PJSC LUKOIL
Q3 2019 Earnings Call Transcript

Published: 27 Nov 2019

[Operator:]

Good afternoon ladies and gentlemen and welcome to LUKOIL's Third Quarter and Nine Months 2019 Results Conference Call. My name is Seth and will be the coordinator for today's conference. For the duration of the call, you will 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 you over to Alexander Palivoda, Head of Investor Relations to begin today's conference. Thank you.

[Alexander Palivoda:]

Thank you very much and good afternoon ladies and gentlemen. Thank you for joining us today for this conference call on LUKOIL's results for the third quarter and first nine months of 2019. On today's call we have Mr. Alexander Matytsyn, our CFO; Mr. Pavel Zhdanov, Vice President for Corporate Development and Investor Relations; and our colleagues from accounting. Before we go about our presentation like traditionally I would like to draw your attention to the fact that certain statements during this call will be forward-looking statements which is related to various risks and uncertainties and other factors as a result of which the actual performance results may tangibly defer from the statements heard and more detailed information you can find on the slides. Now let me pass the floor over to Alexander Matytsyn.

[Alexander Matytsyn:]

Thank you, Alexander. Good afternoon ladies and gentlemen. Despite the decrease in oil prices our performance remains strong. This was especially evident in the third quarter which saw EBITDA and free cash flow before changes in working capital stay flat amid a 17% drop in oil prices and slightly appreciated rubles at this tightened time. The free cash flow and EBITDA before changes in the working remained at the same level. An important role is played here by vertically integrated business model of the company, the high discipline in capital allocation as well as our continuous work to improve efficiency and business development. The hydrocarbon production continues to grow despite external limitations in terms of production of oil in Russia compared to nine months of last year this growth was almost 2% through the development of our gas projects. The production structure is improving ahead of our plans. The share of high marginal barrels in our production reached 31%, thanks to a successful development of growth projects as well as introduction of the energy tax at the beginning of next year. The amount of refining grew compared to nine months last year by 3% including because of almost 7% growth quarter-on-quarter which enabled us to achieve the maximum profit in terms of the refining margin growth. We also continued to improve our product basket. The output of liner products grew and down to the record level we decreased the production of fuel oil in the development of the premium. Sales channels continued to achieve results about macroeconomics. All ratings to remain volatile in terms of the greater risks in terms of the slowdown in the demand of oil will continue to depress oil prices. Compared to nine months in 2018 the decline in oil prices was by more than a half compensated by the ruble devaluation. In the quarter big charges were positive because the exchange rate almost didn't respond to the oil prices going down. The crack spread and for the middle distillates, the last two the refining margin grown compared to the second quarter this year. And I would like at the same time to note that there is a high level of uncertainty remaining with respect to the marked fall effect upon the price spreads, specifically at current times we see [indiscernible] spreads for the high-sulfur fuel oil without improving the spreads for the middle distillates. We are very mindful of this situation and undertaken necessary activities to expediently manage the product basket and further reduction of the high-sulfur method. Despite the decline of oil prices compared to the second quarter the EBITDA actually didn’t change. The decline in profitability in upstream in greater ways was compensated by the EBITDA growth in downstream. Compared to nine months in 2018 the downstream segment became the main driver behind growth and EBITDA, including the cost of high-quality of our refining capacities. At the same time, the EBITDA within the upstream segment demonstrated the high sustainability towards the oil price declines thanks to the growing output, improvement of the structure, and reducing the average cost for recovering. The decline of our cost is the result of the [indiscernible] program aimed at improving our efficiency. Apart from production costs, our drilling and refining costs also went down as well as G&A. Almost all line items within the costs at least that we control are at the level or below the level of 2016, which points to a high efficiency of activities we are undertaking. I would separately note the dynamics of the free cash flow, which is the core high level KPI of the company, which affects the compensation of the management. This particular figure grew almost 1.5 times compared to the level of nine months in 2018 amounting to RUB517 billion or U.S.$8 billion because the dynamics are very strong. Growth is almost by 30% incremental. We are maintaining very stable energy efficiency compared not only to the Russian oil companies but notably are above some international peers. The free cash flow on per barrel recovery in third quarter is where we set an absolute record in the history of the company which was $15 per barrel. Invariably we are trying to achieve improving not only our financial operations, but also the standard of corporate governance to comply with the best sector in practices. New principals of the capital return which have been endorsed by the Board of Directors in the middle of October, let me remind you, that these new principles issue switching to opportunistic buyback of shares and allocating almost 100% of the adjusted cash flow towards the payment of dividends. This kind of an approach enables one to considerably increase payments to shareholders without restricting the investment potential of the company. Yesterday the Strategy Committee of the Board of Directors considered the new draft of the dividend policy regiment which is based upon these new principals. This issue has been included into the Agenda of the Board of Directors meeting which is planned for December 12th. As you may know these principles have already been applied when coming with the recommendation of an interim dividend payment for 2019 which is going to be discussed and endorsed at the forthcoming shareholder meeting. The advantage of the new principles is an absolute transparency of calculations. Another quarter comes by and you can comfort yourself [ph] have much dividends year will be due. For example the third quarter is RUB120 per share, so in nine months this is already a RUB312 and this particular figure is very close to the current market consensus guidance for the whole of the dividend covering this year. In the fourth quarter we also intend to come up with a free cash flow outcome. Similarly I would like to draw your attention to the fact that 2019 is a transitional year since in the course of the year RUB244 billion have been allocated towards the share buyback. According to the new principles this particular amount is deducted when estimating the dividend payment without the buybacks these dividends would have been much higher. So the difference is more than RUB350 per share. Meaning to say that the dividend yield of the company's shares adjusted by buying back within nine months of 2019 amounts to 11%, which is comfortably higher than many of our competitors can demonstrate. And this value is going to be top by the results of the fourth quarter. One should also remember that this business is continuously growing. On top of the high dividends to-date, our shareholders are also enjoying much higher cash flow in the future, meaning to say that the total yield comes up to be much higher. So that is why we believe that the current LUKOIL share prices is considerably below the fair level and we hope that the market will appreciate the efforts of the company including the recent changes in the capital return policy. On our side we will continue to work to implement our long term strategy aimed at raising the share level of the company. Thank you very much. Let me pass the microphone over to Pavel Zhdanov.

