PJSC LUKOIL
Q3 2014 Earnings Call Transcript

Published: 27 Nov 2014

[Executives:]

Andrey Gaidamaka - VP, IR Leonid Fedun - VP, Strategic Development Igor Kozyrev - Deputy Chief Accountant Sergei Epifanov - Head of U.S. GAAP Financial Reporting Maxim Madzhlisov - Head of IR

[Analysts:]

Karen Kostanian - Merrill Lynch Maksim Moshkov - UBS Ivan Mazalov - Prosperity Capital Management Farid Abasov - Standard Bank Koszenya Miszenkina - UBS Ildar Davletshin - RenCap Alexander Kornilov - Alfa Bank

[Karen Kostanian - Merrill Lynch:]

Good afternoon. My name is Karen Kostanian and I am the EEMEA Oil and Gas Analyst for Bank of America Merrill Lynch. And today Bank of America is very proud to host the presentation of LUKOIL’s U.S. GAAP consolidated financial statements for nine months of 2014. LUKOIL today is presented by a very impressive line of senior management, headed by Mr. Leonid Fedun, who is the member of the Board of Directors and the Vice President for Strategic Development; Mr. Andrey Gaidamaka, Vice President Investor Relations; Mr. Igor Kozyrev, Deputy Chief Accountant; and Mr. Sergei Epifanov, Head of US GAAP Financial Reporting; and Mr. Maxim Madzhlisov, Head of IR. The presentation will be followed by Q&A. And without further ado, I will pass the microphone to Mr. Andrey Gaidamaka. Thank you.

[Andrey Gaidamaka:]

Thank you for all gathering here. We really appreciate the attention you guys are paying to our Company in these uncertain times. I just want make a couple housekeeping sort of announcements. We have also -- obviously we will have a translation and you should pick up the speakerphones. Mr. Fedun is going to be speaking in Russian and there is going to be simultaneous translation provided, first. Second, we will have, and now I am speaking to those that are joining us on teleconference line, we will have teleconference available for this call. We will not have a webcast, but you should click on now appearing a special link on our website to get to the presentation and you will be able to follow that. With this, I will pass the floor to Mr. Leonid Fedun, please. Thank you.

[Leonid Fedun:]

