PJSC LUKOIL
Q1 2019 Earnings Call Transcript

Published: 30 May 2019

[Operator:]

Good afternoon ladies and gentlemen and welcome to the LUKOIL's First Quarter 2019 Results Conference Call. My name is Courtney 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. [Operator Instructions] 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. Thank you for joining us at this teleconference call dedicated to LUKOIL's performance results for Q1 2019. In attendance of this call, we have Alexander Matytsyn, our CFO; Pavel Zhdanov, VP for Corporate Development and Investor Relations; Gennady Fedotov, Vice President for Economics and Planning; Vyacheslav Verkhov, our Senior Accountant; and our colleagues from Accounting Department. Apart from that as you know, our IR team in April was joined by Alexander Golovanev and we believe that many years of his past experience as investor analyst would enable us to further improve the quality of our IR work. Before we go with our presentation please note that some of the statements during this call will be referred to the future related to the risks, uncertainties, and other factors as the consequence of which actual results may be significantly different from evaluations and expectations stated in such announcement. More detailed information you'll be able to see up on the slides. Let me pass the floor over to Alexander Matytsyn.

[Alexander Matytsyn:]

Thank you, Alexander. Good afternoon. The first quarter with its strong operational and financial results became a good start for the second year implementation of our long-term strategy. The vertically integrated business model of LUKOIL yet again enabled one to cushion the volatility of the environment allowing us to continue to generate highly stable cash flow. Compared to Q1 2018, the amount of output grew by record 4% despite the external limitations. Also the structure of our production continued to improve. The share of high-profit-margin barrels grew up to 31%. At the same time, I would like to draw your attention to the fact that based on this indicator; we are ahead of our plans because of the successes in the development of our priority projects and the introduction of the windfall profit tax. The amount of refining grew by more than 3%. The product basket continued improving, the output of lighter product grew by 19%, and the output of fuel oil went down. We continue to demonstrate double-digit growth with respect to most of the premium channels. At the same time, in the oil market, there remains a very high price volatility. In Q1, the price for oil was growing, but in average was lower than in the preceding quarter in Q1 2018. The refining margin went down in Russia. This decline was quite considerable also as the result of coming into effect a number of tax changes. Amongst positive environment factors, one should note the devaluation of the ruble compared to Q1 2018 as well as the time lag effect with regards to the export duty and the input inventory stocks in refineries which was the result of the price volatility during Q1. Despite a complex environment the EBITDA in Q1 2019 amounted to RUB298 billion having grown by 7% quarter-on-quarter and by 36% year-on-year which amongst other things was conditioned by strong operational results and the work we were doing to reduce our costs. And amongst positive things one should know that we are demonstrating excellent results in improving efficiency and the controlled expense dynamics. The average drilling cost production and refining went down compared to the previous quarter which in the first place is the result of the implementation of the purpose-specific program improving efficiency that we elaborated upon during our previous call. Apart from it, the cost decline was the result of the application of the IFRS 16 standard. The effect from the standard over our reporting we will tell you more during the financial section of our presentation. The free cash flow before the changes in the working capital in the reporting period was RUB183 billion and US$2.8 billion, which is 30% more compared to the previous quarter and almost twice as much as the year ago. In terms of the average cash flow per barrel of output as a result for the quarter, we took over not only the Russian, but most of the international peers. Similarly, LUKOIL remains the leader amongst the Russian calendars in terms of the average EBITDA indicator. All of it comes from the focus on the structure of the production broadly developed, refining segment, access to the premium channels and marketing and the continuous work at improving efficiency and optimizing our cost and a very high capital allocation discipline. The company performs and over performs in terms of its commitments in terms of the repayment capital to shareholders. Gradual improvement of the fundamental quality of our business enables us to grow our dividend payments at a faster pace remaining confident in terms of maintaining a very positive dividend policy in the future against a conservative oil price scenario. In April, the Board of Directors considered and recommended to increase the dividend payment per share based on results of 2018 by 16%. The recommended dividend growth is 4 times faster than inflation. And as far as the share buyback which was announced last year as a program it has been completely by almost 90%. Compared to the original plans, we are moving at a fast pace based on the actually earned free cash flow. We similarly act on our commitments to cancel the shares that are being acquired. During the shareholder meeting agenda there is an agenda item about buying 35 million shares of the company as part of the public offering that all of the shareholders may participate in. On the one hand this procedure is brought about by the specificity of the Russian legislation. On the other hand, it is fitting into our capital return policy as it represents an additional possibility to buy shares from the market and allocate the additional capital amongst shareholders. From this viewpoint, a public offering to us equals the buyback program. Now bearing in mind the fact that in this offering almost all of the shareholders are entitled to participate the amount of money that can be derived from the market could be significant. Therefore, we are planning to define the parameters of the following buyback program and submit it to the Board consideration only after the results of the public offering are completed in August of this year. And in conclusion, yet again, I would like to focus our commitment to all of the previously stated strategic objectives and policies both in operations as a well as in capital allocation. Thank you very much. With that let me pass the floor over to Pavel Zhdanov.