[Pavel Zhdanov:]

Thank you, Alexander, and good afternoon ladies and gentlemen. Let me tell you about the upstream segment results. In the third quarter we encountered worsening of the market environment which negatively affected the results of our streams, the average euro [ph] price when down by 11% compared to Q2 of the current year. At the same time the average exchange rate of the ruble didn’t change, but the negative effect in terms of the tax time lag. As a result the average oil net price went down by 9% compared to the previous quarter. Compared to the nine months in 2018 the environment in Nemex was a bit better because the decline of the oil price by 9% was due to a much extent compensated for by the ruble devaluation as a result of the old price net went down by 4% only. The average daily production of hydrocarbon without taking into account the West Qurna-2 within nine months in 2019 amounted to 2.3 million barrels a day which is 1.6% higher compared to the similar period in 2018. The production growth primarily is the results of international gas project development as well as a slight oil production hike in Russia because of the changes of the OPEC+ conditions during the course of 2018. Let me remind you, that because of OPEC OPEC+ we were forced to reduce the oil production in Russia in the beginning of 2019 which negatively affected our total production increase. Against the external restrictions, our continuous aiming for the improving of the structure of the production remains to be valid. So compared to the first nine months in 2019 our new projects and the track [ph] reserves grew by 10% and 13% respectively. As a result of the high-marginal battle share in the total hydrocarbon output increased by 5 percentage points exceeding 31%. The additional contribution into improving this indicator was the launching of the energy tax regime in the beginning of this year. The EBITDA within the upstream segment demonstrated a mixed kind of dynamics the decline in Russia year-on-year and quarter-on-quarter is related to market parameters worsening, at the same time one should note quite a moderate reduction EBITDA in Russia compared to nine months of 2018 which amounted to a little bit over 2%. Such good dynamics compared to the oil price dynamics is brought about to greater volumes of oil production and its improved structure. Oversees the effect from the oil production and the oil prices going up for gas compensated for the negative oil price declines as a result EBITDA in our overseas projects grew compared to the nine months in 2018 by 13% while the inter-quarter growth was at 2% level. The deterring factor was the decline of EBITDA in our rocky project which is the West Qurna-2 because of the capital investment being reduced. We continue to successfully operate within our assets as part of the windfall profit tax the aggregate production of oil in our nine licensed areas included into this particular regime as a result of nine months this year was 3.5 million tonnes or 6% from our total production of liquid hydrocarbons in Russia. The capital spend in this particularly licensed area totaled exceeded RUB24 billion. The intensity of these capital investments, I mean the [indiscernible] of the spending per barrel at the current output is twice as high as the average one for the company we are actively bringing into the development the previously unprofitable reserves, specifically in terms of the key group or they went from tax within the material fields in Western Siberia, we increased our daily drilling rate by 31% [ph], while the oil production grew by 7% compared to nine months of 2018. At the same time, I would like to note, that we have considerably advancing in terms of ahead of our plan for this time of the year. So the even the tax rate, the new life for the Brownfield's provides them with a transportation - transformation and raise the traction in terms of capital investments into them. Now specifically about the regions and projects. In the Western Siberia, we continue to effectively manage our output volumes based on the external limitations as part of OPEC+ deal. In the first quarter of this year we have reduced the drilling volumes of the amount of optimization to reduce the production of our oil in Russia down to this level. Starting from Q2 we have been gaining our output in order