PJSC LUKOIL
Q1 2020 Earnings Call Transcript

Published: 4 Jun 2020

[Operator:]

Hello, and welcome to the LUKOIL Conference Call. My name is Jess, and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen-only. However, there will be the opportunity to ask questions. [Operator Instructions] I will now hand you over to your host Alexander Palivoda to begin today's call. Thank you.

[Alexander Palivoda:]

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining our call today to disclose LUKOIL's first quarter 2020 IFRS financial results. Here we have Mr. Alexander Matytsyn, the CFO and First Vice President for Finance and Economics; and then Mr. Pavel Zhdanov, Vice President for Finance; as well as our colleagues from the accounting team. Before we move on to the presentation, I would like to draw your attention to the fact that some of the comments during this call constitute forward-looking statements involving risks, uncertainties and other factors that may cause our actual results to be materially different from what is expressed or implied by these forward-looking statements. More detailed information is presented on the slide. Now I'd like to hand over to Mr. Alexander Matytsyn.

[Alexander Matytsyn:]

Thank you, Alexander. Good afternoon, ladies and gentlemen. Let me begin with the coronavirus pandemic, which prompted us acting first. The safety of our employees and the continuity of our business processes have been at the heart of all our considerations amidst the pandemic. We quickly set up a task force to protect the company's staff, contractors and customers. We have been taking all the necessary measures from regular testing to extended shift periods for our employees. As a result, we have been able to prevent any major outbreaks at LUKOIL facilities, while ensuring continuity of our business processes across the board. As one example, all of our filling stations continued operating with no disruptions whatsoever. In line with its commitment to social responsibility, LUKOIL is working to contribute to the efforts against the COVID-19 pandemic in Russia and other countries of operations alike. We are supporting health care and research institutions and aiding vulnerable families. The company's facilities are now producing sanitizers and personal protective equipment. We hope that the joint efforts of governments, businesses and people will have to curve the pandemic and the implications it may have. The pandemic has caused demand for hydrocarbons to plunge on an unprecedented scale leading to inventory buildup and sending oil prices tumbling to their 20-year lows. The timing of the OPEC+ agreement helped to prevent the situation from turning into the disaster for the industry. Today, we already see business activity gradually pickup across the world with oil demand and prices following suit. We expect that the OPEC+ agreement will help to gradually bring the market back into balance along with destocking. According to projections by the world's leading research agencies, our oil demand is set to generally normalize as early as in the beginning of 2021, but full recovery will take longer. The key factor at play will be the evolution of the COVID-19 pandemic and how quickly lockdown measures are lifted. We realize that protracted mobility restrictions might undermine demand for energy resources in the long run. At the same time, the relatively low oil price is expected after a strong growth driver. Let me also say here that the subdued oil pricing environment is impacting production projects with the lowest efficiencies, which might have a refined influence over the supply and demand balance going forward. In our expectations for oil price recovery we are leaning towards the lower end of the price ranges projected by analysts. This is primarily driven by our traditionally conservative approach to planning. However, we do not see fundamental reasons to review our strategic price target of US$50 per barrel. And we expect oil price to exceed this level within the next 18 months to 24 months. This is by far not the third price cycle that the company is going through. We have been consistently demonstrating our strong resilience and flexibility in a volatile and increasingly challenging market environment. The company has always been able to keep free cash flow positive and continued its robust development. The current downturn is certainly unprecedented in terms of the speed and magnitude of macro changes and the scale of our market imbalances, which makes planning a challenge and potentially leads to considerable fluctuations in financial metrics. However, we believe that the advantages we have allow us to mitigate much of the negative impact that the external environment has on our current performance and targets while at the same time protecting our profit margins at lower prices. These advantages include a high-quality asset portfolio and a very robust balance sheet -- unit natural hedge and the formal progressive tax scale and the currency exchange rate effect in Russia, as well as flexibility and the adjustment of our investment program and strong vertical integration which includes company-owned transportation facilities and trading operations. Finally we have a great level of operational flexibility helping