Ladies and gentlemen, we are extremely grateful for you coming to this presentation by LUKOIL. I think the political situation is quite uncertain, but at the same time I am deeply confident that the relationship, the relations of our Company with international community, international investors will continue developing and deepening. LUKOIL has been a pioneer, one of the pioneers among the Russian companies to access foreign stock markets and it will continue working with its shareholders and positioning itself for the rest of its life and I hope the life is going to be long and I hope that I will survive LUKOIL. Anyway, our Company will continue to develop as an open Company for the financial community, for investors, positioning itself as an international Company in the proper sense of this word. Can we go on to the next slide? And this is a typical disclaimer, just a few forward-looking statements we have to make, such statements whenever we make a presentation. And now on to the main figures. The results of the first nine months of 2014, as you can see, we have marked, we have a marked growth in production. Oil production by over 6%, considerable growth in EBITDA by 6% despite falling oil prices because we have the compensating costs in Iraq -- the beginning of the compensating costs in Iraq, and also the increase of our dividends. The free cash flow, despite the ambitious investment program, remains very healthy indeed. At the moment, in parallel, we have in Vienna another meeting of OPEC countries and the situation in the oil markets is very dramatic. Oil prices have fallen by over 40% and of course that concerns to all of us. All oil producing companies are cutting their budgets, slashing their budgets, particularly in terms of exploration, discovery and exploration in order to adjust to this new regime, tighter, tougher regime. Over the past five years without the volatility in the oil prices, we have relaxed many of our -- a lot of new companies arrived in the market thinking that 90 plus is going to continue as the price for oil for the foreseeable future. But today it is the market which is going to dictate how things should be restructured. According to our calculations, if the oil prices stay or remain at 80 and lower over the forthcoming seven to eight months, 6 million barrels of oil production might leave the market. This is the marginal deposits, fields, oil fields, oil sands, shale oil in the U.S., but also other bio fuels, et cetera, other renewables. So this is quite a considerable cleaning of the market, purification of the market. There is an interesting situation developing in the U.S. market. As you are well aware, the boom over the past few years was a classical American boom, similar to the dot-com boom at the beginning of the 2001. A lot of independents arrived in the market, entering the market without sufficient financing, with long leverages. Of course that was based on stable oil prices and also hedging huge volumes of the entire produced oil and it’s an interesting fact that an average cost of oil was over $100 a year ago, but the average hedging level was about $90. Without hedging, no bank would issue money. Today, we could be quite confident that the level of hedging for such companies is going to be -- the cost of hedging is going to be pegged at 60 and lower, quite loss-making for marginal projects. So this means that a lot of companies will leave the market and a lot of volume will leave the market. You can see that backing up to 40% of oil production forced the companies with ratings lower than the investment rating, so those which are going to be most risky. That doesn’t mean that production of shale oil is going to come to a halt in the U.S., but it is not going to be produced in the volumes it has been produced in before. And the maximum production level has got to 4 million to 5 million barrel in all formation. That means that in the Saudi Arabia and OPEC, we'll make their market healthier and also established themselves firmer in the American market than so far. So what’s going to be the effect in Russia? Because originally we thought that this program of the oil reduction, oil price reduction was going to be dangerous for the Russian companies, the main two companies. On the one hand, we cannot say that there is going to be no reaction to lower oil prices among companies. Our Company is going reduce by 2 billion our investment in drilling, first and foremost, and also infrastructure project of different types. But at the same time, you can see that four Russian companies, because of their Russian exchange rate and it’s quite flexible when expect to a dollar exchange rate, this is not going to seriously affect the prices of the production. Because our taxation system is quite flexible, we have low oil prices but also low taxation, low rates of taxation. And at the same time, the exchange rate $110 per barrel and RUB30 per dollar, that is RUB1,340 per barrel of oil. So this is about RUB4,000 per barrel. It works out to RUB4,000 per barrel. Our costs, 95% of our costs are denominated in rubles. And international projects, Iraq first and foremost, are not linked to oil prices, they are linked to compensation costs, and I am going to talk about it later. So our sensitivity and the sensitivity of the Russian companies in general are not very high vis-à-vis oil prices. But at the same time, we can be confident that starting from 2015 we are going too reduce, we are going to see the fall in production in Russia. I would just give you a linked to the fact that the drilling in West Siberia is going to reduce -- the amount of drilling in West Siberia is going to decrease and the tertiary methods of developing different fields have not yet found recession in the taxation system in Russia. It hasn’t received the necessary support in the taxation system. The next slide, if you can see, shows how the reduction in oil prices affects our costs. Like back in 1998 when we had the financial crisis, we have a sharp reduction in costs by about 63%. And in the third quarter, despite the depreciation of prices significantly by 7%, you can see that our lifting costs have reduced by over 2%. At the same time, the reduction or the decrease in CapEx has also led us to the increase of free cash flow. We have seen this from 2007 to 2010. Despite the falling oil prices, the free cash flow actually grown threefold. The same is going to happen in 2015 