to go back to the normal daily rate of drilling in our production to maintain the Brownfield output as well as to develop our Green projects and the windfall [ph] tax assets. We continue to improve the efficiency and the development of the technology. Specifically we're actively involving the horizontal wells in the 3-tier structures, the number of such wells have doubled compared to 2018. In the North Caspian we have grown our oil output 9% year-on-year. Thanks to the further completion of the Korchagin and Vladimir Filanovsky fields. A slight decline of the production in this region in Q3 was related to a planned maintenance at the Caspian fields combined with planned maintenance in the rated assets. In June, as part of the third phase of the Filanovsky field we have completed the super structure of the conductor facility at the previously installed foundation. In August we started drilling the first well by using the floating rig. In November we started producing from the new well which are the two wells with a smart completion with the starting recovery almost 1000 tonnes of oil a day. The conductor block enables to bring into the production the western part of the field and to provide for maintaining that output at the designed level, which is 6 million tonnes a year. We similarly continued our drilling program for the second stage of the Korchagin field. In the third quarter the block conductor at that particularly field we have launched a new horizontal well. Within nine months of the current year the oil production at that particular field grew by 22% compared to similar period last year. Well then the program of completion of the Grayfer field, which is former Rakushechnoye, at the wash there is an ice ascending [ph] standup platform as well as the dormitory and to the arctic corridor. Based on the end of the third quarter, the construction readiness of that particular platform is about 25%, and as far as the residential module 50%. In the third quarter we have concluded contracts for the marine operations and the laying of the marine pipelines. Let me remind you that that field is going to utilize the infrastructure with the Filanovsky field. And as far as the high viscosity oil production projects in Timan-Pechora part of the Yaregskoye field development, the carbon layers of the Usinskoye field we were able to increase production by 18% compared to nine months in 2018. We continue to expand the infrastructure and operational facilities which provide for further production growth. As a result, based on the results of the nine months, at these fields we have launched new steam generating capacities as well as completed the assemble and installation work for the second lines of the Yaregskoye [ph] pipeline. I would separately note that our successes in achieving the output production with low probability which there was in Western Siberia at the Imilorskoye field from the beginning of the year we have commissioned operations seven to eight oil production and 17 injection wells. The production growth was 4% to 6% compared to nine months of the 2018 year. At the Vinogradov field, the production growth throughout the similar period was 30%. Since the beginning of the year at that particular field we have commissioned operation 21 wells. Towards the end of the year it will be 34 production wells that we will commission. And as far as the production of the gas overseas is concerned, in Uzbekistan within nine months of 2019 production grew up to 10 billion cubic meters as LUKOIL's share which is 9% greater than the similar period last year. In Q3, we still were living with the limitations in terms of the gas intakes in [indiscernible] from the [indiscernible] gas processing plant which belongs to Uzbekneftegaz and to treat the gas to commercial condition. At that plant we have conducted maintenance work, which in October enabled us to bring back the Gissar production to the design level. Based on the results of the third quarter the average gas production at the Gissar project grew by 7% quarter-on-quarter. The production with the Kandym project in October also regained its design level after slight decline following maintenance work. So throughout the full-year in Uzbekistan we expect the production of more than 14 million cubic meters is our share. Let me now pass the floor over to Alexander Palivoda.

