«Gazprom Neft will be moving gradually towards dividends of 50 percent of profit»

Interfax

Moscow. 8 August. INTERFAX — Gazprom Neft has published its financial results for IH 2019, with hydrocarbon production up six percent year-on-year: this increase in production being reflected in its financial results, with the company recording another record increase in net profit, of 30 percent.

Alexei Yankevich, CFO, Gazprom Neft

Gazprom Neft is also hoping for growth in key indicators at its year-end, with good financial results giving hopes for high dividends. Alexei Yankevich, CFO, Gazprom Neft, talked to Interfax about the company’s plans to pay dividends at 50 percent of net profits, about tax initiatives, and about the Finance Division’s contribution to implementing the company’s long-term strategy.

— The company’s key financial indicators are going up. Is this growth mainly down to internal or external factors?

— This year’s first-half results show Gazprom Neft running slightly ahead of plan for the period: net profit is up by 29 percent, to RUB215 billion; EBITDA is up 11 percent, to RUB368.9 billion; and revenues are up seven percent, to RUB1.2 trillion. Looked at in terms of this half-year, this growth in net profit is a new record for the company — although it’s more accurate to calculate this on a yearly basis, obviously.

As regards factors — the external environment has made a major contribution, undoubtedly, mainly due to changes in the exchange rate: the ruble has been weaker over these six months, compared to last year. But the impact of internal factors is also important: production growth, more than anything else, which for oil was about two percent, and for hydrocarbons generally — 5.6 percent.

We’re continuing to see a good pace on our flagship projects — Novoportovskaya, and the Messoyakhskaya group of fields. Added to which, the company is having to operate within the constraints of the OPEC+ deal; we’re compliant with all agreements and, under Minenergo administration are maximising every opportunity available to us under current quotas.

— Should we expect any records with Gazprom Neft’s 2019 full-year results?

— It’s too early to put out any expectations for the full year — even on the most provisional basis — because, in our industry, so much depends on the external situation. But we are expecting positive growth in net profit for 2019 compared to 2018 — which was our fourth record year in a row.

— Speaking of which — is there any chance of a 50-percent dividend on profit with the 2019 year-end results?

— We’re continuing to work towards maintaining a positive trend in calculating dividends per share. We’re doing everything we can to make sure that dividends per share for 2019 are higher than those paid out in 2018.

As regards the percentage of net profit, we’re moving towards our new target, of 50 percent. But we’re getting there in a series of steps. That is, we’re planning smooth, gradual growth. But the year-end results will show a positive trend, that’s for sure.

— Is Gazprom Neft definitely planning to pay dividends on these six months?

— Yes, we’re looking at that option. It’s been put forward as a proposal from management, at the moment. There’ll then be a meeting of the Board of Directors, who’ll take the final decision on this.

The idea behind the company moving from interim nine-month payments to half-yearly dividends can be explained by several reasons. Firstly, the good market environment this year; our financial performance is improving, and net debt is going down. That means we can start paying dividends for 2019 earlier. So we decided to try moving towards six-monthly dividends.

Secondly, if, in time, Gazprom Neft does get to the point of paying 50-percent dividends, it’s probably more logical to pay on the basis of “half and half”. This means our investors and shareholders get their money earlier. And, generally, it’s more convenient to get half-yearly dividends in equal amounts. If Gazprom Neft has that opportunity, why not take advantage of it?

— Net debt was down in the first half-year. Will it go down any further?

— Reducing the net debt is a temporary phenomenon. Over the next few years, in the medium term, we should expect net debt to stabilise rather than keep declining. And that’s because of Gazprom Neft’s investment opportunities — for the moment, we’ve got our own money for ongoing projects.

— So Gazprom Neft has become less active in raising credit and placing bonds? The company has previously used both of these tools.

— Yes, we’re not using credit so much, because the company has enough funds of its own. The main source of finance for Gazprom Neft’s investment programmes at the moment is operational cashflow. Plus, Gazprom Neft has relatively low debt refinancing commitments in 2018–2020. We simply don’t need to borrow. And, most likely, that situation’s not going to change during 2019.

