PJSC LUKOIL
Q4 2019 Earnings Call Transcript

Published: 11 Mar 2020

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the LUKOIL's Full Year 2019 Results Call. For the duration of the call, you'll be on listen only. However, at the end of the presentation, you will have the opportunity to ask questions. [Operator Instructions] I would like to inform you that questions from the press will not be accepted. I will now hand over to Pavel Zhdanov, Vice President of Finance, to begin today's conference. Thank you.

[Pavel Zhdanov:]

Good afternoon, ladies and gentlemen. Thank you very much for joining this call today, which is to disclose the results for 2019. Here I have President and CEO, Vagit Yusufovich Alekperov; and Mr. Alexander Matytsyn, First Vice President for Economics and Finance; First Vice President for Downstream, Mr. Vadim Vorobyev; our Senior Vice President for Upstream, Mr. Azat Shamsuarov; as well as representatives of various departments, good and accounting department. And we will start the presentation and proceed with a Q&A session afterwards. I'd like to draw your attention to the fact that the presentation contains forward-looking statements that are based on our estimates, assumptions, and expectations. No detailed information is presented on the slide. I would like to hand over to Vagit Alekperov, President and CEO of LUKOIL.

[Vagit Alekperov:]

Thank you, Pavel. Good afternoon, ladies and gentlemen. I realize that you are primarily focusing on the current situation, but I'll start with last year's results first. 2019 was the second year of executing our long-term strategy that we unveiled in early 2018. Despite the high volatility in the external environment, we delivered excellent results with new highs reached in some areas. Our operating results were ahead of the strategic targets. In particular, hydrocarbon production exceeded the minimum target by 2.5 times an average, even despite external limitations. In the refining segment, we were well ahead of the plan to reduce the output of high sulfur fuel oil, on the back of the hike and preferred volumes. We were able to achieve both a quantitative and a qualitative increase in all business segments. Most of it was organic. This result is fully in line with the core strategic goal of unlocking our existing potential. I would like to highlight significant progress LUKOIL is making in developing and scaling up efficient technological solutions in the upstream segment, which enables us to boost our reserves and production potential. We made great progress in our efforts to improve efficiency and optimize costs. Controllable costs per barrel decreased by 5% compared to 2017. As a result, many of our cost items went down to the 2016 level. We have also strengthened our capital reinvestment discipline. Thanks to our work in 2019, we achieved record high financial results, and most importantly, the return on capital of 13%. I consider this an excellent results, especially compared to our international peers. On top of that, thanks to conservative planning, we were able to maintain a very strong financial position, which makes us significantly flexible and allows us to move forward in the face of high price volatility. As you're well aware, we have always treated capital distribution to shareholders with utmost responsibility. Last year, we made an important decision on this matter, which was based on a detailed analysis of the external and internal factors. We introduced a comprehensive and efficient solution in the form of a new policy that envisions paying 100% of the free cash flow in dividends and the shift to party initiative share buybacks. This approach means higher returns for the shareholders and more flexibility for the company in terms of our reinvestment capacity, as well as a better capital structure and a balanced shareholder structure going forward. The new policy carries a strong advantage, such as the complete transparency of dividend calculations. For instance, based on last year's accounts, the estimated dividend amount stands at RUB542 per share. This is more than two times higher compared to 2018 dividends. As a reminder, in 2019, we also distributed a significant portion of the capital by buying back the shares. This was equivalent to dividends of over RUB350 per share. In other words, the total capital distribution for 2019 on a per share basis may reach nearly RUB900. The board of directors will decide on the recommended dividend amount in the second half of April. As the global and investment communities are becoming more conscious of sustainability issues, we make sure to keep our finger on the pulse and address any stakeholder concerns in a timely manner. I would like to emphasize that ever since LUKOIL's foundation, we have been exercising a systemic approach to managing sustainable development aspects and consistently improving our performance in this area. In particular, new functions recently delegated to the strategy and investment committee have since strengthened the board's role in sustainable development stewardship. The company implements targeted programs along a number of lines, which result in continuous improvement of key sustainability indicators. Some of the most important achievements of the recent years include a significant decrease in the number of workplace injuries among contracted personnel working at our facilities, as well as an increase in the use of associated petroleum gas to an all-time high of over 97%. LUKOIL is delivering excellent performance and combating climate change, one of the most important issues on the global agenda currently. Since 2016, we have reduced direct greenhouse gas emissions across our Russian assets by 3% or ahead of the target. As part of the forthcoming update of the long-term strategy, we plan to give a special attention to be placed on the climate issue. A few words on the current market developments. To begin with, it is yet too difficult to predict how prices will perform in the oil market. The market is currently driven by emotions, as no one has expected such drastic supply side changes. There is also another strong but hopefully temporary factor of the demand side in play, and that is the coronavirus outbreak. This is not the first time we see a drop in oil prices. In fact, we have got used to high volatility and have many years' experience of overcoming challenging times. Yet, we were able to keep free cash flow positive and continued robust development. Our resilience was supported by a whole range of internal and external factors. Furthermore, we have improved our operational performance significantly over the past years. Our net debt is close to zero today. We maintain rigorous control of costs, and have a highly flexible financial policy. All this makes us even more prepared for lower oil prices than we were five years ago, and I'm confident that we will be able to successfully make our way through the price cycle and aim to continue delivering sustainable business growth well into the future. Thank you. Now, I'd like to hand it over to Mr. Azat Shamsuarov, Senior Vice President for upstream.