us to minimize the impact of lower production on our financial performance. In the first quarter of 2020 we maintained a leadership standing in the industry in terms of per unit financial metrics and unlike some of our peers, managed to keep our free cash flow in the positive range. Our investment program in the quarter was also financed in fall in line with the budget approved for the year. The existing market environment has had a marked negative impact on our financial performance. However the decline that we are currently see is to a large extent linked to one-off factors. This means that our normalized metrics look considerably better. On top of that, a lot of negative drivers are inherently temporary and we'll be supporting our performance going forward. After market conditions start to improve. As one example; one of the notable drivers of decline in our EBITDA in the Russian upstream segment was the tax lag effect. In the downstream segment, the key factor behind the declining EBITDA was the negative effect of inventories at refineries and product inventories right down to net realizable value at the end of the quarter. Our profit was under pressure from the considerable foreign exchange loss caused by sharp devaluation of the ruble along with the impact of asset impairment predominantly in the refining segment in Europe. Controlled factors and an extremely positive impact -- control factors had an extremely positive impact on our financial results. I would like to note a reduction of costs, the improvement of hydrocarbon production mix as well as the improvement of the trade basket into fining. Still our free cash flow was above the level of the first quarter of 2016 when the pricing environment was very similar to what we see now. The free cash flow was also supported by working capital release. Our traditionally low-cost base is a major pillar that underpins our strong resilience in a weak market and helps us to maintain positive EBITDA even when oil prices are at extremely low levels. Successful cost optimization initiatives are additionally contributing to our financial results. In the first quarter we continued delivering a strong performance in cost optimization and control. However conditionally controllable operating and administrative expenses per barrel went down by almost 4% compared to 2019 average. In the current environment, we took additional steps to proceed with cost savings in order to support our financial results in 2020. Our efforts to cover all items of operating and administrative expenses as well as capital expenditures across the board. Let me talk in greater detail about our investment program. Our base case plan for 2020 in capital expenditures, excluding the servicing project in Iraq of around RUB 550 million. We carried out to the leg to optimize our investment program in line with the current market conditions and production limitations. The optimization mostly includes postponement of expenditures in exploration and early state upstream and downstream projects to less extent we reduced our drilling and construction expenditures. Our new target for investments in 2020 is flexible in the range of RUB 450 million to RUB 500 million. It stems from the fact that we can quickly go back on-track with our investments in some of the projects depending on the market environment. Let me stress that the optimization efforts will neither prevent us from reaching our strategic targets nor affect any of the key aspects of industrial safety and environmental protection including climate issues. In the challenging market conditions our paramount priority in cash flow management for 2020 is to deliver positive free cash flow in any macro environment. We have taken well-timed action and increased the liquidity available to us. In May we successfully placed 10-year $1.5 billion Eurobonds for an amount that covers our debt repayment obligations until the end of this year. The amount of committed credit lines grew to more than $3.5 billion. We maintain a very strong financial position with the net financial debt close to 0. This is a major competitive edge in the current market conditions enabling us to honor all our obligations to lenders and shareholders, while continuing to develop the company in line with our strategy, no matter how volatile the prices are. In conclusion, let me outline our priorities taking into account the coronavirus pandemic. Above all, we focus on the safety of the employees and the continuity of our business processes. Another priority for us is to maintain exceptional operational flexibility and ability to respond to macro changes as quickly as possible in order to maximize financial performance. We will also be committed to cost optimization as a way to mitigate the market's impact on our free cash flow. Our long-term strategy including the policy for shareholder returns remain unchanged. On the 18th of May, the Board of Directors recommended that the meeting of shareholders approved final dividends for 2019 in the amount determined in full compliance with the existing dividend policy. We aim to deliver shareholder value in the long-term and view the current environment as an opportunity to enhance the efficiency of our operations. Now, I would like to hand over to Pavel Zhdanov.