[Alexander Palivoda:]

Thank you, Alexander. I will tell you about the downstream segment results. In Q3 we have witnessed further improving environment in refining after a very weak first quarter. The benchmark margin in Europe grew by 24% quarter-on-quarter which was assisted by a notable growth of crack spread for middle distillates specifically for diesel fuel. The Russian benchmark margin was following suit of the European one. In Q3 the average daily refining throughput at our refineries considerably grew compared to the previous quarter being at about 7%. And that was related both to the plant maintenance in the second quarter in a number of our refineries, as well as with the additional loading of capacities against a favorable environment. Compared to the nine months in 2018, the amount of refining grew by 3%. At the same time, the biggest contribution was made from the Russian refineries, thanks to the additional loading of the Nizhny Novgorod refinery. The overseas refineries grew refining throughput growth 2% year-on-year against the greater volumes going towards the Bulgarian refinery. After the maintenance program completed in 2018 the output of the lighter products in Q3 at the Russian refineries grew by 2 percentage points compared to the previous quarter. And this growth was conditioned by the maintenance downside at the Perm refinery during second quarter as well as the optimization of various installations being operated at the Nizhny Novgorod refinery. Within nine months, the lighter product output at the Russian refineries basically didn’t change which conforms to our plans. At the overseas refineries the output of the lighter products in Q3 went down 2 percentage points after a considerable growth in the previous quarters. That decline is because of the heavier oil being refined at Bulgaria and in Italy. At the same time the overall increase of the light products at the overseas refineries grew by 5% with the Burgas refinery making the biggest contribution against their refining volumes growing 23% year-on-year as well as from the ISAB refinery as a result of the input optimizations. Despite the refining growing in as far as the fuel oil is concerned, if you take a look at the nine months data covering 2019 it went down by more than 300,000 tonnes while its output went down to 10%. At the same time the Q3 output in fuel oil was a record low and 9% which is 3% points lower quarter-on-quarter and reflects the high level of readiness or the multiple. We continue to grow our refining product sales through the premium channels, which is an important element of our long-term strategy in downstream. Considering the nine months results, the jet fueling was growing variably as well as we also grew the premium motor fuels and industrial lubricants, as well as bunkering. The decrease of the retail sales of the motor fuels in Russia can be explained by the high base effect in 2018 because then as you may recall, we had very high consumer demand for the motor fuels from vertically-integrated companies. It should be noted that the decline of the retail sales is compensated for by better economics, including better income from the sale of the nonfuel products and services, the most effective channel of our oil distribution in third quarters was their deliveries to our Russian refineries. The improvement of the external environment in refining has conditioned the total improvement of the margin in supplies of oil into Russian refineries with the subsequent sales through our own channels including the premium ones, they are different between the profitability of oil deliveries to our own refineries and the exports considerably improved during third quarter. The growing refining volumes together with improvement of the product basket considerably strengthened the positive effect from the environment upon the downstream results. So the growing volumes of deliveries to our own refineries in Russia as a consequence led to a slight decline of the exportable amounts. The favorable external environment together with a continued improvement of our operational performance enabled us to achieve the EBITDA growth within downstream segment by quarter compared to the second quarter of the year. At the same time, the EBITDA of the Russian downstream grew almost by 30% against a considerable growth of volumes and an increase of the output of lighter products. The deterring factor here was a slight worsening of the results in petrochemicals and the retail segment as well as the seasonal decline of revenues in the power industry. The EBITDA of overseas downstream grew by 14% quarter-on-quarter. Apart from the refining margin growth it was also assisted by the profitability growing in international trading and an improving result of the retail sector. The other deterring effect from the financial results in this sector was ineffective because of non-accountability of the hedging contracts as part of our international trading transactions. Throughout nine months the EBITDA considerably grew while both in Russia as well as in the overseas markets. In Russia that was 1.5 percentage growth which is explained by a growing margin as well as the refining throughput growing, as well as an improvement of the retail results. Overseas this growth was 30% and it is related to a growing margin of international trading, growing volumes in refining and a better structure of project baskets. And so, these baskets overweigh the negative effect from the lower refining marketing comparing it to the nine months of 2018. We continue to work over implementing our specific projects in refining in Russia, which are aimed at raising the output of lighter products as well as the development of our bitumen business. In terms of the delayed coking unit at the Nizhny Novgorod refinery we are currently performing work to construct the reinforced concrete constructions, as well as installing various equipment, as well as installing and assembling the heavy and tinkering, as you may know and technology and it is because that is the biggest and most comprehensive projects amongst all that we're currently working on, though the completion rate of this particular project already exceeded 50%. As part of the isomerization unit construction at the very same refinery, we have now completed preparing the foundation. We also continue with the installation and assembly. So at this point in time, all of the necessary equipment have been fully contracted. The completion ratio for this project is one-third. As