[Pavel Zhdanov:]

Thank you, Alexander. Good afternoon, dear ladies and gentlemen. Let me tell you about the results of upstream operations. Despite the decline of the international oil prices the net euros price in ruble denomination grew by 11% quarter-on-quarter and by 18% year-on-year. This growth comes from a positive effect from the export duty lag in Q1 2019 and the dampening of the ruble exchange rate compared to quarter one 2018. This environment was quite favorable for the financial performance of this stream. The average daily hydrocarbon production without taking into account the West Qurna-2 was 2.4 billion barrels which is 4% higher compared to Q1 2018 and 0.3% above the level of Q4 2018. This growth primarily comes from the growing amount of gas in our international projects. The year-on-year growth production is a record one during the past 10 years and was achieved despite the reduction of the oil output during Q1 because of external limitations coming from the OPEC+ deal. In other words against there being no external limitations the pace of growth could have been much stronger. Now the reduction of production as previously we achieved through the brownfields continue to give the same time to go output in our higher margin -- profit margin projects. As a result compared to Q1 2018, the production from the new projects and the tight reserves grew by 24.15%, respectively while the share of the high-profit-margin barrels reached 31%, which is three percentage points higher compared to the previous quarter and 7 percentage points is above the level of the first quarter in 2018. The growth of this indicator is brought about by the start of the windfall profit tax. Let me remind you that in accordance with our strategy, we plan to achieve 30% by 2020. Based on actual fact in the first quarter this year, we have excelled this level. EBITDA in upstream grew by 37% compared to Q1 last year amounting to RUB235 billion. Compared to Q4 in 2018, this growth was 24%. In absolute terms, the main contribution to EBITDA growth came from our Russian projects. This growth was facilitated by net oil prices growing in rubles, bigger production and a better structure in it as well as reduction of – in our production cost. During the previous call, we announced the update of our goals in terms of the controlled cost dynamics. To achieve these goals, we are implementing a program of improving efficiency, reducing cost at our Russian producing assets. At the level of the corporate center that have established a project office with a affiliates in all of the Russian subsidiaries, which organize a continuous process of analysis, development and implementation of the initiatives aimed at reducing the average operational and investment spending. The first results of this work were evident in 2018, when the average cost per production went down by 2% as opposed to 2017. In Q1, this plan sustained and the average cost per production in Russia in rubles went down by 5% as opposed to an average level throughout 2018 and by 6% compared to Q4 2018. One of the drivers behind it was the application of the IFRS 16 standard, the effect from which amounts to approximately half from this decline. The second half from it is a result of our work aimed at improving efficiency. The positive effect upon our financial performance in upstream was from the conversion of a number of acreages to windfall profit tax. The list of pilot windfall profit tax projects currently includes 29 of our acreages in the first, third and the fourth groups. The average daily output from them is about 293,000 barrels or 5.4% from our total output of the liquid hydrocarbons in Russia. The key importance to us comes from the third group, which are mature fields in the Western Siberia. In the first quarter 2019, we were producing from the third group assets 56,000 barrels of oil a day and we are planning to significantly increase this output during the next five years, which would call upon additional RUB60 billion of additional investments within this time frame. Already in 2019, we are planning to almost by 30% to grow our drilling volumes within these acreages. Apart from brownfields the windfall profit tax is something that 21 acreage was converted into greenfields located in Timan-Pechora and the Western Siberia. Amongst them, we also converted to windfall profit tax our major field like Pyakyakhinskoye. Based on our estimates during Q1 2019 this total EBITDA effect from the conversion to windfall profit tax was about RUB4 billion. Now let me consider individual regions projects. Within the Western Siberia fields even I guess, the external limitations we're able to considerably improve our output dynamics. Overall throughout the region the production went down by only 1.3% compared to Q1 2018. And then as far as brownfields are concerned this decline was 1.3%. The dynamic improvement was achieved against the reduction of the production drilling as well as the weaker exploration, at which points to a better technology. Financial efficiency is also growing. Specifically, compared to Q4 2018 the average cost of production drilling