The net-debt/EIBTDA ratio for this six-month period was almost 0.5 — which is very low, for us. Gazprom Neft’s previous benchmark figure, even before the crisis in the oil market and the price drop in 2013–2014, was around 1 to 1.5. That is to say — we do have scope for raising debt finance, but we’ll only do so when there’s an objective necessity for using that option.

The company has significantly increased its resource base recently, and we now have numerous license blocks under exploration, on which we first need to eliminate uncertainties, and then take investment decisions. It’s entirely possible that, as new production projects come to the fore in the future, the company will need finance to implement these. In which case, we’ll go back to the borrowing market, which will give rise to an increase in net debt.

— And what’s going to happen with capital investments, in the medium term?

— We’re looking at a figure of about RUB400 billion, give or take. On the one hand, we’re already at peak investment in refining, because were in the active phase of our refinery modernisation programme. After that, once it comes to a close, investment in refining will go down. On the other hand, we’ve a lot of opportunities and projects upstream, and that means investments here are going to go up.

— What sort of higher margins are you expecting in refining once the refinery modernisation programme comes to an end?

— The Euro+ project at the Moscow Refinery — which involves replacing several outdated facilities, increasing cost efficiency, and improving the structure of the oil-product yield — is closest to launch, at the moment. After that, a major project at the Omsk Refinery is due to launch, which will include deep processing, based on hydrocracking, and a delayed coking unit. These assets will bring the Omsk Refinery up to standard with the best refineries in the world. Concurrently with this, a deep refining complex is being built at the Serbian NIS refinery in Pančevo, and work is underway on the deep refining complex project at the Moscow Refinery.

Once the modernisation programme is complete, we expect refining margins at Gazprom Neft to increase significantly, by tens of percent. Added to which, total refining volumes will barely change (they might go up a bit at the Moscow Refinery). But, due to the fact that we’ll be producing more light oil products, aviation fuel, lubricants, and high-quality marine fuel, the profitability of the refining business will increase significantly.

— What’s your assessment of the reverse oil excise mechanism (with damper) on the company?

— If we take the new mechanisms — and the general tax environment, as a whole — and compare this with what we had before, then the overall effect for Gazprom Neft is pretty close to neutral.

It should be noted, however, that tools have, in principle, been found that have been able to balance the domestic fuel market. Taking these latest adjustments into account, it seems to us that these new tools, including the reverse excise tax and damper, are working pretty well. It’s clear that achieving the ideal is difficult, but, within the current price range, they’re working. If there are strong fluctuations in the oil price — up or down — more changes might be needed.

What’s really important is that there’s a strong, ongoing dialogue with government. We have to find compromises — like the recent adjustments to the damper formula. We hope this dialogue will continue.

— What other oil-industry tax initiatives would you like to see this constructive dialogue extended to?

— Firstly, I’d like to point out that the additional income tax regime [AIT, an additional tax on revenue from hydrocarbon production] has already come into force. Oil professionals have been expecting it for some time, and we’re glad that, so far, albeit experimentally, it’s stacking up. This impacts both new projects, and pre-existing ones. We, obviously, are hoping that this experiment is going to prove successful, and that the AIT could subsequently be rolled out to a greater number of assets.

It strikes us that the next step needs to be the emergence of a mechanism for some kind of universal, non-discriminatory access to temporary concessions, to stimulate the development of unconventional reserves which are not, currently, covered by the AIT. There are so-called “blind spots”, certain categories of reserves that don’t fall under one concession regime or the other. Gazprom Neft has many unconventional assets — our future production portfolio is, predominantly, based around unconventional reserves and remote locations. New assets in Nadym-Pur-Taz, Gazprom’s (MOEX: GAZP) oil-rim deposits, the development of license blocks around Novy Port, the huge Taovsky and Severo-Samburgsky blocks, and the as-yet unexplored Gydan Peninsula — all of these are going to need a new level of technological advancement and adaptability from the company in oil exploration and production. And, maybe, new tax concessions and stimuli that will facilitate work on developing these projects.