far as the bitumen operation modernization, the design documentation has been completed and submitted to the Government Environmental Impact Assessment. we're also now finishing the polymer, bitumen vicos unit and we are preparing ourselves to start construction work at the site. As part of the construction of the task volatilization unit at the Volgograd refinery, we have completed the underground communications at the foundation level. We are also doing the assembly and installation of the steel work, installing equipment, ramp and various things. Most of the technology equipment has been passed over to the installation. The completion ratio for this particular project is exceeding 30%. Now, shortly a few words about the main drivers behind the dynamics in our financial performance. In Q3 the price factor and the volume basically came up to be evenly negative upon our revenue dynamics, which result went down 8% compared to the previous quarter. The sales volume going down can be explained by the reduced trading volumes as well as accumulating commercial stocks overseas. These drivers were partially compensated for by the seasonal growth in terms of our refined product sales in Russia. We continue to demonstrate solid dynamics and as far as different line item of expenses are concerned, specifically our average production costs year-on-year went down, and reflected this decline was reflected both in our efficiency improvement program as well as the application of the IFRS 19 standard. So considering the nine months, the average cost of production went down 2% year-on-year, as far as Russian assets are concerned, and 2% in dollar denomination in our overseas assets. And as far as optimization of production costs control, we have achieved impressive results, specifically in Russia, if one is to take a look at our current average costs for production they nominally today have gone back to the level of 2016 and that is despite such things as the power tariffs going up, as well as all the inflationary factors. In refining, the results are even more impressive. Considering the results of nine months of 2019, it was possible to reduce the average cost for refining at the Russian refineries by 8%, while at the European assets almost by 13% in dollar denomination. And as far as the EBITDA is concerned, despite the worsening of the macroeconomic environment, this figure went down almost by 1% compared to the previous quarter, and it was RUB 128 [ph] billion, the EBITDA downstream growth by RUB 3 billion [ph] or 25%, compared to the second quarter enabled us to fully compensate for the decline of EBITDA in upstream, which is an excellent demonstration of the vertical integration effect, yet again demonstrating high resilience of our financial performance in terms of the financial volatility. I would also like to note the positive effect from the commercial and general and administrative expenses being reduced, which went down 2% compared to the nine months in 2018 and currently it is at 10% below the level of 2016, if you want to take a little bit without the accruals from the long-term incentive program, which is a non-cash program. And as far as the net profit is concerned, despite a slight decline in our EBITDA position, the net profit grew quarter-on-quarter and its growth was 5%, which was assisted by a reduction of the effective profit tax rate, which comes from the further as well as the greater profit coming from, as part of the optimization in our international operations. The capital spending of the company didn't change as opposed to the second quarter being at RUB 109 billion. The inter-quarter dynamics of the capital spending is traditionally being defined by the schedule of payments to our contractors and suppliers. So you can see absolutely different dynamics within individual subsidiaries and projects. Within nine months of 2019, capital investments went down by 7% year-on-year which is led by reducing investments into our Uzbekistan gas projects because of the fact that we have completed our core construction efforts, as well as the reductions that come from completing another stage of implementation of our two Caspian fields, Filanovsky and Korchagin. In the fourth quarter, we traditionally expand our capital investment level to grow. As far as the free cash flow is concerned, it has grown by 29% quarter-on-quarter, amounting in absolute terms to RUB 209 billion. The main driver behind this growth was a change in the working capital, specifically during the second quarter. The working capital as you may recall, grew by RUB 27 billion while in the third quarter on the contrary went down by 13 following the oil price decline. So without taking into account the working capital effect, the free cash flow demonstrated a moderate dynamics growing by 3% quarter-on-quarter which was related to a slight increase in operations. Our financial position continues to remain very solid, so the total one by the end of the third quarter is RUB 621 billion. Out of this amount RUB 135 billion is allocated to the fact from the application of the IFRS 16 standard, the leverage that we have towards the end of the reporting period again remains traditionally low and is 0.1. Before together with our colleagues, we announce the Q&A session, I would like to draw your attention to certain changes in our target set for 2019. And as far as the hydrocarbon production is concerned, we would expect the value to be up to the upper threshold from 0.5% to 1% growth. And I would like to emphasize here that despite the various external limitations, the original plan is we expect to fully complete. In August during our conference call about the second quarter results as you remember, we're just a bit downward. I mean, our expectations for the capital investments without taking into account the Western Qurna-2 rocky service projects from RUB 500 billion down to RUB 470 billion to RUB 490 billion range. Based on the results of the nine months period and taking into account with high probability, we expect that our actual spending will be even lower than the lower threshold which is below RUB 470 billion. And I would also like to underscore that we have continued working to improve the quality of our disclosure, having added into our MD&A additional disclosure to itemize our revenue from the sales of refined products itemized again in between different types. I'm sure that everyone would find it useful. Thank you very much for your attention. We're ready now to begin the Q&A session.