into the directional and horizontal wells with the three streams design went down by 3% and 12% respectively. The implementation of the cost reduction program optimization of the project decision successes and improving the drilling technology enables us to more effectively bring into operation the existing reserves and to bring additional reserves from a vast resource spaces, which is the main source to achieve priority strategic objective to improve our output profile from brownfields. And as far as the marine projects are concerned at the North Caspian, we have grown output of oil compared to Q1 2018 by 19% through additional development over the Filanovsky and Korchagin oil field. At the second production platform in the Filanovsky from the start of the year two high-output wells were commissioned operations, one of which is the two spring with the TAML 5 completion. Through that we were able to successfully complete the main cycle of the production drilling as part of the second stage of development of this field. Now we are shifting back to the first production platform in order to additionally drill the well stock according to the project design. As part of the third stage of the completion of the field, we finished preparation for the marine transportation of the superstructure of the block conductor, which we'll start in June. Drilling from the third platform is expected to start this year already. As a result of the implementation of the drilling program, as the second stage of the Korchagin field the production of oil from it grew by 27% compared to Q1 2018. As part of the completion of the Rakushechnoye field at -- so there are pre-fabrication for the superstructure and the platform pylons or the living blocks. The construction readiness towards the end of May in terms of the ice-resistant platform is at 12%. The living module is 26%. A few words about our Baltic projects. Recently we went about the industrial development of the D41 field. The development of this field is done from the onshore pad with two horizontal well with a length of almost 7.5 kilometers each. This decision enabled us to very much reduce our cost for the completion of this field and considerably bring up its launching into operation. The average daily output from these fields is about 700 barrels. In terms of the D31 project, we have successfully completed contracting and selecting contractors for the preparement of the field development design and plan. The output growth with high viscous oil in Timan-Pechora is at 16% compared to Q1 2018. With that the production from the Usinskoye field grew by 28%. In order to provide for the continuous growth of production from the fields we do work in order to enhance the infrastructure and operational capacities. At the Yaregskoye field before the end of the year, we plan to commission to operation the second line of the field pipeline as well as to increased capacity for the oil treatment up to three million tons a year. At the Usinskoye field, we're planning to commission to operation additional capacity of steam generations and the system of reservoir pressure maintenance. We continued to develop the fields with low permeability according to the established plans. The total growth of output from the Imilorskoye field to Vinogradov compared to Q1 2018 amounted to 36%. In Q1 of the current year, Imilorskoye field has 17 additional production and six injection wells. The growth of production year-on-year was 44%. At the Vinogradov field, we had seven additional production wells brought into operation with output growth at 21%. Production of gas in Uzbekistan in Q1 2019 grew up to 3.8 billion cubic meters, which is the LUKOIL's share, which is 33% more than in Q1 2018. The growth was achieved thanks to the second line of the Kandym gas processing plant in April of 2018. From September last year, the production of gas in Uzbekistan is at plateau level. Due to the completion of the main investment stage from third quarter 2018 the projects in totality achieved the free cash flow -- positive free cash flow. The further task that was set ourselves is to maintain the achieved production plateau optimizing the supporting investments as well as doing work to further explore geophysical data in order to assess the future potential of the gas-bearing acreages. In conclusion a few words about our Iraqi projects. And as far as the West Qurna-2 is concerned we are in the second stage of development of field and it would double the output within the next five years. Approximately we're going to increase our capital spending, but the funding of those will come out of the current output without bringing in additional capital from us. After the statistics, you can see there's a decline of the total production from the field in Q1 2019. This is a temporary event related to the scheduled maintenance at various units. At the Block 10 projects in Q1, we have successfully completed the testing of the fifth well as part of the assessment stage at Eridu field. The well has confirmed the subsurface model of the field. With that, let me pass the floor over to Alexander Palivoda.