and '16 -- '15 because we are going to reduce the amount of drilling, in 2016 because of two new projects coming online, the Filanovsky fields which are going to give us a considerable additional cash flow for the Company. Another important factor influencing the current situation, other so called tax maneuvers or tax maneuver undertaken by the government starting from 2015 which is going to reduce the overall tax burden on oil production by more than 3%. But, it doesn't quite seriously affect our capabilities linked to processing, because LUKOIL has been fast enough to invest in the increase of the depth of processing in our processing fields, in our processing units and I will tell you about it in greater detail, refining. So how does this tax maneuver affect production -- sorry, refining? When you talk about fuel oil and also heavy distillates, it's not going to be profitable because the export duties are growing. So the companies which have upgraded their facilities, are preserving the level of their margin. Those that haven't upgraded their facilities are facing serious problems. I can tell you that in 2016, we are going to complete the upgrading of our facilities. And despite the general increase in the taxation burden on our processing plants and our refining plants and the refining margin is going to drop, we're going to preserve our income from downstream, the ones that we have from downstream projects. And our retail facilities are going to generate additional revenue because within the gasoline or petrol for producers, it's going to grow by 10% or over 10%. The key factor in order to evaluate the value of our Company is the payout of dividends. Several years ago, we declared the growth dividend payout program and the Board of Directors, which was held last Friday, have confirmed, and also the shareholders' meeting have recommended the interim dividends to the tune of RUB60 per share. And the Board of Directors also adopted a very important decision not only the ruble denominated but also hard currency denominated dividends are going to grow. So irrespective of the situation, ruble exchange rate, the dividends over 2014 denominated in dollars are going to be greater than in 2013 and '12. Even if not by a huge margin, this is a principal position of our Board of Directors. Today, the dividend yield is very high for LUKOIL. We have no doubt that the free cash flow that we have for 2015, and we are planning over $1 billion worth of free cash flow after dividend payout. And I would like to draw your attention that it's going to be after the dividend payout. A few words about our financial indicators. We are showing a very high level, efficiently high level of financial efficiency. You can see that compared with other companies, EBITDA per barrel of oil equivalent, we are the most efficient oil company despite the fact that we are going behind, we are lacking behind of near twofold in terms of the volumes per produced. That means that our Company shows the highest financial efficiency among all the competitors. The macroeconomic and taxation climate, we can see that all -- in fact almost all the market indicators have had a negative influence. You can see that the fuel oil price has fallen by over 20%. That means that the investments that we have made in the refining facilities are extraordinarily important in terms of our financial efficiency. And at the same time, we can see the reduction of other indicators such as freight, rates for the transportation of petroleum products and the nominal weakening of the ruble, depreciation of the ruble by over 10% and that has had a positive effect on the activities of the Company. What is the breakdown, the main breakdown of our profit of our income and the calculations of our income? We have the indicators, some of the indicators which have affected the growth of our income. And at the same time you can see there is a change in our position linked to the depreciation of the ruble and this has had a certain negative impact. The major operational results, parameters are shown here on this slide. You can see there is an increase of sales of oil domestically inside Russia and we’re continually reducing oil exports. This is because the export of petroleum products is more profitable because of taxation specifics. But starting from 2015, we can say confidently that oil export either gets stabilized, gets settled or will be increasing because of this tax maneuver as more than 30% will be export duties will be decreased for oil. It’s important here that one of the areas, directions for experts together with the Europe, China is becoming more important. You know that China has signed some contracts on oil consumption and our Company is among other providers, suppliers to China. It’s one of the -- our netbacks are higher than providing oil domestically. This major indicators as far as oil production is concerned, there is some little decrease of oil production in Western Siberia because of natural reasons, because of the level of oil production objectively decreases, the water environment is increasing. But it is being compensated by the significant oil production growth in other regions, in the euros and Pechersk region, but also because of starting receiving compensatory oil from Iraq. So as a result, we have almost 6% growth of production of hydrocarbons in total. From the point of view of comparing benchmarking us with our competitors, you can see LUKOIL is number two on oil production growth after Bashneft. And we can say confidently that after the change of owner, Bashneft is still growing. And including all other parameters, other competitors including some international global major, because of this oil price drop and falling of spreads, they started to gradually decreasing their oil production. Not only the OPEC sees the production to get stabilized, but all other major oil producing companies have already mentioned this process will be sustained by small oil producing companies. Some major key financial results have been published and you’re welcome to see them on our website. Basically what you’re seeing here, you see them here as well, there is nothing kind of extraordinary with the exception of our substantial sale increase irrespective of drop of oil prices. As already said, this because of the growth of oil production and because of the compensation coming from Iraq and the drop in oil prices is about the price