PJSC LUKOIL
Q2 2019 Earnings Call Transcript

Published: 29 Aug 2019

[Operator:]

Good afternoon ladies and gentlemen and welcome to the LUKOIL's Second Quarter Half Year 2019 Results Conference Call. My name is Jess and I'll be your 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 question. [Operator Instructions] I would like to inform you that questions from the press will not be accepted. I'll now hand over to Alexander Palivoda, Head of Investor Relations to begin today's conference. Thank you.

[Alexander Palivoda:]

Good afternoon ladies and gentlemen and welcome. Thank you for joining us on this teleconference call dedicated to Q2 results of 2019. Now joining us today is Alexander Matytsyn, our Vice President and CFO; Pavel Zhdanov, Vice President and Corporate Development and Investor Relations; Alexander Palivoda, Head of Investor Relations myself; Vyacheslav Verkhov, our Senior Accountant; as well as our leading accounting teams. Now before we move on to the presentation I would like to draw your attention to the fact that some of the statements and comments what we call forward-looking statements involving risk, uncertainties and other factors that cause our actual results to seriously deviate from the expressed or implied as this forward-looking statements. For more details please see the slides. And now I'd like to hand it over to Mr. Alexander Matytsyn. Please sir, you have the floor.

[Alexander Matytsyn:]

Thank you very much, Alexander. Good afternoon ladies and gentlemen. Now the second quarter and the first six months of 2019 has proven to be very successful for LUKOIL. Despite external limitations, LUKOIL has been outperforming compared in terms of hydrocarbon production, which has increased by nearly 3% compared to the first half of 2018. Now, the product slate is also improving. So the share of high margin barrels exceeding 31%. Now -- and we are ahead of schedule on this one and this has to do with the target development and also moving on so called additional income tax for number of our fields. Our refining is up 2%, also the product mix is improving, such as light product yield is up 6% at our European refineries. The sales for premium channels continues to grow at double-digit rate. Now speaking of macro environment after a rapid recovery in the first quarter of 2019. So the crude prices have been declining since May on a backdrop of growing risks of global economic slowdown. Now as a result and average international prices were rising on quarter-by-quarter, but the net price in rubles was sliding due to the tax lagging effect and of course the U.S. dollar depreciation. Now, although international prices were lower than the first half of 2018, so the net price in rubles actually increased due to a devaluation of the ruble. Now refining margin greatly improved on quarter-by-quarter basis in both Russia and Europe mainly through cracks spreads, higher cracks spreads on gasoline. So as compared to the first half of 2018 refining margins declined, decreased actually by 20% in Europe due to deterioration of crack spreads gasoline and diesel fuel. Now I'm pleased to announce that our quarterly EBITDA hit a new record high, which is RUB 330 billion, and thanks to of course, in small part to our increasing downstream profitability. So as a result, despite lower oil prices our first half EBITDA is up 22% on a year-by-year basis, which is RUB 330 billion, which is mostly driven by effective business development and efficiency improvement. So we continue to implement our efficiency improvement program on a cost per meter drilled, barrel lifted and ton refined. So we see a decline on a year-by-year basis. And as far as sales as well as general and administrative expenses, including incentives programs they remain flat on a year-by-year. And IFRS 16 introduction also helped to reduce cost. Now despite growing capital expenditures our free cash flow generation in the second quarter has actually increased by 11% on a quarter-by-quarter basis to RUB 308 billion for the six months, which is US$0.7 billion for the first half of 2019, which is 1.5 times above the previous year. And upstream segment was the key contributor. Now although crude oil prices remain relatively sluggish so LUKOIL is still generating considerable strong free cash flow by leveraging highly efficient vertically integrated business model, which has proven to be highly efficient and sustainable. Now it is worth mentioning that LUKOIL is not only maintaining its long standing leadership among Russian companies, but it's also suppressing some of the global peers in terms of EBITDA performance and free cash flow. Now, that said, our EBITDA per barrel produced stands at $23 in the first half. And hit actually a record high of $25 in the second quarter, which is the best evidence that our focused on better production mix, selective downstream projects, our premium sales channels, as well as, of course, our continuous Op and CapEx control is paying off. Now speaking of distribution end to shareholders, now as for the shareholder returns, we, as you know, completed our buyback program, which is $3 billion in August, having purchased over 37 million shares in open markets, which is about 5% of our charter capital. Based on a strong free cash flow we actually managed to complete this program much faster than initially planned. Yesterday, we actually cancelled 35 million shares over a decision made by the shareholders meeting in June, which is just below the number of shares repurchased so far. Now, we also spent another US$1.6 billion on repurchasing 19.5 million shares from minority shareholders under our public tender offer. Now, having said that, since 2018, we have spent a total of US$4.6 billion pushing share, which is 50% more than the size of a recently completed buyback program, which is about 10% higher than the half of the incremental free cash flow we generated between January 2018 and June 2019. So, we are ahead of the announced policy targets in terms of return of capital to our shareholders. We are currently in the process of finalizing a new buyback program, which is all the way through 2022, which is part of a three year schedule and official announcement is pending and will be coming soon. We are also strongly committed to pursuing this policy to -- and strongly committed to our guidance. Now, in conclusion, I would like to also emphasize the ongoing improvement in LUKOIL Corporate Governance Program. So in particular, our Board of Directors was -- as you know, we shuffled in June. Now, 6 out of 11 directors are independent. So the share of independence are now exceeding 50%. And we are far ahead number of public Russian companies and of course ahead of all oil and gas Russian companies on this indicator. So, thank you, I'd like to pass it on to Pavel Zhdanov.