[Azat Shamsuarov:]

Thank you, Vagit. Good afternoon, ladies and gentlemen. Over two years of implementing our upstream strategy, we have reached great results and exceeded our plans and expectations on almost all counts. As you know, since 2017 up until recently, we have been operating and external limitations on oil produced in Russia. Additionally, in 2019, we saw limitations in gas intake from Uzbekistan projects. Still, we managed to exceed our hydrocarbon production targets. For example, production growth in 2019, excluding the West Qurna-2 project, reached 1.4% versus the initially planned of 0.5% [ph]. Over the two years, our production increased thus by more than 5%, holding our value over volume, which is our core principle, we continue focusing on the priority products. The share of high margin battles in 2019 grew to 32%. This makes for an increase of more than 10 percentage points in two years. As a reminder, our strategy envisions reaching the 30% level only in 2020 by the end of 2020. In addition to better production next, we also achieved improvements in business efficiency through cost cutting, coupled with development and rollout of technologies. This combination of factors results in higher growth of the segment's financials, relative to the production growth rates. We were able to bring down the production decline at material West Siberia fields from 10% in 2016 to 2.5% in 2019. Were it's not for the external production limitation, the 2019 figure would have been even better. Originally, we planned to reach the rate of 2% to 3% no sooner than in 2020 and with no external limitations in place. As part of the strategy update, we will pay special attention to analyzing our material field opportunities, but it is rather clear already that there is significant potential to improve the production profile looking forward. This comes mainly on the back of the efficiency improvements already achieved through the scale-up of technologies and cost cutting. In 2019, we almost doubled the number of horizontal three-string wells, which significantly cuts our costs and makes them, on the average, 20% less expensive. On top of that, we were able to bring down the cost of drilling three-string wells by 8% compared to 2018. You may remember that we drilled the first basic multi-bore well back in 2018. By the end of 2019, 20 of such wells had been drilled. We continue working on removing technology-related restrictions in order to apply this solution on a wider scale. Compared to 2018, the number of small diameter wells went up by 1.5 times. These wells are 50% less expensive than standard directional wells. This year, we plan to double their number. This means that we will be rolling out such wells at a much higher rate to what was previously planned. We have also increased the share of complex wells in West Siberia to 44%, and by 11 percentage points compared to 2017. These wells are effective when it comes to highly complex deposits. The technology is being constantly refined, making the solution cheaper. For example, the cost of drilling multiple wells decreased by 4% year-on-year. It was achieved thanks to a 18% increase in the speed of drilling. In the future, the speed of new well construction will also be boosted through the rollout of batch drilling, which had been successfully piloted at several of their fields. They're actively developing digital technologies in production. The intelligent field concept that relies on integrated models is already being applied at 45 LUKOIL fields, and quite successfully, which account over one-fourth of our production volumes. The application of neural networks to manage production and flooding at the pilot sites of material fields has proven highly efficient. We plan to roll out this technology team. In addition, we're continuing to expand the use of energy efficient pumps, modern pumps, delivering more than 10% in electricity cost savings. By decreasing operating and capital expenditures, we unlock new opportunities to bring more reserves into production in an efficient manner. We implement targeted cost reduction programs, which makes us even more sustainable in price volatility environment. In a number of areas, we exceed even some of our more ambitious targets compared to the ones set out in the strategy back in -- set back in 2018. In particular, over a two-year period, we achieved an 8% decrease in per unit drilling costs. Construction costs remained flat compared to 2017, while the lifting costs decreased by 4%. We make use of an entire set of cost optimization tools, and in 2019, we decided to create a continuous improvement system that will bring an even sharper focus on enhancing efficiency. In 2019, we started the implementation of new development plans for the areas under the so-called TAI regime, which means tax on additional income; they cater to liquid hydrocarbon volumes produced at such areas during 2019 amounted to almost five million tons or 6% of our total output in Russia. The investments here exceeded RUB80 billion, which is almost 2x higher than the company's average on a per barrel basis. In 2020, we plan to ramp up our respective capital