[Pavel Zhdanov:]

Thank you, Alexander. Good afternoon, ladies and gentlemen. I will now present our results in the upstream segment. I believe you are well aware of the oil price developments that we have seen over the recent months, with the average price of the euros grid dropping by 23% quarter-on-quarter, the net price excluding the mineral extraction tax and export duties, suffered a stronger decline and went down by 30%. This was due to the considerable tax lag effect as oil prices plummeted in March. Excluding the tax lag effect, the net price would drop by 9% in U.S. dollars and just 5% in ruble terms. April proved to be the most challenging month for the Russian upstream segment with extremely strong negative impact of the tax lag effect, causing the average net price drop by the -- drop to $4 per barrel, which is below the operational breakeven level. However, the situation recovered in May as oil prices largely bounced back as the lag effect reversed and started recovering the margins lost through the last two months. As you may know -- as you may well know, a progressive scale of the mineral extraction tax and export data helps to largely offset the negative impact, the declining oil prices have on margins in the Russian upstream segment. Also, let me once again highlight our traditional low cost base, which makes LUKOIL one of the world's most efficient oil producers in an environment of lower prices. Another positive factor is the devaluation of the ruble that supports the company's margins in the upstream segment due to cost denominated predominantly in rubles. In the first quarter of 2020, average hydrocarbon production, excluding the West Qurna-2 project, totaled 2.3 million barrels per day, down 2.5% quarter-on-quarter. The decline is attributable exclusively to the reduced supplies from our Uzbekistan projects to China as demand weakened because of the coronavirus pandemic. Since mid-February, we have cut our production in Uzbekistan to some 40% of the capacity, and are currently in talks with the Uzbek side to resolve the situation. You may remember that gas is supplied to China under contract between Uzbekistan and China, and that contract is beyond our control. Excluding our projects in Uzbekistan, hydrocarbon production increased by 0.4% quarter-on-quarter. The share of high-margin barrels in the production structure also continued growing up by 2 percentage points year-on-year. I would like to talk more specifically about the new OPEC+ agreement. Based on that agreement, since the 1st of May, we have cut our crude oil production in Russia by 19% or about 310,000 barrels per day against average daily production in the first quarter. That reduction was reduced by shutting down the least profitable wells predominantly at the mature fields of West Siberia and the Komi Republic. The water cut in the shut-in wells exceed 90%, which is above to LUKOIL's average. This approach minimizes the adverse impact of the production cut on our financial performance. When drafting the list of wells, besides the economics, we've acted in geological and technological risks to avoid a negative effect on the long-term production potential of our fields. Our experience from the previous OPEC+ agreement confirms that the production from shut-in wells can be restored without losing their potential rather quickly. We are going to stay prepared to increase production as soon as appropriately instructed by the Russian Ministry of Energy. In the current market environment, we depend -- we decided to focus on maintaining our long-term production potential in order to be able to promptly restore their production back to normal and secure further sustainable growth. This is a perfectly justified approach as oil demand is expected to recover quite rapidly and our production is highly efficient even when the prices are low. Given that most of the shut-in wells are mature, the number of well rigs with a relatively short-term impact on the output will be significantly reduced including for instance hydraulic fracking. At the same time, there will be a less considerable decline in production drilling contributing to a better basic production profile by the time the restrictions are lifted. In addition, restoring the number of well rigs after the limitations are removed will create an extra production driver within a comparatively short period. I would like to stress that the production cut due to OPEC plus agreement will not affect our high-margin priority projects. And this means that we should expect an extra increase in the share of high-margin barrels in total output. Besides our Russian projects, the OPEC plus agreement also affected some of our overseas assets. In part -- in particular we had to cut production in Iraq and at our oil projects in Kazakhstan. As oil prices went down, the upstream EBITDA fell by half both quarter-on-quarter and year-on-year. In Russia, EBITDA was significantly affected by the negative tax lag effect and inventory write-down to net realizable value. Without these factors, the Russian upstream EBITDA decline would have been twice as low. The adverse macroeconomic impact was partially offset by our efforts to cut costs and improve the production mix. In particular our per unit production costs in the first quarter of 2020 went down by almost 2% compared to the 2019 average on the back of operational efficiency improvement program. In addition to the market environment, the overseas upstream EBITDA was adversely affected by lower gas production in Uzbekistan, which was partially offset by a greater share of attributable production and projects implemented under production sharing agreements due to lower hydrocarbon prices, as well as high EBITDA of the West Qurna-2 project because of a higher amount of cost reimbursement. Relatively robust cash flows amid lower oil prices allow us to go ahead with our priority projects strictly in line with our plans. In the first quarter of 2020, the Caspian drilling program helped us to keep production at the target level. As part of phase three development of the Vladimir Filanovsky field one more high rate horizontal well was drilled. Due to our continuous efforts to improve drilling efficiency in our offshore projects, we managed to increase drilling speed by 29% quarter-on-quarter reducing the well drilling cost by more than 10%. We have been successfully implementing the drilling program of phase two at the Yury Korchagin field. Since the launch of the program in the second quarter of 2018, the field's daily production rose by 50%. As part of the Valery Grayfer field development, shipyards are building an ice resistant stationary platform and accommodation platform and a crossway connection. As at the end of the first quarter, the ice resistant stationery platform was more than 40% complete and the accommodation platform was almost 70% complete. In May, offshore jackets for the accommodation platform were installed in the Caspian Sea. In the second half of 2020, the company is planning to install offshore jackets for the ice resistant stationary platform and complete pipelines to the Vladimir Filanovsky field. Now, high viscosity oil production in Timan-Pechora was up by 5% year-on-year. That's the average daily volumes. In the first quarter of 2020, six SAGD production wells and 90 underground wells were commissioned at the Yaregskoye field. The Usinskoye field commissioned for production wells. We can continue expanding our field infrastructure and production facilities to support further production growth. By the end of this year, the company plans to commission use steam generating facilities and proceed with its drilling program. We are consistently reducing our field development costs. For example, the drilling speed of SHD wells increased by 25% compared to the average level of 2019. This led to 10% reduction of cost of drilling such wells. Our major low permeability fields in West Siberia increased production by more than 50% year-on-year. I would like to make a special mention of the Sredne-Nazymskoye field, which doubled its production in the first quarter of 2020, 37 production wells were commissioned at low permeability fields. We continue our efforts to cut costs. For example at the Sredne-Nazymskoye field, we managed to increase drilling speed of directional wells by 20% compared to the average level of 2019 that resulted in 8% cut in the cost of drilling of this type of wells. Now let me hand over to Alexander Palivoda who will present our results in the downstream segment.