[Pavel Zhdanov:]

Thank you very much Alexander and good afternoon, ladies and gentlemen. I will cover the upstream segment. Now speaking of price and tax environment, so the segment show mix results in the reporting period due to the highly volatile price environment. So the average euros crude prices is up 8% on a quarter-by-quarter basis. But the tax lag effect, coupled with a 2% ruble appreciation made the ruble denominated net price drop by 4%, which is negative of course affecting financial performance in the segment. Now the average euros crude price in the first half of the year is down 4% on a year-by-year basis, but the ruble lost 10% of its value driving up and net pricing almost positively affecting the financial performance of the company. Now in terms of operating highlights, so the average hydrocarbon production exceeding the West Qurna-2 project reached 2.4 million barrels per day in the first half of 2019, which is 2.8%, higher than the first half of 2018. That the increase was mostly driven by international gas projects, as well as the oil production ramp up in Russia due to change in OPEC+ agreement in 2018. Now, as far as the external limitations, of course, I think the growth rates could have been higher if it wasn't for the external limitations. And this is obvious occasion second quarter was when hydrocarbon production dropped 2.3 times on a quarter-by-quarter basis due to external factors. Specifically, and I'm talking about the changes in OPEC+ agreement in late 2018 and lower gas output in Uzbekistan, which is mostly again driven by external technical limitations and constraints. We continue to focus on better production mix and also keep increasing the share of high margin barrels. Now compared to the first half of 2019, the production on new projects at hard to recover reserve increased by 15% and 21%, respectively. Now, upstream EBITDA is actually up 14% year-on-year to RUB 470 billion. Now the growth is supported by a better production mix coupled with higher volumes. So the TAI introduction at some fields and reduction in per barrel lifting costs. As I mentioned earlier, so the net price in ruble, of course, surge on the back of the weaker ruble also improving results. Now the EBITDA from our international operations grew by more than 30%, which is greatly boosting our financial performance in the segment. So this impressive growth was mostly driven by of course high gas production in Uzbekistan and Azerbaijan as well as high rising gas prices now upstream EBITDA stayed pretty much more or less the same on a quarter-by-quarter basis. However production volume shrink and the net ruble price on oil dropped. So the Russian operations were supported also by better production slate and of course and introduction of the TAI. And outside Russia the negative effect from lower gas prices. Uzbekistan was partly offset by high EBITDA on the West Qurna-2 project in Iraq as a result of the current CapEx. Now a couple of words about the tax on additional income or TAI as we call it now. I would like to touch upon this and in the first half of this year, our 29 TAI projects produced a total of 2.43 million tons of oil, which is 6% of total liquid hydrocarbon output in Russia. So the third group plays a key role. And you can clearly see in our results in the first half 2019 so we increased our production drilling operations by 30%. So -- and the oil production output grew by 8% on the year-by-year basis. Now -- and also with the positive effect on the upstream segment from introduction of this new tax regime. Now, let's talk about specific regions and projects. The Western Siberia, so we continue to manage our production volumes at our mature fields at Western Siberia despite external limitations. So in the first quarter, we actually scaled back on the drilling operation as well as work hour operations to reduce our oil production in Russian as required. And in the second quarter, we actually are back in terms of our operation drilling so to maintain the production level in the region. So, consequently, after six months of production in the region only declines by 0.4% on a year-by-year compared to 1.8 times decline at mature fields a year earlier. So, I'd like to also remind you that originally planned to reduce production by 2% to 3% at mature fields. So, we are ahead of our target from this indicator. So, that means that we are hugely successful and we see a strong potential for the increase in production should the external limitations be lifted. So, we are also pushing on our cost optimization program, so