expenditures to over RUB50 billion. Compared to our plans before the introduction of the additional income tax, there will be almost RUB170 billion of additional investment in these projects over the next five years. The tax on additional income effect is most evident in the third group of projects. These are material fields in West Siberia. We increased drilling operations there by more than 20% already, with production having grown by over 7% compared to 2018. I would like to emphasize that we are far ahead of the production target with this third group. The tax on additional income scheme gives new life to our material fields, transforming them into growth drivers. Now, I shall move onto specific regions and projects. In the North Caspian, we have increased our production by 7% year-on-year through our continued development efforts at the Yuri Korchagin and Vladimir Filanovsky fields. In 2019, we launched phase three development at the Vladimir Filanovsky field, bringing our construction program there to a close. In 2019, five wells were drilled in the field. We plan on further drilling of the wells stock and maintaining an oil rate plateau of six million tons per year. We carried on with the drilling program on the Yuri Korchagin field. In 2019, we commissioned four production wells there and produced more than 20% above the 2018 volumes. They were able to accelerate the [indiscernible] for field development and form a [indiscernible] field, and we now plan to launch the production in 2022, which is one year ahead of plan. The ice-resistant stationary platform is already 35% complete. The platform for the living quarters is more than 60% complete now. This year, we plan to install offshore jackets for both platforms and lay the pipelines to the Vladimir Filanovsky field. A few words and our projects in the Baltic Sea. In May last year, we launched production at the D4 field. The field is being operated from the shore, with two horizontal wells more than 7.5 thousand meters in length each. This arrangement allows us to achieve much lower development costs and a much faster launch. As for the larger D33 field, our project design work is underway, with the final investment decision expected in the end of this year. They have been able to achieve significant volumes of production from hard to recover reserves, as the key fields produce production grade by 1.5 times over the two-year period. In particular, the high viscosity oil volumes increased by more than 40%. They're continuing to expand their infrastructure and production facilities to produce more high viscosity oil, and their oceans-grey [ph] field, we see potential to increase the plateau rate, as compared to the current target. Thanks to the new geological information and improved technology, our production at the largest low permeability fields increased by almost two times. Such an impressive result came on the back of the scale of both unique technology and individual approach to each well. Our successes in developing the [indiscernible] field in West Siberia with low permeability deserves special mention. In 2019, we increased oil production there by more than 1.5 times to 300,000 tons with more untapped potential still ahead. In 2019, we continued working on transferring our tight oil reserves to a category where investment incentives apply. By the end of the year, we transferred over 47 million tons of reserves, which is 2 times more than in 2018. In 2019, local share of gas production is Uzbekistan raised by 7% year-on-year to 14 billion cubic meters. The second quarter of 2019 saw limitations in gas intake from the Gissar project by the short-term gas processing plant, as a result of unscheduled repairs. The production at Gissar was back to the target level in the fourth quarter of 2019, and we're able to offset the shed losses at Gissar with additional volumes from Kandym. In Uzbekistan, we aim to preserve the current plateau rate, optimize maintenance capital expenditures, and assess the oil and gas bearing capacity of new investment blocks in the north of the Republic. In 2019, we acquired stakes in the Marine 12 project in the Republic of Congo, and the Ghasha project in the UAE. These acquisitions are fully in line with our M&A strategy. The project's based explored reserves and substantial production potential, while also fitting our technological expertise. For Marine 12, production is already underway onto two fields. The current rate is approximately 40,000 barrels of oil equivalent per day. We have recently launched the second phase of Nannine development that includes the construction of a wellhead platform and drilling of seven production wells. The preliminary design work for the third phase is already underway. To finish my presentation, I'd like to mention our success in overseas exploration projects. At the end of 2019, we drilled the first exploration well at Block 10 in the Gulf of Mexico, which resulted in the discovery of an oilfield, whose geological reserves, according to preliminary estimates, amounted to 200 million barrels. Thank you, I would like to hand over to Mr. Vadim Vorobyev, First Vice President for downstream.