[Alexander Palivoda:]

Thank you, Pavel. Let me tell you about the refining stream results. The refining margin dynamics during the first quarter of this year was being defined by whole host of factors. In Europe, benchmark margin went down to minimum since the beginning of 2018 against the record low crack spread for gasoline. The situation started improving only towards the end of the quarter. The crack spreads for diesel also went down. Some support to the margin came from an improvement of the fuel oil crack spread. In Russia, the benchmark refining margin after the record levels in Q4 last year dramatically went down, which is related both to the European margin dynamics as well as the domestic market dynamics specifically growing oil netbacks and growing fuel refined product margins against the reduction of the wholesale prices in the domestic market. The negative factor over the refining margin came from a negative gasoline damper, which was related to low crack spread for this particular product in the international market. The positive driver was the diesel dampening factor. Our average daily refining throughput in Q1 2019 practicality stayed unchanged compared to the previous quarter. Alongside with that in Russia, it grew by 2.6% because of the scheduled work done at our Nizhny Novgorod's refinery in Q4 last year. While at European refineries, the throughput went by 4.1% because of an unfavorable weather condition in the Black Sea ports and the maintenance done at the Burgas refinery. Compared to Q1 2018 the refining volume grew by 3.4%, which is related to the scheduled maintenance at Burgas as well as the growing load at the Novogorkovsky refining. We continue to improve our product basket. The output of the lighter product grew by about one percentage points but with respect to the first as well as to the fourth quarter in 2018. This was achieved primarily at our overseas refineries, which was positively affected by the maintenance down in our refineries in Romania and Bulgaria in Q1 last year and the optimization of the inputs at the ISAB and Zeeland refineries in Q1 this year. The factors, which were holding back the positive dynamics, were the scheduled maintenance for the units at the Volgograd and Perm refineries. The growth in producing lighter products and optimizing the inputs at our foreign refineries enabled us to reduce the output of fuel oil below 10% or three percentage points compared to the similar period last year, which is equivalent to the top reduction of the fuel oil per quarter production by 370,000 tons. We continue to increase the volume of sales of our refined products through premium marketing channels. In Q1, we demonstrated double-digit growth in the sales of bitumen, in terms of the jet fueling and bunkering. The volumes of premium motor fuels continued to grow as well as the gross income from non-fuel products and services. The reduction of the retail sales of motor fuels in Russia came from the normalization of the volumes after their considerable growth in 2018 because of the higher consumer demand for the products by vertically integrated companies as well as the reduction of the average fueling is in average check. This reduction was compensated for by better economics in retail business, which reached a positive area compared to the negative indicators in Q4 last year. Thanks to the high level of our refining capacities as well as the high level of vertical integration through the access to end users through well-developed premium sales channels, our total integrated margin in the Russian downstream shows a much weaker volatility compared to benchmark refining margin, which points to one of the most important competitive advantages of our business models of our asset portfolio. Despite a considerable worsening of the market environment in the refining, we demonstrated the growth in the integrated margin compared to Q1 last year and an average reduction compared to the previous quarter. Replacement of oil at our refineries remained to be the most effective channel of the allocation of our raw materials. The EBITDA improvement looks even better than the integrated margin, which comes with positive effect from the input refining stocks in the first quarter of this year as opposed to a negative effect it demonstrated in the previous quarter. This effect considerably cushioned the volatility in the refining margin. A positive effect over the EBITDA in downstream came from such factors as an improvement of the product basket from refineries, improvements of the results in the retail business bunkering, power industry, petrochemicals and international trading. We also noted the reduction of the operational cost in refining, which merely came from buying the additives from outside supplies after the maintenance was completed at catalytic cracking and alkylation units at our Nizhny Novgorod refinery. And negative effect it came from a -- the reporting period hedging contract because the negative influence from this particular factor in Q1 this year exceeded RUB10 billion compared to a positive factor on this particular factor for approximately the same value which was registered in Q4 last year. As a result despite a considerable worsening of the macroeconomic environment for the refining industry, the total EBITDA downstream in our case was RUB80 billion practically staying unchanged quarter-on-quarter and growing by 71% year-on-year. We continue the implementation of the purpose-specific projects at our refineries which would additionally