streamlining our projects and improving our drilling technologies. And our drilling cost per meter drilled declined by 8% on a year-by-year at [indiscernible] and basic horizontal wells. Now -- and this is absolutely key to deliver our strategic priorities and to improve our production profit at mature fields. Now through the development of this additional reserves from our very extensive resource base. Now, speaking of North Caspian, this is a top priority and in the first half of 2019, so, we increased production by 14% year-on-year in this region. We also successfully completed the main drilling cycle, under phase two of Vladimir Filanovsky field development. So with the three high rate production wells, which is to be commissioned in the first six months of 2019. And that construction and installation are mostly over at phase three of the field. So, we have started drilling for the first production well. So -- and the first production platform have embarked on further drilling of the well stock as per the field development plan. So, I would like to also emphasize that at the Korchagin field we are successful. So well production has increased by 30% on a year-by-year basis as a result of phase two completion. So as far as Rakushechnoye field, so the shipyards are being build, these are ice-resistant [indiscernible] platform ---- quarters platform and crossway connection. Now as of the end of the second quarter, so the ice-resistant station platform is 14% complete. Now the quarter’s 36% complete, also we have tendering procedures to do under waterways and offshore operations. Now let's talk about [indiscernible] heavy crude oil. Now, speaking of that, so the development at Yaregskoye field and Permian reservoir at Usinskoye field has actually helped us to increase our highest cost oil production by 18% on a year-by-year to 2.4 million tons. We continue to expand our infrastructure and production facilities. As far as Yaregskoye field, we plan to put the second line of the oil pipeline into operation by end of this year and also expand its oil capacity to 3 million tons per year over the six months of this year. So the [indiscernible] field commissioned 18 production wells as well as well as a steam generation capacity 20 tons of steam per hour. We also optimizing our drilling costs there. Now, we also continue to develop our lower probability reservoirs in the Western Siberia, hard to recover reserves. Now over the past six months, so the total increase in production at Imilorskoye and Vinogradov field reached 38% on a year-by-year basis. The first six half, now we see 45 production wells and 13 injection wells were put in operations at Imilorskoye field, with production output increased by 42%. Now, over the same period, so we also commissioned 14 production wells at Filanovsky field where the oil production is up by 29%. Now as part of our ongoing cost cutting effort, we successfully piloted our batch drilling technique. And the technique which has helped us actually reduce drilling time by 10%. Now, let's talk about Uzbekistan gas project. In the first half of this year, so LUKOIL share of gas production in Uzbekistan is up by 18% to 7 billion cubic meters. So this growth was mostly thanks to the second frame of the Kandym gas processing plant, of course, which was launched in April of last year. Now the second quarter saw a decline due to scheduled maintenance at Kandym plant, as well as limitations in gas intake from the Gissar project from the Shurtan gas processing plant, as a result of repairs. Now the Shurtan plant is owned by Uzbekneftegas and also is engaged in Gissar project and to treat marketable gas. Now the plant will remain dormant. And as for now, so we see a decline basically of 5 billion cubic meters due to this and we expect it to recover of course, as the repairs progress. Now, at the same time, our production at Kandym is well ahead on target, which will mostly offset of course, the production loss at Gissar. Now, we also expect to close a deal with New Age to acquire 25% interest stake in Marina XII, which is the Republic of Congo. Now, this project is fully in line with our M&A strategy and this project of course has tremendous potential in terms of explored reserves, infrastructure and is fully in line with our technological core competence and expertise. The project is already generating positive free cash flow, which is sufficient to fund our projects expansion going forward. And the project operator is Eni, which is our strategic partner. So with that, I’d like to pass it on to Alexander Palivoda.