[Vadim Vorobyev:]

Thank you, Azat. Good afternoon, ladies and gentlemen. The downstream segments not only markedly contributes to the company's free cash value, but also, it is an important factor of sustainability that cause financial results during high volatile times. The high level of vertical integration and high quality of our downstream assets give a huge advantage to the company during the periods of oil price weakness. As a reminder, our strategy in the refining segment covers three key areas. First, it is ongoing efficiency improvement at all our existing facilities, and optimization of maintenance CapEx. The second area includes selective projects to improve the production slate. The third area focuses on petrochemicals production using our own feedstock. Let me start with our performance in the first area. In 2019, the refining throughput of services rose by more than 2%. The growth was somewhat below our guidance, as we optimized capacity utilization at our refineries throughout the year in response to the market environment to maximize our financial result. And the same time, we were ahead of our targets in terms of improving the product slate, with the light product yield going up by two percentage points year-on-year. Here, I would like to stress that with a set of measures we had carefully developed in advance, the company was able to reduce the yield of high sulfur fuel oil to a record low of 8% by the end of 2019. This helped to mitigate the negative impact that refining margins felt from the worsening spreads for high sulfur fuel oil. As compared to 2017, total output to fuel oil declined by more than 1.5 million tons. Efficient refining is our key priority. We are committed to reducing costs and optimizing processes in order to enhance the free cash flow. All of our refineries have three-year operational efficiency roadmaps in place, which are updated on an annual basis. They include a range of comprehensive operational measures that either require zero investments or very short payback periods. Over two years, these initiatives produced and affected more than RUB62 billion. This amount, over RUB10 billion, comes from cost savings. This is strongly above our expectations. In 2019, two of our refineries underwent a holistic review by external experts to identify additional opportunities for efficiency enhancements. This translated into a range of measures that had not been covered by any earlier roadmap. We are planning to have the initiatives rolled out across the groups, other refineries, and expect these efforts to deliver a sizable additional impact. On top of that, in 2019, we embarked on 23 pilot projects as part of the digitalization program. At our refineries, the most successful projects will also be rolled out, and are expected to deliver further upturn and efficiency. As part of the strategy's second area, we keep implementing selected projects at our plants. The construction of a delayed coke unit in [indiscernible] is now 60% complete. Pipeline installation and equipment hookup works are underway. More than 70% of the equipment has been delivered to the site. The largest of our selected projects, it is designed to drastically reduce the output of fuel oil and increase the yield of light products. At the same refinery we're continuing -- we are constructing an isomerization units to increase the output of high-quality gasoline. The project is now 60% complete. The two other projects focus on developing our premium business is our bitumen expansion plans at the Nizhny Novgorod refinery will help us to deliver on our strategy for the bitumen production. The result will be improved quality and output, including those of polymer modified bitumen products. WE successfully completed a state environmental review for this project, with part of the process equipment already delivered to the site. The DSL tithing unit at the Volgograd refinery will contribute to improve quality of lubricants and reduce production costs. The project completion rate has now exceeded 40%, with more than 40 units of equipment already installed and act reinforcements and installation currently ongoing. Given the impact of marked fall [ph] on price spreads, reducing fuel oil output is really important. The market is searching for a state of balance currently, with a new equilibrium levels hard to forecast as yet. On our part, we're doing everything we can to optimize the product slate and secure additional benefits from