drop as well and also financial writing-offs which was happening. Our major operating expenses. The cost of expenditure of hydrocarbon extraction have been increased by 12%, but this is last year. They have been increasing. But starting 2015 we cut our investment program because all the major projects would have been implemented. Separate here is Qurna in Iraq, but in Iraq stage of self-financing will start. Meaning that all our expenses will be compensated in quarter four according to our agreement signed with the oil minister of Iraq. So Western Qurna is a thing by itself. And this basically operates as sort of a reverse hedge in terms of oil prices. At high efficiency, the Company demonstrates high efficiency in cost management. If we just move aside the Iraqi business because the costs in Iraq are regulated first of all by the agreement with the Iraqi government and they're basically compensated almost in full, all the other costs you can see they’re reducing even in relation to, comparison to quarter two 2014, quarter three they decreased, this is mostly because of the ruble depreciation. And if we compare ourselves with the major companies, our cost levels expenditure is extremely low. Most of the companies, the price of less than $90 per barrel would have to decrease the production. For us, breakeven in oil production is around $25 per barrel. We’re here absolutely flexible. On one side we receive support coming from Russian taxation system, which by the way actually was being established. With my involvement we were concerned of oil price dropped more than $10 per barrel. On the other hand, there is conventional resources, they have a unique opportunity to keep production with minimal costs. Transportation, commercial, SG&A expenses there within the general trend. And the decrease first of all is linked to the ruble devaluation. LUKOIL keeps its robust financial position, maintains its robust financial position. And net debt has increased slightly and we try to move our debt into ruble zone, ruble nominated zone. You know we recently signed an agreement with the bank, with the Sberbank to financing its ruble interest rates because with the ruble devaluation this kind of borrowing is more optimal. Starting from 2015, 2016, we again start decreasing our debt irrespective that even it’s not actually huge. Our CapEx structure -- as far as our CapEx structure is concerned, investment in exploration and production have increased by 11% because of Western Qurna, but mainly because of Western Qurna project in '14 and 2015 are peak years for such projects as Korchagin and [Nakhodkinskoe] (ph) fields in the north of Western Siberia. This is the biggest volume of drilling and infrastructure investment. As already mentioned, 2014 is a peak year, considered to be a peak year in terms of our CapEx structure. In '15, '16 we expect gradual decrease and correspondingly an increase in free cash flow. If we look at the structure of our CapEx structure, you can see that in geology and exploration and production, you can see there is a substantial volume is actually happening abroad and quarter-by-quarter, quarterly they are within a certain range. A few words on project development. Our project in West Qurna is better than, developing better than expected as that is coming from the drilled holes are better than expected. The dimension of formations have been confirmed. The production is growing months by months and now we came to the 300,000 barrels per day. Next year we'll be 400,000 per day and then we start Mishrif project with the level of production 550,000 barrels per day. We also started oil compensation. It says here nine, but more than that with the compensatory oil. This is issue with the oil price drop, the company has to give us more oil. And West Qurna operates as a reverse hedge, the lower oil prices the more oil we get as a compensation. Actually we’re planning this project as certain hedge project, to a certain extent natural hedging project while we receive our cash irrespective of the world oil situation. We don’t really get huge premium, but at the same time we hedge ourselves completely against oil prices which is very actually just demonstrated, proved by the current situation. The next project is in Uzbekistan. Literally some days ago a law of the Republic of Uzbekistan was signed by President Karimov in terms of selecting contractors for our Kandym field, very important project would allow us to produce up to 8 billion cubic meters of gas. And starting next year, this project will get developed actively. You are aware that all the gas from this field is supplied to China. The Chinese companies are constructing an additional link of pipeline from Turkmenistan to Western China. The gas price is very attractive on this contract, very attractive for us as we don't really spend any cash on infrastructure. The infrastructure has been constructed and provided by our Chinese comrades. There's a big, huge interest coming from Chinese companies to participate in this project, but they are still under discussion. One of the growth regions which we have currently is the Urals. You can see here that within last 10 years, the production have been increasing in this regions irrespective of the fact that these fields are quite old. They have been starting from 1950s and the average debit of these fields is increasing, so the Urals is one of the growth regions for us. The same with Timon-Pichora region, after certain successful results from [indiscernible], we are more careful now approaching the studies of our geology and geodynamics of formations, new technologies allow us to increase our product. As a rule, all these fields are being developed with hydro-fracking and these fields after receiving this arctic benefit, they become more efficient. And you can see for the last year an average production in Timon-Pichora will increase by more than 9% and highly efficient production. A very important event for us was Imilorskoye field launch. If you remember, there was a huge battle of the tender was for this field with Rosneft and we were the winners. Actually answering the question why Rosneft always wins, not always and not everywhere. The successful development of the Imilorskoye field, we're actually five months ahead in developing this huge field, potentially reserves this up to 1 billion barrels of oil there. And they demonstrate that we do have some potential to