enable us to improve the structure of the produced refining product bucket as well as develop our bitumen business. In terms of the delayed coking unit at the Nizhny Novgorod refinery, work is being done in order to establish the reinforced concrete foundations and the piping along the ramps. Currently the completion ratio in this project is about 35%. In terms of isomerization units at the very same refinery work is being done to put in the foundation. The completion indicator here is about 15%. And as far as the modernization of the bitumen production by now we have put together the project documentation and we have optimized our various technical solutions. So we're getting ready to begin. At the Volgograd refinery, we are doing the deasphaltizing unit where currently the foundations are being built the reinforced installations the installation of the piping and prefabricated steel construction. The completion level of this project as of now is approximately 15%. Now let me go over the financial part of our presentation. And I shall begin with a bit of a novelty which has considerably affected many line items of our reporting. Since the beginning of the year, we started applying IFRS 16 standard which effectively converts the operational leasing and the number of service agreements into financial leasing. As a result of the application of this new standard, we booked on our balance additional fixed assets and additional debt. As a result our net debt grew by RUB150 billion amounting towards the end of the quarter RUB197 billion. The improvement of the operational lease cost in the amortization and interest led to a higher administrative and transportation cost adding about RUB9 billion to the EBITDA in the first quarter. Now the increase of the fixed stock in our balance boosted amortization by about RUB8 billion and the increase of the debt increased the interest expenses by RUB2 billion. The currency component here led to an additional effect from the exchange rate differences at about RUB5.5 billion. As a result the affect of this new standard upon our net profit in Q1 this year was plus RUB4 billion. This new standard also affected the structure of our cash flow report. The operational cash flow grew by RUB9 billion as a result of transferring the operational lease into the debt servicing cost. The capital spending effect was RUB3 billion. As a result the additional positive effect over the positive cash flow was about RUB12 billion. Now in terms of the main line items. Revenue quarter-on-quarter and it dynamic equally was affected by the lowering prices for hydrocarbons as well as the lowering amounts of sales as a result of the lower volumes of oil trading. In terms of the operational expenses, I would yet again note the excellent dynamics in production and refining. Costs have considerably went down in terms of the averages which occurred because of the application of the IFRS 16 standard as well as because of the implementation of the improving efficiency. All other categories of operational expenses are under control. Despite complex market environment the consolidated EBITDA quarter-on-quarter grew by 7%. The main growth factors were the positive export duty lag, greater share of the high-profit-margin structure growing of gas production abroad and the refining inputs as well as reducing the average cost for production and so the positive effect over refining from the IFRS 16 standard. The main negative effect over the EBITDA was from the lowering refining margin and the specificity of accounting for hedging operations in our international trading business. So despite the growing EBITDA net profit quarter-on-quarter went down. And the main reason comes from the amortization dynamics which grew almost twofold. The key driver behind this growth was a low level of amortization in Q4 last year. And one-off factor related to its revaluation because of an increase of the proven drilled reserve. The part from it additional RUB8 billion in amortization in Q1, this year was accrued as a result of the application of the new IFRS 16 standards. Capital spending in Q1 were RUB97 billion, and went down by 14% quarter-on-quarter, and 20% year-on-year. This decline primarily is conditioned by the scheduled payment of supplies and contractors, the seasonal factor as well as the completion of yet another operational stage at the North Caspian field. Our free cash flow before changes in the working capital grew by 33% up to RUB183 billion. The working capital growth by RUB37 billion was conditioned by the accumulation of the inventories of the refined product as part of the international trading and great inventories at the overseas refining. In Q1, we have allocated in total RUB142 billion to be paid to our shareholders, which is a record capital allocation within one quarter. And it was approximately equally allocated between the dividend payment and the share buyback as was noted. As a result of the application of the IFRS 16 standard the size of our debt grew by RUB150 billion. And the total debt towards the end of the quarter was RUB642 billion. Our leverage towards the end of the quarter is 0.2. In conclusion, I would once note our strong quarterly operational and financial performance as well as confirm all of our target and goal commitments as well as the plans for this year which we announced during the previous call. And which is represented in details in our presentation. These are staying unchanged. Thank you very much for your attention. We're now ready to begin Q&A session.