the current market conditions. As one example, last year, our Volgograd refinery started producing marine fuel with naught point 5% sulfur content, its annual capacity standing at up to 1 million tons. In 2020, we expect to deliver fuel oil output at a level of below 8%, which is better than our last year's guidance, thanks to additional measures that we have been taking. The launch of the delayed coke in Nizhny Novgorod will bring their fuel oil yield down to below 4% by 2022, which translates to less than 3 million tons of fuel oil annually. Given that some of our refineries will continue processing purchased fuel oil, which will take their balance now production volume even lower. As part of our strategy to produce petrochemicals at the refineries using our own feedstock, we have made considerable progress in terms of design potential projects. Our focus is on projects that produce polypropylene at the Nizhny Novgorod refinery and at the refinery in Bulgaria. These projects and now at the feed stage. These are based on the propylene fraction coming from the catalytic cracking units. Also, feasibility study on styrene production at the refinery in Nizhny Novgorod has been completed. The project relies on ethylene produced from fuel gas containing catalytic cracking units and benzene from the reforming unit. We continued exploring potential for the firm refinery, where we see the greatest synergies. We have a number of strong competitive advantages enabling us to go ahead with petrochemical projects, and our key goal at present is to analyze everything as carefully as possible, above all, marketing risks amid an ever-increasing level of global competition. Now, let's move to our product sales. In the retail segment, the focus of our strategy is on improving efficiency and maximizing the free cash flow. We continue optimizing and upgrading our chain of filling stations with an emphasis on the geography and format of the stations, but increasing the share of filling stations with non-field marketing space in the most attractive locations, while reducing the number of low margin outlets. Work is ongoing to enhance efficiency and cut down on the per unit costs. Sales of non-fuel goods and services are demonstrating a double-digit growth. Two years after the strategy was launched, the gross profit from the business has risen by almost one-third, already covering over 40% of operating expenses at our filling stations with non-fuel marketing space. I would like to specifically highlight our achievements in optimizing motor fuel logistics. In 2017, we started exporting diesel fuel from the Volgograd refinery, and supplying gasoline from the refinery Nizhny Novgorod to the Moscow area, using new trunk petroleum product pipelines of Transneft. In 2019, these supplies came close to 6 million tons, which is more than a 20% increase above 2018. Using data on logistic crates provides us with considerable savings in terms of transportation expenses. We successfully continued with our strategy in aircraft refueling and marine bunkering, which is aimed at maintaining our market share, while also increasing sales to end customers and improving efficiency. Over the past two years, we managed to grow volumes of high margin into plane refueling by 16%, including as a result of stronger presence in Russian airports. In marine bunkering, we're in line with our strategy to maintain our market share and also increase sales volumes in their high-margin retail channel. We see strong growth of our business of lubricants production and sales. Over the past two years, sales of our high value added lubricants range increased by more than 20%. As part of the business development last year, we scaled up our production by launching a new plant in Kazakhstan with a capacity of 100,000 tons. This is a major milestone towards expanding our sales geography to the Asian market. In this area, 2019, we won a tender for service sales for Volkswagen and became the supplier of first sale for Daimler in China. We continue developing the strong potential of our [indiscernible] modified bitumen business. Here we are establishing the entire supply chain from production to end consumers. Last year, sales of bitumen to the very building industry grew by 1.5 times. Our total bitumen sales were close to 1 million tons, which is a 15% increase year-on-year. Thank you. Now, I would like to hand over to Mr. Alexander Matytsyn, First Vice President for Economics and Finance.