[Alexander Palivoda:]

Thank you, Pavel. In the first quarter of 2020, the economics of Europe's refining segment greatly improved compared to the fourth quarter of 2019, despite a decline in demand for motor fuels and lower crack spreads for gasoline. The benchmark margin was up more than 80% quarter-on-quarter on the back of lower feedstock costs coupled with a higher euros discount versus Brent crude as well as relatively high crack spreads for diesel fuel and improved crack spreads for fuel oil. The same drivers contributed to further benchmark margin growth in April. In May, however, there was a drastic change, as the refining margin fell to nearly zero amid oil price recovery and decline in crack spreads for diesel fuel. The Russian benchmark refining margin also went up quarter-on-quarter supported in part by the positive lag effect of the crude oil export data. In April, the Russian margin was flat quarter-on-quarter. In May, it dropped to a negative value on the heels of the decline in the European margin. In April and May, the Russian refining margin was adversely affected by a decline in the net wholesale gasoline price on the domestic market with a negative damper payable to the government well below the export netback. Additional negative factor in May was the almost full erosion of the export duty differential due to the crude oil export duty being reduced to near zero during the month. Travel restrictions due to the coronavirus pandemic resulted in a significant decline in demand for jet and motor fuels across our key sales markets. However, by leveraging our robust refining facilities and own trading operations, we were largely able to mitigate the effect of this adverse factor on the refining throughput. In fact, the first quarter of 2020 even saw an increase in the refining throughput quarter-on-quarter. In Russia, the growth of average daily throughput volumes exceeded 2%, mainly thanks to the Volgograd refinery. Our European facilities also recorded growth of up to 1%, mainly on the back of higher capacity utilization in Italy following the end of maintenance works in the fourth quarter of 2019. This offsets the decrease in the Bulgarian refinery's throughput caused by disruptions of feedstock supply in February due to adverse weather conditions. In April, the refinery in Nizhny Novgorod started scheduled repairs well our other Russian plants continued operating at normal rates. To adjust to changes in the demand pattern, some optimizations were introduced at European refineries with capacity utilization there decreasing by 8% compared to the first quarter. Keeping a high level of refining throughput in the first quarter helped us to maximize our financial performance which was supported by high margins. In May, the Ukhta refinery was shut down for scheduled repairs, while our two best Russian refineries in Volgograd and Perm continued operating at normal rates. We optimized capacity utilization at our overseas refineries to factor in the refining margin pattern and commenced scheduled repairs at our plants in Bulgaria and the Netherlands. This resulted in refining throughput reduction in May by 40% and 20% quarter-on-quarter for our European and Russian refineries respectively. That allowed us to minimize the negative impact from weak market environment. I would like to stress that despite higher refining throughput in the first quarter of 2020, the fuel oil output across the group was down by 10% quarter-on-quarter, while its share in our product slate decreased to 7%. This is one percentage point better than this year's target and more than three percentage points below the level of the first quarter of 2019. The decline in demand for May to fuel adversely affected our filling station sales. In the first quarter, our retail sales of gasolines and diesel fuel were down more than 10% quarter-on-quarter, partly due to the seasonal factor among other things. April saw the greatest decline in sales, which were down some 40% year-on-year. In May, as some quarantine restrictions were lifted and economic activity started to pick up, we saw a certain upward trend in retail sales that significantly exceeded our expectations. The average daily sales volumes were up 26% compared to April and reached 80% -- nearly 80% of the level seen in late April – seen in April 2019. The air travel industry was hit the hardest by the pandemic, which resulted in drastically reduced jet-fuel consumption. In the first quarter of 2020, our aircraft fueling sales decreased by nearly 20% quarter-on-quarter. Apart from seasonal factor, the sales dynamics was negatively affected by a decline of international flights of Russian Airlines since mid-March due to the pandemic. The peak in sales drop was in April and sales were down 75% year-on-year. So that was also in April, as is the case with the retail selling stations. Since May, however, we have been seeing a gradual sales recovery at hubs across our geographies. The month-on-month hike in May was 20%. Nevertheless, we expect demand for jet fuel to recover at a slower rate compared to other petroleum products because it may take a long time for the domestic and international air passenger traffic to bounce back. In the first quarter, supplies to our refineries were traditionally the most efficient crude oil distribution channel. A higher refining throughput combined with improved petroleum product slate allowed us to maximize the positive effects of a better Russian benchmark refining margin on the downstream segment performance. More shipments of crude oil to local oil refineries