[Operator:]

[Operator Instructions] Our first question comes from the English line from Alex Comer of JPMorgan. Please go ahead Alex.

[Alex Comer:]

Hi guys, just a quick question. So the working capital benefited from lower oil, I mean if there is anything else in there and as we go into the fourth quarter, what is your expectation for working capital in the fourth quarter? And also give us some guidance on CapEx for this year. I mean, assuming there's no change in OPEC+ run through 2020, is there any chance you'd give us guidance on what your CapEx would be in 2020? Those are my questions, thanks.

[Alexander Matytsyn:]

As far as expectations in the evolution of the working capital is concerned, clearly it will dependent upon volatility, so I would like to refrain from giving any guidance about it. And as far as the CapEx expectations for next year are concerned, it was more than one occasion that was said that mid-term plans are going to be discussed by the Board of Directors in the beginning of December. So before the specific plans are endorsed, we are not in a position to disclose it, but what we can say nevertheless, that the investments will definitely grow compared to the level of this year because new elements have appeared, like the windfall profit tax on the international projects. And we continue to stem from our basic level of annual investments, which is a US$8 billion in accordance with our long-term strategy. So at this point in time, we may voice the expectations for CapEx at a level about RUB 550 billion without taking into account Western Qurna for 2020. But a lot shall depend upon the OPEC+ dynamics. Taking into account the current understanding of the situation, we are not planning any changes take place within the first half of the year. For the second half of the year, we are planning additional investments which we may do depending upon how OPEC+ unfolds.

[Alex Comer:]

Okay, thanks.

[Operator:]

Our next question comes from Ildar Khaziev from the Russian line at HSBC. Please go ahead, Ildar.

[Ildar Khaziev:]

Thank you very much and good afternoon. I have got a question about the refining margin. Previously, you mentioned that in the course of the fourth quarter, it went down in Europe. So is there any connection between the refining margin Europe and in Russia? Not always obviously, could you possibly comment which way the margin is going in Russia because Russia accounts for a big part of your business? Thank you.

[Alexander Matytsyn:]

Thank you very much for the question, the refining margin in Russia as is known is based to some extent upon the normal base kind of a margin which is specifically defined by the spreads for the refined products in the European markets and certain elements related to the specificity of the Russian taxation are added on top and the way the market is developing. Whatever we are, I mean the internal market here, whatever we are and are seeing in terms of pricing because there is time lag effects emerge and so on and so forth. So whatever we are seeing right now, we all note that both the preparation for and because of the uncertainty that everybody is seeing in the market in terms of the way, the [indiscernible] is going to be implemented next year, we need to know that the market is quite unbalanced and the spreads for the high sulfur fuel oil do jump around. So we don't see that the spread is responding to the diesel fuel in the meantime. So most probably, it will happen in the future, but the fact of the matter is that the European refining margin present is going downward while the Russian margin is always following suit.