[Operator:]

[Operator Instructions] The first question comes in from the Russian line from Ildar Davletshin calling from Wood & Company. Please go ahead.

[Ildar Davletshin:]

Good evening. Thank you very much for the opportunity to ask a question. I congratulate you on your good results. If I may, there are two questions that I would like to raise. One is about the return of cash to shareholders. And about your principle of allocation of approximately half of the additional free cash flow above $50 to buyback. We see that approximately you've done this program based upon the additional cash flow that you earned last year. But my question is about the second half of this cash flow. If -- is there an understanding of what kind of investment projects you are going to do? Or there is a probability that the second half is something that you can also allocate to buyback. So maybe in terms of the time guidelines, how long you're prepared to wait for an appropriate investment project or makeup your mind about starting the buyback? So that was my first question. And related to it my second question about the new investment projects, could you possibly comment on the main priorities, in between onshore, offshore, refining, petrochemicals there are certain indicators such as Iraq or payback within the period? So what are you trying to go forward when considering new projects? Thank you.

[Pavel Zhdanov:]

Ildar yes thank you very much for your question. This is Pavel Zhdanov speaking. Let me answer this way. The second half in compliance with our strategy is what we're going to dedicate to reinvesting into or getting investing with a focus upon Russia and Russian upstream. The purpose to expedite the development of the proven reserves, particularly and as far as the brownfields are concerned with a big resource base, which have been underinvested during the past few years, we are actively involved in comparing the resource for drilling, we are putting together additional development documentation, we are trying to seek the necessary permitting, land allocation, building infrastructure. In other words, we're trying to really speed-up all of the internal processes quite evidently very external limitations such as OPEC+, which do not allow us to go about these processes, we shall certainly speed up the developments with low permeability and under the windfall profit tax status. As far as the scale is concerned, they are about US$0.5 billion worth of such additional projects, which have been prepared. So that's where our main focus is. And further, as we have reflected in our strategy, we intend to consider purpose-specific investments in downstream. For now, no decisions in investing have been made. So it's premature to say anything about it. And merger and acquisitions to us is a much lower priority than organic reinvesting. So that's the way it is.

[Ildar Davletshin:]

Thank you.

[Operator:]

Okay. We have another question coming through from the Russian line from Igor Kuzmin calling from Morgan Stanley. Please go ahead. Hi, Igor, is your line muted?