[Alexander Matytsyn:]

Thank you, Vadim. Good afternoon, ladies and gentlemen. In 2019, the macroeconomic environment was less favorable for the company's financial performance than the year earlier. A decline in average annual oil prices was only partially offset by the weaker variable. Also, the past year delivered one of the decade's worst results in refining margins, falling lower gasoline spreads, and the plunge in spreads for fuel oil at the end of the year. Additional pressure on refining margins in Russia came from increased excise rates for petroleum products. The fourth quarter was also relatively unfavorable in terms of macroeconomics, as oil prices and refining margins were going down, while the rubble was getting stronger. Despite the weak market environment, we delivered record-breaking financial tombs [ph] in 2019. This was driven entirely by business related factors, including better metrics in terms of volumes and quality, strong vertical integration, and strict cost discipline. In terms of key financial metrics, we were ahead of many of our competitors. This enabled us to solidify our leadership and efficiency compared to Russian companies, and to considerably outperform a lot of majors. Our free cash flow per barrel exceeded $12, which is a new all-time high. This is the best evidence that have focus on business development and efficiency improvement is paying off. Now, let me talk in greater detail about our 2019 financial results. The impacts of prices and revenue from oil sales was almost fully offset by growing volumes of production and global trading. Revenue from gas sales went up significantly, as a result of increased production and high prices. Revenue from oil product sales declined on the back of lower prices and global markets, along with reduced trading volumes. As a result, total revenue was down by 2% year-on-year. This reduction in revenue was offset by the rubble devaluation. We are delivering a strong performance in cost optimization and control, as I said earlier. We have been stating previously, these efforts are our priority and the key tool to implement our strategy. You may remember that two years ago, we carried out a detailed review of the core expense items under our control, and developed and launched initiatives to improve efficiency. At the outset, our goal was to contain cost growth within inflation. But a year ago, we focused on a more ambitious objective of keeping the costs flat. Our actual results turned out to be even better than the revised targets. Conditionally controllable operating and administrative expenses per barrel went down by 5%, compared to 2017 in nominal terms, and by 12% in real terms. This means that in 2019, actual savings versus the scenario of cost growth in line with inflation exceeded RUB50 billion. Importantly, this amount does not include the effect of CapEx optimization, where we have also delivered some very strong results. Let me stress here that the efficiency improvement and cost savings not only helped grow the company's current free cash flow, but also opened up new investment opportunities in the Russian upstream segment. We plan to continue these very important efforts, and as Mr. Vagit Alekperov said, we will be conducting an additional review of this area when updating our strategy. In 2019, EBITDA reached a record high of RUB1.2 trillion, going up by 12% year-on-year. The strongest contributor to EBITDA record was the downstream segment industry, driven by higher refining volumes, improved product slate, and better results in the sales segment. Despite lower refining margins, downstream EBITDA outside of Russia improved on the back of their high trading margin, positive effect of inventories and refineries, and high refining volumes, and improved production slate. The EBITDA in the upstream segment went up, despite weaker oil prices. In Russia, the growth is attributable to a larger share of high-margin barrels and the structure of production, introduction of the additional income tax, and the ruble devaluation stronger. Upstream EBITDA outside of Russia is due to high volumes of natural gas production. Net profit went up by 4% in 2019 to RUB646 billion. The increase is driven by strong EBITDA, and was constrained by high depreciation on the back of production capacities commissioned in the Caspian Sea and Uzbekistan, and also IFRS16 transition. Another constraint was the reduction in non-cash foreign exchange gains, which is due to both FX rate evolution and changes in the net monetary position in foreign currency. We're also committed to stringent investment discipline and engaged in ongoing optimization of our capital expenditures. Compared to 2018, capital expenditures stayed almost flat at RUB450 billion. In the upstream segment, lower expenditures in Uzbekistan and the Caspian Sea, following the completion of the main construction rigs, were offset by rising investments in the West Siberia as a result of the additional income tax introduction and increased drilling operations at material fields. In the downstream segment, capital expenditures remained virtually unchanged year-on-year. The construction of a delayed coke in Nizhny Novgorod remains our largest project. The share of upstream segments and capital expenditures totaled 80% for 2019, with a share of expenditures in Russia exceeding 80% as well, and that is generally in line with our strategic targets. The 2019 free cash flow exceeded RUB 700 billion or $10 billion U.S. This is an all-time high for LUKOIL. This was made possible by our unwavering focus on capital discipline that does not in any way compromise the financing for business development. Our investment needs fully are covered in line with strategic objectives, but always taking into account the OPEC plus restrictions and their external limits on production would mean a larger investment program and a smaller free cash flow. Let me also point out that in 2019, we fully honored our capital distribution commitments to our shareholders, in line with the previous policy. And dividends for 2019 are now regulated by the new policy taking into account that all in 2019, a considerable amount of capital was distributed through a share buyback program, a major decision we made as part of reviewing our capital distribution policies that transmit transition to debt financing for our asset acquisition deals. This move will help further improve the company's capital structure. I would like to talk more specifically about the buyback. As you know, we have a program for $3 billion, the new capital distribution policy provides for opportunistic buyback, we consider that as an opportunistic instrument and while making the decision we take into account not only the share price proper, but also it's ratios with a number of factors. We understand the importance of dividends for the shareholders and given the market environment today, we decided on the possibility to do a buyback with the help of debt which would enable us not to reduce the dividend. The market environment today is very similar to Q1 2017, same oil price, same FX, and same delayed effect from the tax lag. Please be reminded that our free cash flow was positive at about RUB40 billion. And as usual, our performance is supported by a strong vertical integration largely ruble denominated costs, progressive tax rates and the high operational and financial flexibility. What is more, we have improved our operational performance significantly over the past years, we have already began to take in necessary measures to adapt effectively to the new conditions. And amidst high price volatility, I would like to draw your attention to the fact that low close years denominated free cash flow is equally sensitive to changes in the oil price or the exchange rate; this is attributable to a large share of ruble denominated costs, both capital and operating, and does not account for any potential CapEx optimization that we might perform in this market environment. At present, our balance sheet is very strong. As of the end of the year, total debt stands at RUB550 billion while net debt is close to zero. A little leverage in the current macro environment is a priceless advantage that gives us more flexibility in decision-making. Thank you. Now, I would like to hand it over to Pavel Zhdanov.