[Alexander Palivoda:]

Thank you very much, Pavel. Welcome ladies and gentlemen. So I will cover the downstream segment. Now in the second quarter, we saw a better price performance for our downstream segment. So in Europe we see the benchmark margin rose by 19% on a quarter-by-quarter basis, mostly due to crack spreads for gasoline recovered after a very unusual winter. This was largely of course due to seasonal maintenance at Europe refineries, as well as a seasonal rise in demand for gasoline in the United States during spring and summer and this effect was partly offset tighter crack spreads with diesel fuel, naphtha and fuel oil. Now in Russia, the benchmark margin in U.S. dollars is up more than 2 times, following a very sluggish first quarter of 2019. And this growth was mostly driven by a lower feedstock costs was also higher wholesale prices from domestic markets as well as rising crack spreads for gasoline in the international market causing export netback and the price damper of course for gasoline. Now I'd like to also point out the fact that the price damper was negative in January to February of 2019, as crack spreads for gasoline remained low also keeping of course, gasoline prices relatively low. Now, in the second quarter saw our average daily refining throughput remained virtually flat on a quarter-by-quarter basis, and at the same time, our refining throughput in Russia dropped by 3%, mostly as a result of scheduled maintenance at our Perm refinery. Now our European refineries actually increased thus offsetting the decline in Russia, so we talk about more than 5% increase. The growth was mostly due to high capacity utilization in Bulgaria following refinery maintenance program in Q1 2019, as well as disruptions to feedstock supply in the first quarter, which was of course mostly due to adverse weather in the Black Sea ports. And both Russian and European refineries increased their throughput by 2% in the first half of this year, driven by higher capacity utilization. So in Russia’s Nizhny Novgorod refinery, and of course, our refinery in Bulgaria, which is a Burgas refinery. Now despite scheduled maintenance at our Perm facility, the light product yield in Russia generally remained flat on a quarter-by-quarter basis at 69%. After we improve the hydro cracking process, at our Volgograd refining facility. Now always these refineries enhanced the light product yield in the second quarter 75% to a very impressive number of 79%, thanks to a better of these companies and also processing lighter oil blends. Now despite higher refining throughput the first half of 2019 saw a decline in total field oil output by 129,000 tons, which is down to 11% in terms of yield. Now, speaking of sales channels, now, premium sales channels was key that as part of our sales strategy, part of our downstream sales strategy. Now in the first half of this year, our sales of Bitumen and also playing refueling and ship banking were growing at double digit rates, our sales of premium lubricants for motor engines and industrial use has also continue to grow. Now retail sales of motor fuels fell by 4% on a year-by-year basis due to a high base effect in 2018. When vertically integrated companies enjoyed surge in consumer demand for motor fuels. It's also important to point out that the decline in sales was offered by better economics in our retail business, including higher revenue from non-fuel goods. Now, oil supplies to our Russian refineries remained the most efficient distribution channel so far. Now the second quarter saw a better price environment for Russian downstream segment thus enhancing our integrated margin on oil supplies to Russian refineries and further sales through our channels including the premium channels. Now, oil supplies to our Russian refineries declined in the second quarter entirely due to scheduled maintenance. Now the decline gave a boost to exports with incremental volumes being largely processed by our European