[Igor Kuzmin:]

Oh, yes, yes. I'm sorry. Well, I've got two questions. The first one is about new buyback program. If I understood correctly, these can be defined not before a certain date in August. And if we are to say that is not going to be before August, is there any date in mind that such decisions should be made, let's say will get delayed until September and October if so why? I would like to understand what is the decision making process? And my second question is about your guidelines in terms of the investment level for 2020. I can see upon your slides that there is a bit of a guidance for up to RUB500 billion for 2019. Could you basically advise us with respect to 2020? I do understand that there’s a bit of dependence in terms of the OPEC-plus but nevertheless please.

[Pavel Zhdanov:]

Igor, this is Pavel again speaking. As far as the possible deadlines are concerned I would say that right after we review the results of the offering, which is expected to take place in the end of August to revisit this issue inside the Board of management of the company. The CapEx guidance for this year RUB500 billion. With respect to the future periods there may be a slight increase over the basic plan because if you recall it that was about US$8 billion depending upon the exchange rate. If there are additional projects to be reinvested into we may go slightly above this budget.

[Igor Kuzmin:]

Thank you.

[Operator:]

Okay. The next question comes in from the line of Ron Smith calling from Citi. Please go ahead.

[Ron Smith:]

Good afternoon, everyone. I have a question, coming back to the buybacks and related questions. And that has to do with your balance sheet policy. Before the adjustments for leases under IFRS 16 in this quarter at the end of 2018, your net debt was down well below $1 billion. In other words you're getting close to having a net cash position. Given the LUKOIL's very strong cash flow generation outstripping your dividend and even your buyback so far, could you give us an update on your leverage policy? Is there any chance that management will decide to go to a net cash positive policy in the future? Thank you.

[Alexander Matytsyn:]

Ron, thank you very much. As we have mentioned in more than one occasion we are not planning to go to the net cash position.

[Ron Smith:]

Thank you.

[Operator:]

The next question comes in from the Russian line from Alexander Burgansky calling from Renaissance Capital. Please go ahead.

[Alexander Burgansky:]

Good afternoon. Thank you very much for presentation. I've got three questions. First of all you said that the share of high profit margin production currently has reached 31% which exceeds your targets which you said as well previously. Now could you tell us what your ambitions now? Is there any new goal within this particular indicator do you plan to reach? The second question is about the OPEC-plus limitations. Could you tell us what are your free capacities right now? And how quickly you can ramp-up your production? And up to which level if OPEC-plus is no longer in effect? And my third question is about petrochemical because there has been recent news about LUKOIL quite possibly considering new projects in petrochemicals such as the construction of a plant to produce polyethylene and so on and so forth. Could you please give us a few more details about these plans? Or when one can expect your announcements about these plans? Thank you.

[Alexander Matytsyn:]

Well as far as our targets for the high-profit-margin barrels are concerned, it's difficult to say anything right now because on a very serious level that is dependent upon the way legislation may change. We're quite naturally going to try and maximize the share, but certainly looking back over the external limitations. And as far as your second question about OPEC-plus is concerned we have also stated many times previously that we do not see any economic rationale in keeping free capacity. So we first want to see and make sure that there are changes in place and only after that act on them. As far as petrochemical sector is concerned that is exactly one of the areas possible areas where very purpose-specific investments may take place within downstream that I mentioned previously. In the meantime as I said, no investment decision have been made. We do identify a potential for a further much more effective monetization of the petrochemicals inputs which we currently have at our Russian and foreign refineries. Thank you.

[Alexander Burgansky:]

I'm sorry when one may expect any news about your [Audio Gap]?

[Alexander Matytsyn:]

Our petrochemical strategy is something that we are not planning to announce because there is an ongoing work in various streams of the company assessing the potential of such investment projects. Once we are ready to make an announcement, we will do that, but not before the second half of this year definitely. Thank you.

[Operator:]

Okay, we have another question coming through from the Russian line from Ekaterina Smyk calling from Bank of America. Please go ahead.