[Pavel Zhdanov:]

Thank you, Alexander. At the end of our presentation today, let me talk briefly about our plans for 2020. In hydrocarbon productions, we are predicting growth of up to 1%, and refining volumes increase up to 3% but the actual performance will depend on the market environment. Capital expenditures extends upto RUB550 billion, that's the base case excluding worst corona [ph] scenario. This is based on RUB65 per $1, we're going to try to fit in to that limit, optimizing the CapEx if required. Before we proceed to the question-and-answer session, I would like to once again highlight the key strengths of LUKOIL's investment story, equity story. We combined the best features of both, Russian and international oil companies, namely low cost strict investment discipline, focused on efficiency enhancement, balanced and clear policy for capital distribution, high level of transparency and a strong corporate governance standards. We've benefited from extensive reserves and the quality and material refining capacities, and we aim to grow organically with a focus on Russia. Now key objective is to deliver shareholder value in a big challenging market environment of today, an important advantage of -- I recall as high resilience, thanks to low debt and flexible financial policy. And we also focused on Russia and a have high degree of vertical integration with natural hedging mechanisms in Russia; that boosts our resilience as well. Thank you. We are ready to start with the Q&A session. And please, if you have several questions; please ask those questions one after another, so we have an opportunity to answer each of them. If some have -- some of you have technical questions in our financial accounts, or if you don't have enough time during the conference call today, please direct the question to the IR department and we'll be happy to answer them as soon as today. Now we're ready to take your questions now.