[Ildar Khaziev:]

Thank you very much.

[Operator:]

The next question comes from the English line from Henri Patricot of UBS. Please go ahead, Henri.

[Henri Patricot:]

Yes everyone, thank you for the presentation. I have two questions please. The first one, could you come back on the increase on production drilling in West Siberia and what's driving this increase and any impact in terms of the CapEx intensity? And secondly, I wanted to ask about the recent announcement of your acquisition in Abu Dhabi. I want to know what made that asset of particular interest to you and you've also signed an agreement for a broad partnership with [indiscernible]. So I was wondering if we should expect more upstream activity in the country or are you also looking at downstream potentially? Thank you.

[Alexander Matytsyn:]

And as far as the Western Siberia is concerned, as you may know, this region which is where the bigger part of our production comes from the brownfields with many being characterized by a very hot water cup and as we anytime stated primitives as part of our production management in order to comply with the level set forth by the OPEC+. The Western Siberian fields amongst others are being used as the balancing factor, and so during the strategy presentation we did in 2018, we voiced our ambitions and plans to reduce the decline rate at the Brownfields in the Western Siberia down to 2% to 3% range. And if you take a look at the actual figures which through let's say, the third quarter or the nine months of this year, we have demonstrated we’re looking even better because the decline rate is about 2%. And it is important to see that as part of the overall flexibility, in a sense of preparing ourselves for additional capital investments into additional production growth, we have prepared a number of projects and as far as the permitting is concerned and documentation and having the base infrastructure in some places. So we do identify Western Siberia being very - having a good potential in improving our production profile right. And as far as acquiring a share in the Ghasha project in Abu Dhabi is concerned, this acquisition is following the format of our strategy of acquiring the high quality class of assets in the region that LUKOIL use as fitting its strategic interests. So, having a very high class reserve base and highly skilled operators, so that is fully conformant to our strategy.

[Henri Patricot:]

Okay, thank you. Should we expect more activity for you in Abu Dhabi in upstream and maybe downstream?

[Alexander Palivoda:]

At this point in time, we're not looking at any additional projects in Abu Dhabi because within this particular project, there is an allowance for an expansion which we as shareholders may participate if this is decided by the consortium. So there are no new projects that we could just mention right now.

[Henri Patricot:]

Okay, thank you.

[Operator:]

Our next question comes from the Russian line from Igor Kuzmin at Morgan Stanley. Please go ahead, Igor.

[Igor Kuzmin:]

Thank you. I would like to ask a question. According to the guidance for 2020 that you've spoken about, and I do understand that the figures may still change, but to say, in a simplified matter if I run a parallel between 2018 and 2020, I mean looking at the 2019, where the maximum from RUB 470 billion of those and in 2020, it's RUB 550 billion not including the Iraqi projects. Could you possibly guide us towards what kind of the free cash flow dynamics you may expect in 2020, against the kind of CapEx levels that you've referred to? I do understand that it may depend upon whether OPEC+ gets extended or not. But nevertheless, let's say if the extension scenario is probable the RUB 550 billion and taking into account, so cash flow in one barrel, will it grow? Will it remain at the same level of 2018 and 2019 or maybe one could expect certain decline further in the future? And my second question, you mentioned that you've got several projects up your sleeve, which if is conditioned by anything you may launch in 2020? Could you comment what kind of projects are these?

[Pavel Zhdanov:]

Well, thank you very much. This is Pavel speaking. As you may know, in terms of the free cash flow guidance we are not giving it because with the help of your assumptions, you may arrived at a certain understanding. As far as CapEx is concerned, yes, additional CapEx is being done into the projects, which are expected to generate additional profitability. So against all odds being equal, I mean there are a lot of odds saying, but against all things being equal, we do expect that the profitability won't go down, it will grow. So, as far as the additional projects are concerned, related to the OPEC+ being terminated, well these are not projects, these are activities related to drilling, optimization, new wells, new pads and various optimization activities, which we may expedite and start investing into them as long as the limitation for OPEC+ are lifted. So these are the kind of optionalities which require investments into them, which we may start applying in the second half of the year if OPEC+ stops.