[Ekaterina Smyk:]

I'm sorry. I was muted. Yes, good evening. Thank you very much for your presentation and answer of other questions. I've got two questions. The first one is about your CapEx guidance for this year. Upon the slide that is RUB500 billion is the top threshold depending upon OPEC-plus. But basically what is the range that we're talking about if CapEx is at the upper thresholds at RUB500 billion? And what kind of production growth you planned for? And my second question is about public buyback offering. In case there is a big number of applications from the marketplace to participate and you won't be in a position to completely suspend your treasury stock what will be the subsequent procedure in terms of announcing a new offering? And what could the time line for that please?

[Alexander Matytsyn:]

Well, our CapEx guidance RUB500 billion I mean the lower threshold could be let's say RUB25 billion. If you stay at the upper threshold, our production plan will be plus 1%. As far as the offering is concerned, we'll definitely act on all of the submissions that will come from the shareholders. And once we finalize it, we'll find out how much stock we have on the books of our subsidiary companies and then we'll make a decision about cancellation of the shares depending upon the quantity and other conditions. I mean the purpose is for the shares that there are which have been acquired in the course of the program to cancel them.

[Ekaterina Smyk:]

Thank you very much. Just a little question to continue on the technical side of things. So, what was the procedure? Will you need first to summarize the results and then make a decision and then hold an extraordinary shareholders meeting in order to approve the further capital reduction on that? Thank you.

[Alexander Matytsyn:]

Ekaterina, the way that we chose that we will follow through the offering requires the shareholder meeting's resolution. So let's not run -- put the horse in front of the cart rather in front of the horse. This particular issue can be resolved in this way by submitting it to the next shareholder meeting. Thank you.

[Operator:]

We have another question coming through from the Russian line from Anna Kotelnikova calling from Sberbank. Please go ahead.

[Anna Kotelnikova:]

Hello. Good afternoon. This is Anna Kotelnikova. Thank you for your presentation. I have two questions, if I may. The first, well I mean just one left to be more precise. We see in your report excellent figures in terms of your Uzbekistan production growth. Could you give us guidelines in terms of what was the free cash flow in Uzbekistan last year and what will it be for the current year? Thank you.

[Alexander Matytsyn:]

It was 0.5 billion last year and we're not announcing any guidance for this year because we'll report on the actual reports rather.

[Anna Kotelnikova:]

Thank you.

[Operator:]

Okay. We have a question coming through from the English line from Henri Patricot calling from UBS. Please go ahead.

[Henri Patricot:]

Yes. Well, thank you for the [indiscernible]. Just one left for me. I wondering if you could comment on any impact of the issue of contaminated crude on Druzhba pipeline I think on your operations in the second quarter. My understanding is that it's not only important export route for yourselves but backdrop some repercussions on the supply chain and impact on the sales production? Thank you.

[Alexander Matytsyn:]

Yes, that's right. There is no considerable effect over our sales because we were able to redistribute -- reallocate our transportation volumes and additionally load up our refining -- refineries and raise our stocks. And as far as our refineries are concerned they are outside of the Druzhba mainstream pipeline. So there was no effect upon them at all.

[Henri Patricot:]

Okay. Thank you.

[Operator:]

Okay. We have a question coming through from the Russian line from Ildar Khaziev calling from Bank HSBC. Please go ahead.

[Ildar Khaziev:]

Good evening. Thank you very much. I've got a question about the internal market. Would you please tell us, what was the difference in Q1, in terms of the gasoline domestic market supply and export what was the difference in percentage at least? And do I understand correctly, that currently in Russia there is a bit of excessive capacities of gasoline output. And all the companies including you do have a bit of flexibility? So specifically as far as I understand you slightly kind of fine-tuned your outputs from the refineries. And so the gasoline production slightly went down because of that. Do I understand this correctly?

[Pavel Zhdanov:]

Ildar, good afternoon. Thank you very much for the question. The domestic price effectively was below the export netbacks. Unfortunately, we don't have the precise figures in front of our eyes. So we cannot give you a precise growth in terms of what the deviation was. We will revisit this separately and share the figures. Thank you.

[Ildar Khaziev:]

Thank you.

[Operator:]

Okay we have [Audio Gap] Ladies and gentlemen, thank you for joining today's conference. You may now replace your handsets.