refineries. Now, let's talk about downstream EBITDA , despite the favorable market environment, the downstream EBITDA in Russia dropped by 8% on a quarter-by-quarter basis mostly due to negative effect of carried down inventories of oil and refined products in the second quarter of 2019, as opposed to a positive material effect in the first quarter. So, also refining throughput was due to scheduled maintenance coupled with seasonal decline in revenue from power generation. And these negative factors were partly offset by high refining margin and better results from retail business performance and petrochemicals. Now in contrast downstream EBITDA outside Russia actually showed strong growth mostly due to the impact of hedging contracts of course and hedge accounting as part of the international trading business in the first half of this year. So higher oil prices actually resulted in a loss recognized as of our reporting date in relation to a hedging of unsold crude oil and refined products, which is dragging down on Q1 EBITDA basis. Now in the second quarter however, so, we see profit from sales of these oil and product volumes, they contributed positive EBITDA growth. So on quarterly difference is exceeding RUB 25 billion. And I would like to also point out that the oil impact of hedge accounting of EBITDA is close to zero. Now, this positive quarter-by-quarter basis impact of hedge accounting was actually partly offset by the carryover effect of inventories and refineries. It was positive in the first quarter and negative in the second quarter. So, downstream EBITDA actually is up in the first half of this year in both Russia and abroad. So, in Russia it is back due to higher margins and processing volumes, better product slate and robust results in retail business. It is actually more than 30% increase outside Russia due to again higher processing volumes, better product slate, as well as stronger profitability in treating operations. Now -- and lower refining margins in Europe constraint of course the EBITDA growth. Now speaking of new projects, we are working on implementation of selective downstream projects in Russia with a view to enhanced lighter product yield and also promoting Bitumen production as a premium business also so the delayed coker in Nizhny Novgorod work is underway on installation of steel structures also shipments of plant and equipment started buying water. The project is 42% complete as to the isomerization unit also in Nizhny Novgorod so the work is underway to construct that the project is 25% complete with the furnace installation. So the Bitumen expansion plans we are also getting ready to submit our project implementation for environmental test and to receive a positive statement from the government. So we are getting ready to start construction. As to our Volgograd refinery, we are building a deasphaltization unit so we are currently under construction in terms of the underground utilities, pipelines, furnace foundation, and existing racks. And so we also receiving our shipments of equipment. And of course, it is currently 25% complete. Now, very briefly about financial highlights. Quarterly revenue increase is mostly due to higher trading volumes in oil and petroleum products, and also due to sales of inventories accumulated during first quarter. And while the price factor was a far less, it had less effect. Now, inventories were also an important driver behind this quarterly growth in the second quarter. So we talked about 1.3 million tons of oil and petroleum products accumulated in the first quarter. Now also, speaking of operating costs, our operating costs have improved strongly in both upstream and downstream segment. Very positive trend, so -- and on a per unit cost, we see a decline. So a lot of that due to IFRS 16 standard, which we discussed in detail in the previous call, and also due to our efficiency improvement program. So as of six months, we see that on a per unit lifting cost basis we’re