increase our production, including Western Siberia. One far more important event of this year is the completion of construction of all above-water facilities in Filanovsky field, which is our major operational project for us. And currently, at present there is a great confidence that by 2015 we will start producing first oil in that field. This is a major investment project in 2015 to be launched in the Russian Federation. The specifics of Russian taxation system is about the so called individual benefits for the fields -- are there over difficult construction of or so called unconventional oilfields that everything which is covered by this term. There is a high [viscosious] (ph) oils and difficult to extract oils, oils produced across the polar circle and offshore production. For us, it's Baltics and the Caspian Seas. Next slide actually demonstrates the attractiveness why these fields are attractive for us. You can see the netbacks at the price of $90 per barrel are different from so called normal regime. The most efficient production is hardly [viscosious] (ph) oils, but even hard to strike oils there are quite efficient here as well. But also offshore is very attractive area for us in terms of investments in this development. As far as the high viscous oil, we have here two major fields, one is Usinsk field and the other one is in Samara region, Russian-European parts. You can see the production will be 3.5 million metric tons and substantial influence on EBITDA RUB23 billion to RUB25 billion of net income. The highest efficient project in high-viscosity oil in Yaregskoye field, if under normal regime we plan to produce 700,000 ton and according to plan to get to 4 million tons which allow us to have a high level of income on this field as well. Because we have a benefit here, we only 10% of export duty and 10% of MET tax. So in fact this is a very strong cash cow, it's a very powerful cash cow for us. Extremely efficient and effective as far as our Company is concerned. Difficult to, hard to extract oil, there have been lots of issues with it and questions whether our Company would be able to produce hard to extract oil when we have sanctioned because there are obviously limitations on how much equipment could be supplied by shale oil. But, hard to extract oil doesn’t fall under the definition of shale oil. And the equipment that can be limited by sanctions from the U.S. will be replaced by Chinese equipment which will be just as effective. And similar equipment is now being manufactured in the Russian Federation. Here we show an example of the Vinogradov field. Vinogradov field was totally ineffective and of low commercial value in the previous regime. But now it can actually produce NPV exceeding $535 million at the level of production 2.7 million tons per annum, which means that we are getting closer to the situation when working with unconventional oil could produce very effective results. Another example of stepping up production in the Russian Federation is tax incentives for those who are working beyond the polar circle. We have two such fields in the Nenets Autonomous region and also Yamal-Nenets Autonomous region in Russia. By 2021 we will be producing 9.5 million tons of oil from those fields and the level of EBITDA at $90 per barrel will be close to RUB50 million per annum. The Caspian Sea, a similar situation, a lot of talk about the Caspian Sea projects. The range of tax incentives for the second level of difficulty of fields is very attractive and makes the production very attractive indeed. After Filanovsky, we are preparing for developing another three fields on the Caspian shelf. There are small fields in the Baltic Sea. We have been working in the Baltic Sea for quite a long time and along D6 which we are producing oil from now, we have developed we have actually explored four other reservoirs and we know that these small fields nevertheless are going to be an additional asset for our production, because here we have very low transportation cost because it’s in the Baltic countries, part of the market already, and we have additional tax incentive for these fields. I have already mentioned that on the eve of the tax maneuver, we actually invested considerable amount of money into improving our refining facilities. Our three refining facilities in Nizhegorod in Nizhny Novgorod, Volvograd and Perm are going to be highly efficient. And you can see the demand of fuel oil that's going to be refined or processed. By 2015 it's going to be reduced by 60% and by 2021 we will produce no commercial fuel oil. That means refining is going to be a very highly effective asset for us. Another important factor linked to our work is access to the Asian capital markets. Yes, indeed, we can see some difficulties in working with Western capital markets because of the credit committees often looking at difficulties, although we have no financial sanctions applied against our Company. Nevertheless, we can see that the problems exist in the European capital markets. So for us, there is a way of having a listing on the Hong Kong Stock Exchange. So at the moment we have a highway between the Hong Kong and the Shanghai Stock Exchanges and this connect allows us to access the Asian capital markets with a total capitalization of about $5.5 trillion. Because we’re already working with a number of Chinese companies, this allows us to be very optimistic that we will be actively developing this area of our work in this direction. We think by the middle of next year, all the restrictions, the former restrictions for our Company entering the Asian stock exchanges are going to be lifted. The Central Bank of the Russian Federation is working very actively to remove those restrictions. And the traditional conclusions I would like to make here, in conclusion, that LUKOIL is going to continue to increase the efficiency of its operating activities, to increase its profit not just for themselves but also the income for the shareholders. And despite the turbulent times in the markets, we’re still very optimistic about the development of our Company. Also, we think that the policies of the OPEC countries are in fact favorable for the oil markets as a whole because they would allow us to preserve and strengthen our position as a Company which is strong financially and has unique opportunities to preserve the cost price of the production and increased income. Thank you for your attention.