resulted in lower export volumes. Due to change in market environment, we markedly increased supplies of equity crude oil to our European refineries. Despite improved refining margins increased volumes and the better product slate, our downstream EBITDA went down by 51% quarter-on-quarter. The key factors behind the decline were effect of inventories at refineries and product inventory write-down to the net realizable value as at the end of the quarter. Normalized EBITDA, which is adjusted for rolling over and one-off accounting items remained almost unchanged quarter-on-quarter. This confirms the strong quality of our refining assets, the flexibility of our downstream segment and its ability to operate in any market environment. The segment's performance was supported by reduced refining costs and improved results in power generation petrochemicals. Despite the challenges caused by the coronavirus pandemic, selected projects at Russian Refineries are being implemented fully in line with our plans as part of the delayed coker construction in Nizhny Novgorod core long head – long lead equipment has already been installed. On-site pipeline installation and equipment staffing works are underway. The project is now over 70% complete. As part of the isomerization unit construction of the same refinery in Nizhny Novgorod, all the main equipment excluding compressors has already been delivered to the site. The installation work is in progress on equipment metal structures and process pipelines. The project is 60% complete. The bitumen production project at the Nizhny Novgorod refinery again successfully completed a main state environmental review for its oxidation unit. The main equipment has been supplied for the polymer bitumen binder production unit. We're now preparing to start construction. The deasphaltizing unit construction project at the Volgograd Refinery has seen the completion of foundation construction with the installation of tanks and pumping equipment currently at its final stage and existing allowing racks undergoing reinforcement. Installation of pipelines and electrical equipment continues underway. The project is 76% complete. Now let me briefly outline our financial performance compared to the fourth quarter of 2019. The key negative impact on the revenue came from declining hydrocarbon prices combined with reductions in oil product trading volumes and in international gas sales, revenue was supported by higher volumes of oil trading. As a result of these factors, revenue was down by about 13%. EBITDA declined by 46% to RUB151 billion. In addition to prices, there were three major factors impacting our EBITDA performance. The first one is the negative tax lag effect in Russia. The second factor is the inventory effect at our refineries, which traditionally plays a considerable role whenever prices fluctuate a lot within a quarter. And finally, the third factor is inventory write-down to the net realizable value, as it's the end of the quarter, which was only partially offset by hedging gains since we hedge only trading operations. This factor is part of change in crude oil and petroleum product inventory item included into the cost of purchased crude oil, gas and product line in the income statement. The aggregate write-down amounts to RUB92 billion, which includes RUB58 billion related to international trading offset with profit from hedging. EBITDA in the first quarter was supported by stronger refining margins and volumes and improved product slate along with reduction in operating and administrative expenses. In the first quarter, normalized EBITDA adjusted for rolling over and one-off accounting items to nearly RUB240 billion, which is more than 50% above the actual EBITDA for the period. The company posted a net loss for the quarter. The key drivers behind it, was the noncash impact from asset impairments which include several items. First, a loss on fixed assets impairment in the amount of RUB36 billion, second, loss on impairment of other noncurrent assets totaling RUB8 billion. These items are shown as part of other expenses line in the income statement. Third, write-down of deferred income tax assets in the amount of RUB13 billion reflected in the amount of income tax. This noncash effect in aggregate total of RUB57 billion, there of RUB49 billion related to our ISAB refinery in Italy. The impairment of ISAB stems from the downward model revision because of the actual effect of MARPOL turned different compared to expectations as at the end of last year. The second net loss driver was the noncash FX loss due to sharp devaluation of the Russian ruble to U.S. dollar and also to the year in March. Profit was also under pressure from higher depreciation charge, following the commissioning Phase three of the Vladimir Filanovsky Field at the Caspian Sea at the end of last year, along with an increase in cost recovery at the West Qurna-2 project in Iraq. The normalized level of profit, net of one-off and rolling out factors, totals around RUB100 billion. Despite the unfavorable market environment and capital expenditures almost on par with the fourth quarter of 2019, our free cash flow exceeded RUB55 billion. And driver behind the free cash flow performance was a reduction in the working capital associated mainly with lower oil prices. At the same time, inventories of crude oil and oil products increased by about two million tons in absolute terms for the quarter, which is expected to support our performance in future periods. Thank you. We are now ready to take your questions. Please go ahead.