[Operator:]

[Operator Instructions] The first question comes from the Russian line and it's from Igor Kuzmin from Morgan Stanley. Igor, your line is now open.

[Igor Kuzmin:]

Good afternoon. I have two questions. [Foreign Language] Thank you. Considering your oil price scenarios, we would like to ask the following; looking up several months into 2020, should the oil price standard, $35 to $40 per barrel, how would that change your CapEx guidance? You suggested RUB550 billion proceeding from RUB66 per dollar. I would assume so, what would your oil price guidance or oil price assumption be part of that CapEx guidance? And my second question is related to that; what would be your upstream production guidance in the following scenario? Thank you.

[Pavel Zhdanov:]

Igor, thank you for the question. Pavel Zhdanov speaking. I think I mentioned that as part of my answer. Our guidance is up to RUB550 billion at the rate of -- exchange rate of RUB65 to $1. So should there be any change in the macro environment, we'll try to fit within the RUB550 billion by optimizing our CapEx. Considering production guidance is upto 1% growth in production under the base case, and the oil price is not going to affect that guidance in this year.

[Operator:]

Next question is from the Russian side, and it comes from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

[Foreign Language] Thank you for the opportunity to ask questions. I have a couple of those. And let me ask those upfront. My first question relates to your early OPEC plus deal which failed to be extended. What's your attitude to that as a private company, given that some of the members of OPEC, say Saudi Arabia for once, have decided to increase their production output? Would you have to follow suit as well, should all the industry in Russia decide to hike production or would you have flexibility in your strategy? My second question relates to your share buyback program; you mentioned $3 billion in total, would that cover upto 2022? And whether you're going to provide any more insight to that?

[Vagit Alekperov:]

My first answer is on the OPEC plus transaction. Mr. Alekperov speaking. Myself and LUKOIL stood for the deal to be extended, both decisions are made at a very senior level. Tomorrow I'm going to participate in a meeting with a minister and I'm going to deliver our opinion. I'm convinced of that, in an environment like today, with the coronavirus present and problems with the Chinese economy, the oil producing countries must coordinate their efforts. So, hopefully on March 15, the OPEC Committee is going to meet and find a mutually acceptable solution that would enable stabilizing the prices in the whole market. As far as your second question on buyback is concerned, we're not entitled to comment on that. Say, at this point, I wouldn't dwell in detail upon the future transactions. Thank you.

[Operator:]

The next question comes from the Russian side. Karen Estonian [ph] from Bank of America. Karen [ph], your line is now open.

[Unidentified Analyst:]

[Foreign Language] I'm sorry, can you please repeat your answer concerning the guidance and production for 2020? Unfortunately, the translations overlapped the original and that is a very important question. We'd like to hear your answer.

[Vagit Alekperov:]

Colleagues, we are taking a five minutes break in order to resolve some technical glitches. We're going to reboot the system, and we'll come back to you in five minutes time. Please remain on the line. I am testing the English line, testing the English line. Testing the English line. So, colleagues we're ready to carry on. Well, unfortunately, we didn't hear the last question. So could you please repeat that last question by Karen Estonian [ph]? Please go ahead, sir. Yes, that's the case.

[Unidentified Analyst:]

Now, I would like to repeat [indiscernible] because means a question about your 2020 CapEx. Any plan to change the 2020 CapEx guidance given the low pricing environment of today? Since I wasn't able to hear the answer, could you please repeat your answer as well?

[Vagit Alekperov:]

[Foreign Language] Karen, I hope my third attempt to answer this question will make it. So our CapEx guidance for 2020 is upto RUB550 billion excluding West Qurna project. That is based on RUB65 per $1 should the rubble be weaker, we are still trying to fit within the same limit by optimizing the CapEx scope. Okay, thank you. [Call ends abruptly]