[Andrey Gaidamaka:]

Now we’re going to switch to Q&A. And I want to remind those people on the conference call that follow us on our website that we will be taking questions also through Internet and we’ll be taking questions through the phone lines. But we will take the questions first from the room, then we’ll take questions from English line and then we’ll take questions from the Russian line. I would really appreciate as we’re taking questions from the room, I would really appreciate if those that are on lines would make themselves known to the operator. So with this, we’ll switch to the questions from the room. Are there any?

[Q - Maksim Moshkov:]

Maksim Moshkov of UBS. Two questions on the reduction of CapEx in Russian upstream projects. As far as I understand, this is going to be just a transferral of CapEx to a later time. What are the specific projects where there are going to be such delays? And also about the dividend payouts, you’ve always talked to us about the 30% is the target. But formally it’s going to be achieved this year, but at the same time you’re saying that the growth in absolute terms in the dollar denomination is a matter of principle for you and the Board of Directors. So 30% payout and the growth in absolute terms, what is the target then given that the oil prices are falling and the negative macro factors?

[Unidentified Company Representative:]

The matter of principle, yes. If we say that the budget for 2015 oil prices stay at 70 and lower, we could pay more than 50% of our profits in terms of dividends. So that was based on the budget that we had when it was $110, $120 per barrel with the reducing dropping, falling oil prices. The position is changing, but the actual amount of payouts is protected. It is absolutely obligatory, such as for instance paying taxes or repaying debt. This is protected this is ring-fenced. This is a matter of principle, it's ring-fenced as far as our Board of Directors are concerned. As to the reduction in the drilling, this is mostly Brownfields in West Siberia. The marginal field which had a low yield, we just supported production there. So part of the fields with the falling oil prices are becoming not attractive and they're just really marginally breakeven, so we have decided to reduce them. But the development projects are not affected, Filanovsky and [indiscernible], all the other projects linked to the production levels, high production levels that I have mentioned with high net backs. We think overall that in 2015 Russia will see a small reduction in production which will increase in 2016 and this allows us to say that the government will sit back at the negotiation table and to think about what their additional income tax is going to be, extra income tax going to be like and that if they reduce that tax, it's going to allow us to increase production levels. And the rates of oil recovery for us, it's about 19%, the rate of oil recovery for our Company. That allows us, the proven reserves 20 billion barrels, we have the proven reserves of 20 billion barrels. If we increase it to 38, I am not talking about 40%, 38%, that means that theoretically we have the opportunity to double our proven reserves and our capacity to produce oil. But it’s the tertiary methods are not efficient even at high oil prices. And at given oil prices, they’re even less attractive. The government has formed a whole system of tax incentives which allows us to preserve our level of production, which we need to move from individual incentives to a normal taxation system which exists in most producing countries of the world. Looking at the financial results and not the volumes of production, then we will increase drilling and also oil production. But for that, we need a certain clearing of the market and also of the mines.

[Ivan Mazalov:]

Ivan Mazalov, Prosperity Capital Management. Over the past 10 years, three major Russian companies have become nationalized and over the past two years in particular. Can you evaluate the situation and tell us how this trend is impacting your strategy, the nationalization of the major companies in Russia?

[Unidentified Company Representative:]

Well, any action leads to consequences. How serious the consequences, positive consequences, reaction. So when they talk about tax incentives, if we only had private sector, because these are state companies, they’re lobbying the interests with the government, they want to protect their own efficiency through tax incentives and this is what you’re watching today. These tax incentives are being used for all of us and we’re using that fact, perhaps better than the others. When I started in the oil business, that was 1991, we only had two companies at the time, LUKOI and the rest which was called Rosneft and we felt fantastic of the time. So if the market goes back to the situation, nothing will change in practice for us. As to risks, threats, challenges, the reduction in oil prices, any acquisitions are unimaginable now because those companies who are now merging and acquiring other companies will have no finance to service their internal debt. So I am quite confident that in the future, in the forthcoming 10 years, we will develop normally and stably.

[Unidentified Analyst:]

Credit Research. I want to ask a question about Iraq first. And I noticed from the accounts that you mentioned EBITDA of $2.3 billion was accumulated in nine months '14. I was just wondering what were the actual cash flows that you received since you started shipments and perhaps your expectations for Q4?

[Unidentified Company Representative:]

At the moment, all the money that we’ve generated are going to EBITDA because this is the return of our capital investment and also our OpEx. The volumes we’re getting of management fee, the so called management fee, is insignificant, but we do get. So all the flow 14 million barrels, translated into the current prices, that means our cash flow and it is actually reflected in our accounting, in our financial reporting. Have you understood what I meant?