[Igor Kuzmin:]

Thank you.

[Operator:]

Our next question comes from the Russian line from Grigory Myasnikov at Ronin Europe Limited. Please go ahead, Grigory.

[Grigory Myasnikov:]

Yes, good afternoon. Can you hear me? Yes. Good afternoon. I've got a couple of questions. The first question over next year, you are planning to grow your investments and what is the internal rate of return that the company is planning for its investments, if I mean there are any internal expectations? And my second question is about the fourth quarter results this year, is there any expectation, any guidance in terms of the EBITDA and the profit, I mean as long as the current environment stays unchanged?

[Alexander Matytsyn:]

From the point of view of our investment process, we are using to use a similar rate, which is 15%. And as far as our financial performance guidance for Q4 is concerned, bear in mind that there are too many, too many drivers which might affect such things as the cash flow. Again we're not voicing any guidance.

[Grigory Myasnikov:]

Thank you.

[Operator:]

Our next question comes from the Russian line from Andrey Gromadin from SBERBANK. Please go ahead, Andrey.

[Andrey Gromadin:]

Yes, good evening. Thank you very much for the presentation. I have two little questions, could you please explain what are the projects that your CapEx growth primarily fall upon, if I could already correctly this year is going to be less than RUB 470 billion for the next year, I mean the base scenario and actually, we're talking about RUB 550 billion? And my second quick question about downstream if I may, because it's quite a difficult situation let's say with high sulfur products. Let's say in the worst case scenario, could you try and predict up to which level you can reduce the production of fuel oil, Bunkering Hill and vacuum gas, gas oil next year, if you have to? Thank you very much.

[Alexander Matytsyn:]

As far as the first part of the question is concerned, related to the additional increase of CapEx, like we previously stated, there is a whole set of initiatives which are linked to investing into the Russian upstream. And these are the one form of profit tax that we're going to invest into irrespective of various limitations and additional investing into the production drilling which may be or may not be depending upon the various OPEC limitations and the existing assets production dynamics. Additional investments into the upstream overseas, which again may happen or may not happen depending upon the timeframe within which the final investment decisions are being made by the operators into them, as well as minimum additional investments in to the evaluation of the investment opportunities in downstream projects, which emerged in the light of the government initiatives to incentivize investments into the Russian refining and Russian gas chemicals sector. I mean the projects with a high payback and short implementation period. As far as [indiscernible] is concerned, the second topic that you raised, it's not a straightforward situation. We feel that we're well prepared and that we have an established plan of action in case the spreads change following different scenarios. Already now we have started implementing most important activities and if the environment remains as negative as it is now already towards the end of the Q4, if we compare it to the results of Q3, we would expect in a preliminary way, a decline in the production of high sulfur fuel oil from the European refineries by 30% while the Russian refineries by approximately 20%. So recently by way of example, we also issued the press release that we started the production of the bunkering fuel with a sulfur content half percentage at the Volgograd refinery. And so, this type of field is based upon the kind of the fuel that refinery is producing, it contains 1% of sulfur. So, this is for planning purposes and as far as the 2020 is concerned, then we see the opportunity to reduce the high sulfur fuel output from our Russian refineries by about a quarter as opposed to the level that we will arrive towards the end of 2019, while the overseas refineries it will almost go down two-fold and again, the preliminary estimation of what we can achieve in terms of the fuel oil output within the whole basket, if for the starting point you consider the nine months of 2019 where these figures are at about 10%. We see the potential to reduce it further by down to 7%, 8% which we believe to be very good outcome, which would enable us to really maintain self efficient in a very broad range of things.

[Andrey Gromadin:]

Thank you very much.

[Alexander Matytsyn:]

Dear colleagues, we understand that we don't see any requests for questions in the line. So I'd like to thank everyone, for participating at our quarterly conference call and hear you next time. Thank you.

[Operator:]

Ladies and gentlemen, thank you for joining today's conference. You may now disconnect your lines.