Other companies have challenging assets of their own. There isn’t, as yet, any consensus within the domestic oil industry as to how to determine a concessions methodology for hard-to-recover reserves. Individual companies are trying, independently, to secure some concessions or other for developing their own unconventional reserves, but there’s nothing systemic about this. As well as unconventional reserves per se this also concerns tertiary enhanced oil recovery (EOR) techniques, such as surfactant—polymer flooding, for which there aren’t any tax incentives, as yet.

Take export duty on oil, for example. At one time, every company could submit an application on a project and obtain some concession — all under a single, inclusive methodology. This created equal opportunities for all companies. It would be logical to develop a similar approach in this case, too. There’s certainly demand for this within the industry.

— Discussion on the systemic risks associated with major companies having a high debt burden, and the tools for limiting such risks, has moved on. A number of Russian companies have called for debtors to be assessed on the basis of Russian agencies’ ratings. Do you think that’s going to increase lending to corporate borrowers? Is there any risk to Gazprom Neft if it declines to move over to Russian ratings?

— Certainly, on the one hand, it’s essential to talk about the risks in the banking system, insofar as banks have to evaluate information on the companies they’re lending to closely, so that they’re not overburdened by debt. But, on the other hand, there are a large number of efficient companies, with good credit history, and promising projects. And for these, obviously, opportunities for borrowing should not be reduced. Particularly not quality companies, subject to industry sanctions. Access to capital on the domestic market is particularly important for these — they can’t raise money abroad.

Take Gazprom Neft, for example. We’ve got high ratings, minimal risks for borrowers, a dependable business, improving financial indicators, and promising major projects. At the moment we’re not standing in line for credit, and are, instead, making use of our own resources for ongoing projects. But, after a while, we too might need major loans to develop new assets.

And there are many companies like this, in various industries, and of various sizes. It’s extremely important that borrowing opportunities and lending limits are not curtailed. It might be the case that the banking system has to approach certain categories of companies, riskier borrowers, more stringently. But there needs to be a balanced policy — there’s no point in treating them all the same.

Obviously, the Central Bank has to have a healthy conservatism in setting standards. At a certain point, this was a positive thing for Russia, helping to avoid the banking crisis that happened in other countries. But it now faces another challenge — economic growth. Maybe the time has come to soften that conservative view with regard to quality borrowers. If major companies aren’t able to implement projects because of a lack of resources, this could lead to a slowing down of the country’s economy, as a whole.

— Gazprom Neft’s “Strategy 2030” sets the company some ambitious goals. How do you see the Finance Division’s contribution to transforming the company?

— Gazprom Neft’s new strategy is certainly ambitious. The company is looking to become a global industry benchmark in terms of efficiency, safety, and technological adaptability and advancement. It’s important to us that we grow faster than the market, and that we are among the industry’s top-10 leading companies.

At the same time, the new strategy contains fewer digital benchmarks than the old strategic document did. And that’s no accident. It’s because we’re now living in an environment of considerably greater uncertainty, particularly in terms of the oil price. And in this environment, Gazprom Neft is placing its bets on flexibility.

We think that in an environment of high volatility and unpredictable markets, the company has to be able to respond to challenges quickly, and use every chance it gets. We can’t miss out on investment opportunities, but we can’t allow too much capital to be lying dormant in projects, either.

I see the role of financial specialists in implementing the new strategy, actually, as being one of ensuring effective investment management, in being able to maintain a balance between dynamic company growth and maintaining the industry’s highest return on investment. As well as looking out for the interests of investors and shareholders.

I expect Gazprom Neft’s Finance Division to gradually free itself from technical activities, automating internal processes as far as possible. Gazprom Neft’s financial centre will be focussed on solving intellectual business challenges — including portfolio management and analysis — as part of implementing strategy. That’s what we’re working towards.