[Operator:]

Thank you. [Operator Instruction] The first question comes from the English line and this comes from the line of Alex Comer from JPMorgan. Please go ahead.

[Alex Comer:]

Hi, thanks for taking my question. I’ve just got a couple of questions. In terms of the share buyback, what triggers would you look for to begin to do that in terms of the macro and maybe the share price? And secondly, in your downstream business, in terms of the retail component of that, could you give us an idea of maybe how much per barrel you make in the retail and what impact that's had and how you think that's going to pan out through the rest of the year? Thanks.

[Pavel Zhdanov:]

Pavel Zhdanov taking your questions. Starting with the buyback. Well, on numerous occasions we have explained it that our priority tool to distribute capital to the shareholders is dividends. That is after the new dividend policy was introduced last year, while buyback tool has become more opportunistic. As you are aware, we don't comment on the decision-making within the buyback program. We do have the program in place; we have funds allocated for that. And when opportunity presents itself, we will be happy to use this tool. Regarding our activities in the -- recently when we had the share price coming down drastically, that was very short-term fall. And in the circumstances of high turbulence in the global markets, we decided to prioritize high liquidity and financial sustainability of the company, especially given the commitments we have to pay dividends for the full year of 2019.

[Alexander Palivoda:]

Mr. Palivoda, taking the second question. Regarding profitability of our retail business, it's also quite volatile. Given the wholesale price also fluctuates very significantly, be it in Russia or in the global markets. Take me as an example, our margins in Russia was at a normal level. As to how the situation would unfold, it's very difficult to predict, given the very high volatility still present in the markets. Thank you.

[Operator:]

The next question is on the Russian line and this comes from the line of Alexander Burgansky from Renaissance Capital. Please go ahead.

[Alexander Burgansky:]

Good afternoon. Thank you for the presentation. I have two questions. First of all, the decline of 10,000 barrels a day of May that you have discussed. Is that 100% of your quota and you don't expect any further downward movement in June, or maybe cut your production in May by a larger or a smaller amount as compared to a quota? And my other question, can you comment on the fuel oil prices dynamics in the domestic market in Russia? In April, an excise data was introduced for fuel oil, but as I look at your numbers. And generally, it's the market statistics, many producers of fuel oil still sell it with no excise, because for some technical grounds they believe it's not considered to be fuel oil for the purposes of taxation. Now, can you explain, as far as your refineries are concerned, which share of your fuel oil is subject to the new excise duty and which is not? Thank you.

[Pavel Zhdanov:]

Thank you. Mr. Pavel Zhdanov speaking. We do have the quotas. And it's 310,000 barrels per day, which is our growth. We fully comply with that as of the 1st of May and intend to carry on as long as the quota exists. As to your second question is concerned, we don't have a comment for you upfront. We comply with the legal requirements. So if we have to pay an excise duty. We definitely pay that. So we'll get back with an answer to your question.

[Alexander Palivoda:]

Mr. Alexander Palivoda, taking this one. We'll get back to you, but again, it doesn't affect -- the excise duty doesn't affect our margin in downstream -- and in the upstream -- and the downstream. Thank you. Next question, please?

[Operator:]

Thank you. The next question is from the Russian line and this comes from the line of Igor Kuzmin from Morgan Stanley. Please go ahead.

[Igor Kuzmin:]

Thank you so much. I have a question about your expectations. What are your expectations of the working capital in the second quarter? It's more than two months of the lock down there. So it's more of two months of the second quarter that have passed already. The volatility is still high, but maybe you have observed some of the trends. Can you comment on the working capital dynamics, in the second quarter?