down by 4%, in Russia and by 7% in our overseas assets. Now excluding the IFRS 16 effects on a per unit cost, we see a decline by 1% and 2% on a year-by-year respectively, which is again, due to improving our efficiency and optimizing controllable costs. In Russian downstream business, we see also a decline by 1% but European refineries actually demonstrated a 5% decline. Now the IFRS 16 effect in downstream is insignificant, mostly negligible, so there we’re talked about real business factors and real cost cutting. Our EBITDA is up 11%, one a quarter-by-quarter basis to RUB 332 billion, which is a new record. Now the key drivers are mostly improvement in refining margins in Russia, positive accounting the effects from hedging and global trading, as well as sales of oil and petroleum product inventories accumulated during the first quarter. Now, the last factor is reflected in the elimination line in the EBITDA breakdown in operating segment. Also know that the inventories and hedging factors are recurring it's not a one off. The second quarter additional EBITDA that came from sold inventories and hedging costs offsets the EBITDA that we lost in the first quarter, which means that in the six months, this effect offset each other. Now the net profit rose by 21% on a quarterly basis, which is a 21% increase. And another driver of that profit was the decrease in effective income rate. So was just 19% versus 22% in the first quarter. Now, again, it's a one-off effect, it's a revision of regional income tax rate. Now let's talk about the CapEx situation. So capital expenditures are standing at RUB 108 billion in the second quarter, which is a 10% quarterly growth. The increase in the option is mostly due to of course, the scheduled payments to suppliers, contractors, as well as the commencement of the second development phase of West Qurna-2 project in Iraq. In the first half of this year, so CapEx expenditures declined by 10% on a yearly basis. So we scaled it down due to our investments in Uzbekistan given the completion of the main construction works. And also, of course, the completion of yet another phase at our two Caspian fields. Now as usual, of course, we expect increased capital expenditures in the second half of this year. Now, let's talk about cash flow. The rising CapEx of free cash flow before changes in working capital increased by 3% on a quarterly basis, and standing at RUB 189 billion. So this RUB 27 billion growth in working capital was due to an increase in trade receivables due to trading volumes. Now on top of that, our free cash flow before changes in working capital reached RUB 273 billion in the first half of this year, which is 50% increase on a year-by-year basis. Now also in the first half of 2019, we actually distribute a total of RUB 200 billion to shareholders and a third of that was spent on buyback. So we also spent over RUB 56 billion on debt repayment and servicing. Now, financial spending is very strong, so total debt stands at RUB 620 billion as of the end of this first half of this year, including RUB 142 billion due to IFRS 16. So our leverage is at 0.1 times as of the end of the reporting period. Now finally, before we move on to Q&A, I would like to also mention our 2019 plans. Now initially, we planned for a hydrocarbon production to grow about 1% assuming that the external limitations will be lifted in the mid-2019. So we expect to boost our daily hydrocarbon output in the second half of this year. So despite the external limitations were still in place, we believe that our plan, we’re talking about 1.5% to 1% increase, again, due to incremental gas volumes. So in terms of the CapEx original plan was RUB 500 billion that's excluding the West Qurna-2 in Iraq. Since the production limitations remain in effect, we expect lower capital expenditures, somewhere lower in the range of RUB 470 billion to RUB 490 billion. And that’s all for me. Thank you very much. And we are ready to take your questions.

