBC.

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Ildar Khaziev, HSBC, Research Division - Analyst [13]

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I have a question about the net refineries, please. Has there been any changes to the crude diet of TANECO? And do you plan any changes going forward to the crude diet in terms of quality of the crude processed at the refinery?

And then the second one, second question is also about TANECO. Some of your competitors are considering cutting refining throughputs in response to very weak fuel price. I know your fuel output is going to be very small next year. Do you have any contractual flexibility to do the same thing?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [14]

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Basically, the -- well, our own crude that we've been supplying for processing at TANECO, it would remain the same. As a matter of flexibility, as I correctly understand the question, with respect to any units that we are currently building at TANECO, or I mean to an extent, of course, we do have such flexibility, you will find in our financial statements a mandatory disclosure related to our commitments with respect to spending that is associated with TANECO and other projects. And apart from those, we're not constrained by anything else related to the completion of the units that we envisage to have as part of the operation.

But from where we stand now, and that's -- we've been mentioning before, our strategy is that the additional initial throughput capacity, which has been achieved with the launch of the second CDU-VDU, the unit is not running at its full capacity, so we minimize the output of heavy product. And those units that we're adding is actually -- they are designed to achieve our higher-life products build and improve for complexity and quality, the quality of the output. So within that framework, what we're doing as a matter of spending only improves the profitability of the operation.

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Operator [15]

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(Operator Instructions) The next question is from Olga Danilenko of Prosperity.

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Olga Danilenko, Prosperity Capital Management Ltd - Director of Oil and Gas [16]

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I have 2 questions. The first one is to follow up on the ramp-up in case OPEC+ restrictions are being modified or lifted. My question relates to some article which I read in the paper that one of the compromise decisions can be that the condensate is being taken out of the overall mix for the compliance of OPEC+. If that decision will indeed be taken, can you please elaborate on how -- do you have condensate projects? And if you can potentially benefit in the case of only condensate being taken out?

And my second question, if you can elaborate a little bit more in details on why and how you had such a big inventory release during third quarter? And what can we expect for the fourth quarter so far?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [17]

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Thank you for your questions. The first one is we don't really have significant output of condensate, which is one of the discussions just by nature of our operation and our production. So with respect to that discussion, we don't expect that, that would be a material change with respect to our position with respect to restrictions. But we welcome any improvement on that front as an indicator of potential further steps.

And with respect to the situation with the inventory buildup in the second quarter and its release in the third quarter, it's very simple. Historically, we've had significant storage capacity within our operation in Tatarstan. So when the incident with Druzhba pipeline occurred, it didn't affect our production because we could continue producing and use the storage facilities to store oil produced before we could start delivering it into the pipeline system, which started to happen more in the third quarter. And during the third quarter, we've quite significantly increased deliveries and pretty much sold all the oil that we stored above the normalized inventory level that we historically had. So that was as simple as that. To say how it is different to some of our peers, to be honest, I can't tell you. But it's one of the things that obviously we have an advantage in having the ability to store oil that we produced.

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Operator [18]

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We have a follow-up question from Igor Kuzmin of Morgan Stanley.

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Igor Kuzmin, Morgan Stanley, Research Division - Equity Analyst [19]

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Vasiliy, so the RUB 121.5 billion guidance for the company for 2020, just wanted to double check. So this level is assuming the OPEC+ agreement is extended into the year-end? Or it's currently built on the assumption that it's ending in March 2020.

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [20]

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Yes. The CapEx plan is based on the assumption that the restriction, the OPEC+ restriction will remain. But as we were carrying before with respect to this year, for example, this year, we had about RUB 10 billion to RUB 12 billion reserve CapEx, which would allow us to ramp up and achieve higher production level in case the restrictions are lifted. Roughly the same magnitude CapEx perhaps would be required if we have the ability to ramp up quickly without any restrictions. But that would depend, obviously, on timing and specifics of any arrangement that might be in place in the course of next year.

If you look at historical precedents, when a couple of years ago now or 1.5 years ago, rather, the restrictions were eased and we could produce more, the ramp-up did not require significant boost in CapEx. Because what we're talking about is mainly -- bringing back online some of the wells that we keep technically alive into production, but not really incur significant workover expense to bring back online those wells.

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Igor Kuzmin, Morgan Stanley, Research Division - Equity Analyst [21]

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Sorry, did you say RUB 10 billion to RUB 20 billion or RUB 10 billion to RUB 12 billion? And is that the annual number?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [22]

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Sorry. Sorry. RUB 10 billion to RUB 12 billion.

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Igor Kuzmin, Morgan Stanley, Research Division - Equity Analyst [23]

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RUB 10 billion to RUB 12 billion on a full year basis reserve?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [24]

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Yes. That's right.

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Operator [25]

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(Operator Instructions) Sir, it would appear that we have no further questions. Do you have any closing comments?

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Vasiliy Aleksandrovich Mozgovoy, PJSC Tatneft - Assistant To General Director of Corporate Finances [26]

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Thank you very much, and appreciate you joining our call. I know you've been exhausted after 2 conference calls in a row, and thank you for dialing in. Once again, thank you to Renaissance Capital for hosting us, and I would like to use this opportunity to wish you happy holidays. And obviously, if you have any questions you would want us to find, please reach out. Thank you.

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Operator [27]

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Thank you very much, sir. Ladies and gentlemen, that then concludes this conference call. You may now disconnect your lines.