[Alexander Palivoda:]

Mr. Palivoda is taking floor. Hi everyone. Well, as far as the dynamics of the working capital is concerned, we don't think we can produce any specific numbers, at this point. As a general comment, I can say that the current market developments have demonstrated that we have trading business which fully benefits from the situation in the markets. We do observe an increase in inventories, when -- in the contango market, which enable us earning more money. But that would affect the dynamics of the working capital for the full quarter. And as to the scale of that working capital change and how long will it keep the position, I think we'll be able to do that when we report on the quarter results. Thank you. Next question please.

[Operator:]

Thank you. So the next question comes from the English line. And this comes from the line of Henri Patricot from UBS. Please go ahead.

[Henri Patricot:]

Yes, everyone. Thank you for the presentation. I have three questions please. The first one is on the CapEx guidance the new plan of RUB450 million to RUB500 million. I wanted to get a good sense of whether you feel, likely to be at the lower end of that guidance range? And what the time is that that range, RUB450 million be the base case? And then, if you're able to ramp up production a bit faster than you'd be closer to RUB500 million, just a bit more guidance around that would be helpful. And secondly on the upstream side, you have a sense of the, the timing of productivity around gas production in Uzbekistan? And if we can expect a ramp-up in the second half of the year? And finally on the downstream side of the business, would you expect you to be back at normal refining utilization, in the third quarter? Thank you.

[Alexander Palivoda:]

Can you repeat your third question?

[Henri Patricot:]

Yeah. The third question is on the refining business. And whether you expect to be back to normal refining utilization rates in the third quarter of this year, as demand recovers? Thank you.

[Alexander Palivoda:]

Thank you for your questions. Well, Mr. Palivoda taking the floor. I think we have shared it as part of the presentation a major effort has been ongoing to optimize our investment program and capital expenditures with the OPEC+ agreement, now in place. The guidance we have provided of RUB450 billion to RUB500 billion, we also focus on dynamic cost management, if I may put it this way. We'll try to be as flexible as possible, depending on how the market environment develops, in the second half of the year. If the oil price recovers sustainably, we'll be able to restart some of the investments. I believe your comment -- the comment you provided is fully justified if the economy goes weak, we'll be closer to the floor of this range and we'll be able to restart, if the environment is better. As to your second question, it's really hard to make any forecast because the situation is beyond our control. Just like I said during the presentation, if the production remains flat, it will be about seven billion cubic meters for the full year. And we believe -- we hope that this pessimistic scenario will not be implemented and it recovers.

[Alexander Palivoda:]

As far as the third question is concerned, Mr. Alexander Palivoda taking the floor, the cut in May of which I have just explained is related to the fact that a number of our refineries are now in scheduled repair and overhaul. Once they are completed, we would expect the capacity utilization to move up. The Nizhny Novgorod Refinery has started utilizing more capacities as of recent claim. But a lot depends on the actual refining margin. The markets are so volatile that it's rather problematic to give a precise forecast. So, we manage refining business and capacity utilization depending on the actual refining margins. As far as market access is concerned as a potential upside opportunity. Well, we have traditionally good access to the markets thanks to everyone trading arm. Next question please.

[Operator:]

Thank you. We currently have no questions in the queue. [Operator Instructions] And we do have another question from the Russian line. This comes from the line of Olga Danilenko from Prosperity. Please go ahead.

[Olga Danilenko:]

Good afternoon. Thank you for the presentation. I have three questions. One relates to gas production in Uzbekistan. Just to follow-up on my colleague could you please explain? The current production is less than the plan. Does that affect the PSA, the Production Sharing Agreement in any way for you to recover your costs? Would the terms be standard and such an Act of God or force majeure taken as is? My second question relates to your statistics. Maybe you can help me. Your statistics as at the end of May or in early June. The situation is so dynamic as you rightly put maybe you can share some numbers. Your sales at the filling stations in Russia or maybe in some of the European countries. Not just the full month of May I'm referring to, but rather the end of May so that we could compare that against the May of last year. My third question is about your normalized EBITDA. It would be very nice to see a breakdown across different business lines and also the full group. Do I get to challenge that most of the effects you're saying covering the gap between the actual EBITDA and normalized EBITDA is going to be recovered? Once the petroleum product prices and crude prices recover and the tax lag effect is no longer present? Thank you.

[Pavel Zhdanov:]

Mr. Pavel Zhdanov taking the floor to answer the floor to answer the first question. As far as Uzbekistan is concerned in cost recovery, obviously, the lower production volume and the lower price are going to affect the pace of recovery that we're supposed to recover under the PSA. That is going by the PSA if that's what you mean.