[Operator:]

[Operator Instructions] The first question comes from the Russian line from the line of Igor Kuzmin from IUS [ph]. Please go ahead.

[Igor Kuzmin:]

Igor Kuzmin, Morgan Stanley. So a couple of questions for you. My first question, if I understand correctly about the shares that are still at a subsidiary level that you haven't yet bought back as part of open offering. So I'm just trying to figure out what's going to happen to these shares? Is it my understanding that there's an intention to actually cancel the shares? But if your intention is strong, then what would be the procedure for canceling these shares? And the second question, specifically on liquid hydrocarbons production in Russia. So what trends are you expecting on an annual basis 2019? Thank you.

[Alexander Matytsyn:]

Thank you very much Igor for Morgan Stanley. Now as to our intention, the intention is there. And to the procedure and details of that -- so we're not ready to comment on that. So we'll come back to you on that. So this as to the liquid hydrocarbon, so we expect flat on year-over-year basis in Russia.

[Igor Kuzmin:]

Thank you very much.

[Operator:]

The next question comes from the line of Ildar Davletshin from the Wood & Company on the Russian line. Please go ahead. Ildar, please go ahead, your line is unmuted. The next question comes from the line of Karen Kostanian from Bank of America on the English line. Please go ahead.

[Karen Kostanian:]

Gentlemen, thank you so much for the presentation. My question is, you are indicating that the next spies from the bias and the timeline of the public is going to be determined soon, but in several meetings that we had previously, you have indicated that you are also contemplating potentially increasing the dividend payout. I just wanted to see if there is any update on changing the mix between the buyback and the dividend policy? And if there is any consideration of increasing the payout in line with other Russian oil companies? Thank you.

[Pavel Zhdanov:]

Thank you very much. Indeed, we are keeping track of what's happening with other Russian companies, we believe that the existing dividend policy also coupled with buyback is one of the best offerings out there in terms of capital distribution. And we are actually underway to offer our interim dividends and the Board of Directors will take place in October so and the announcement will be made in due time.

[Karen Kostanian:]

Okay, thank you.

[Operator:]

The next question comes from the line of Ildar Khaziev from HSBC. Please go ahead.

[Ildar Khaziev:]

Thank you very much. Just a couple of questions, first one on the upstream can you please remind me on your outlook for liquid in production in Azerbaijan, in Kazakhstan, and also on the gas. Would you please remind me on the op numbers? And the second question is quite technical. So you said that the new IFRS-16 actually led to a reduction in capital costs on production? So did it also have any effect on the working capital?

[Pavel Zhdanov:]

As to the first question on production, for purchase outside Russia on the liquid hydrocarbons. So the outlook for 2019, specifically is an incremental increase, we’re planning an incremental increase now as to the actual gas production as you see. So the production volumes are growing strongly, mostly through Uzbekistan. So we are planning as of the year end a significant increase in gas production, again, due to Uzbekistan and planning to also increase our total output of the company so to 1%. Now, as to any specific project plans in Azerbaijan project second stage is currently underway. So they’re ramping up production for Kazakhstan, also very successful. So a very optimistic outlook as to the future period all the way to the year-end. And on the second question of yours, down to IFRS-16 standard hold true, in fact of course on operational costs classification, and it also affected our SG&A transport costs, et cetera. It had multiple effects and of course, it does affect our free cash flow for sure. So a reduction in operational costs and other items, of course, will directly translate into better number on the free operating cash flow. But it also has some marginal impact on capital costs, again due to IFRS-16 we see a minor decline, but generally there is a positive trend, positive effect on the free cash flow. So -- by the way, we fully disclose it in public statements. You can drill down and look into specific numbers we provided in granularity. Thank you.

[Operator:]

Next question comes from the line of Henri Patricot from UBS on the English line. Please go ahead with your question.

[Henri Patricot:]

Yes. Hello, everyone. Thank you for the update. I have two related financial questions and then one operational. So to develop on the previous comments around the buyback and the way it’s setup currently 50% of excess cash flow, should be thinking about that figure growing up in the future, given the fact that you have more limited offering to invest in the future in Russia would be a big plus production constraint? And related to that, you’ve said in the past that you wouldn’t like to go into a net cash position. And given your strong free cash flow generation, looks to me that you'll be in such a position at some point next year. So how would you return to net debt position you would be thinking about a special dividend or perhaps another bond offer when we’ve seen this somehow to buyback bigger chunk in one go? And finally, just a question on the downstream side of the business, you mentioned, lighter crude slate in the second quarter, I was wondering if we should expect any changes on the crude slate and product mix in next two quarters, in particular, in light of the much wider spread between clean and dirty products in the past few weeks. Thank you.

[Alexander Matytsyn:]

Thank you so much, Henry, for the question. So we're planning to continue on the strategic policy when it comes to capital distribution that we announced. So all details will be provided to you in shortest time possible. Now, as to the balance, once again, we confirm that what was said multiple times we're not planning a net cash position. And we take it into account in our three year business plan. And on the third question, due to, of course, changes in the spread situation, and also due to difference between prices on light and heavier oil, and also the petroleum product spreads we can very flexibly change the actual slate of products, and again, it's a process that is happening in real time. So we're very flexible on that and so will function properly, we expect to change it, like that we use for refining. And again, the top priority here is to maximize the margin, maximize profit and refining. So if there are no further questions, with that I would like to thank you for joining us today on this conference call and have a very nice day. Thank you.

[Operator:]

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