[Alexander Palivoda:]

Mr. Palivoda taking the floor to respond to the second question on retail sales. Just like I said end of May, we had about 80% sales as compared to a year ago. I think that's the most recent number we're happy to share on this call. In terms of the one-offs, yes that's true to a great degree. A lot who is going to depend on further crude dynamics, but the tax lag effect is starting to reverse when the oil price is up. So we're getting compensated for the margin lost, when we had the negative effect of the tax lag. And the inventories revaluation is an accounting exercise, which happens again when the prices go down significantly. Once the prices recover, and we sell the inventories at higher prices. That is supposed to come back to us as additional EBITDA. As far as the inventories at refineries are concerned, it's pretty much the same situation financially. Once oil prices go up then that is always different as compared to the product slate basket price and that reflects on the EBITDA. Everyone understands that, the drivers you have just mentioned as opposed to come back to us as additional EBITDA and be reversed to a great degree. Thank you next question please.

[Operator:]

Thank you. So the next question comes from the Russian line, and this comes from the line of Ildar Khaziev from HSBC. Please go ahead.

[Ildar Khaziev:]

Good afternoon. Thank you. I have a quick question on the upstream segment. You're saying, there was a negative effect from revaluation. Can – I'm a little bit surprised. It was not the case before. Can you please comment how this works in upstream – in downstream segment as to the upstream? Can you comment?

[Alexander Palivoda:]

You're quite right. On the upstream side, the effect is there albeit very small. We still mention that, because we factor it into the calculations. But in terms of materiality absolutely not material as compared to the same effect on the downstream side. Thank you. Next question please.

[Operator:]

The next question comes from the English line, and this comes from the line of Ildar Davletshin from Wood & Company. Please go ahead.

[Ildar Davletshin:]

Yes. Good afternoon, everyone. So I'd like to ask three quick questions, please. So, first on – just again on Uzbekistan. Could you clarify the stage of this PSA contract in the sense that, have you already recovered the full cost or not? And, how much is still pending? And in the current micro environment gas sales at in Uzbekistan are they profitable if micro environment doesn't change in the – that's the first question. And the second one, just maybe better – trying to better understand, how quickly you can bring your production back? Upstream production and whether you would face any extra costs? And then finally, just on the dividend. One of your core shareholders Mr. Fedun in an interview mentioned that some dividends paid to management maybe allocated to a special fund, if I understood him correctly. Could you explain if there are details on that? Does it mean that a total cash outflow out of LUKOIL will be less, or maybe it's like payment and kind that there will be new shares issued to management instead of cash dividend? Thank you.

[Alexander Palivoda:]

Thank you. Mr. Palivoda taking the call. As far as the Uzbekistan costs are concerned, in terms of recovered costs vis-à-vis the total cost. Total costs stood at US$9.9 billion, which includes administrative cost as well, so US$8 billion out of those -- about US$8 billion out of those have been recovered already. As far as production recovery, second question of yours, well, just as we mentioned during the presentation, we are prepared to ramp up production rather quickly. If the situation permits, we have already tested this approach and these methods in the previous production cuts agreements. In terms of the costs, I think, operating costs, we believe the operating cost will be minimal. We carefully selected the wells to be suspended so that they could be restarted again at the lowest cost. So capital expenditures would not be required, because we are targeting to maintain the production upside potential continuously. Your third question was about the, what the shareholders going to do with the dividends. Actually, yes, you're welcome to ask this question not to the company, but to the shareholders who are supposed to receive the dividends. However, we understand what particular comments in the meeting you're referred into. Well, you know, that the core shareholders invest a lot in Russia. Mr. Alekperov has a fund called Our Future, which has invested significantly very large amounts into the development of Russia and Russian regions. So as far as we understand the idea expressed by Mr. Fedun is to develop a more systemic approach from the shareholders and maybe join forces to set up a platform for the shareholders, which could potentially increase the scale and maximize the positive effect for the Russian economy. These projects would not be directly related with the core business of LUKOIL. So I think that's all I can say at this point in time, as Mr. Zhdanov done it. Next question, please

[Operator:]

Thank you. There are no further questions in the queue. So I'll hand back over to your host for any closing remarks.

[Alexander Palivoda:]

Thank you for taking part on the call and see you next time.

[Operator:]

Thank you for joining today's call. You may now disconnect your lines.