[Andrey Gaidamaka:]

We already showed it on page 26 and this is an important point, you’re absolutely right. That’s why we are showing this slide that up to date we have received already nine tankers with over 14 million barrels of crude that we have shipped and this is our cash payment. Of course, it’s way smaller than 2.3 billion than on accrual basis that we have booked. So you are totally right. But this is, we’re catching up. I mean right now we do have certain increase of working capital, but with the shipment catching we will have higher cash reimbursements at some point.

[Unidentified Company Representative:]

And also of course we have obligations by the Iraqi government. They have to supply us with oil to the tune of $2.3 billion. Some of the obligations, undertakings have already been met. The rest will be met by the end of next year, by the end of this year, beginning of next year. And we are getting cash when the shipment takes place. So if we supply to our own refinery during the processing of the petroleum products, there is a little gap in time in our reimbursement.

[Unidentified Analyst:]

Personally, one tanker per week and it looks like that schedule is being stuck to, is that what you are expecting going forward on a regular [indiscernible]?

[Unidentified Company Representative:]

Two tankers in a week.

[Unidentified Analyst:]

Two tankers per week. [indiscernible] question as well. About the reduction in the CapEx, could you just remind us what share of Russia CapEx is ruble denominated? Because I was just wondering if ruble is actually helping the foreign CapEx, is the spend actually going to stay more stable year-on-year in ruble terms?

[Unidentified Company Representative:]

We are talking about $2.2 billion reduction, in dollars. We have our budget in dollars. It’s very difficult to look at the fluctuations of the ruble, it’s very hard. From 2016, we are going to be denominating everything in international reporting systems. And the currency for the reporting is going to be ruble and there is a real fall in our CapEx and ruble depreciation helps us, it improves the economic environment with falling oil prices. I've already mentioned it, because with our contractions and everybody else, we pay in rubles, even international contractors are paid in rubles. Therefore the current contracts are all being executed in rubles, with Halliburton. The Halliburton are loss making at the moment. If the ruble was strengthening, there would be profit making. So all the new contracts which are going to be concluded are going to be ruble denominated, but of course the situation is going to be slightly different. So this is why we are looking more and more at Russian contractors because they are not as sensitive as international contractors to the fluctuations of the exchange rate.

[Farid Abasov:]

Farid Abasov, Standard Bank. The first question is about your forecast, on production in the West Siberia. You said you are going to reduce CapEx by 2 billion. Are there serious consequences to those projects and what is it going to be? What is the percentage in the decline in Brownfield production in West Siberia. And the second issue is your gas prices in Uzbekistan, are they linked to the oil prices? And if so, what is the picture?

[Unidentified Company Representative:]

Indeed, the production and the natural fall in the production in West Siberia is large, it's by 11% per annum. It's a natural fall and we have to compensate with the increased volumes of drilling. When we decrease the volume of drilling, that leads to the decrease in production. But you can see the decrease in production in West Siberia is about 1% per annum. But we are also preparing the [indiscernible] field beyond the polar circle, which will produce 14 million, which will compensate the decrease which we have already seen in 2014 and we will see in 2015 and then of course the [indiscernible] field, which is going to be producing 2.4 million and further. But in general, the West Siberian production is going to fall, there are not secrets here, until we start to use efficiently the tertiary methods of production and development of fields. The second question was about Uzbek gas prices. Yes, of course they are linked to the oil petroleum product basket prices, but the counterparty for the supply of gas to China is not our company. We are trading using the Uzbek national company. This is the market formula. It is complementary for us, more complementary than other gas supply projects to other directions. It's more complementary than the rest of the gas supply to China from the Russian Federation projects.

[Unidentified Company Representative:]

I cannot open the former, because it’s confidential information.

[Unidentified Analyst:]

[indiscernible] A question about CapEx. You have suppliers in Ukraine and to what extent, how it influences any impact, any decision or any pressure to decrease the share of Ukrainian suppliers? And the other, the costs and CapEx is from local suppliers. Do you expect the growth will be higher than the inflation because there were less suppliers contractors, meaning concentration and smaller number of companies or if you believe the inflation will be higher than the general average inflation?

[Unidentified Company Representative:]

We don't have any suppliers, contractors in Ukraine. We used to have a team fly in from Ivano-Frankivsk. But if they are banned to fly, they will lose hundreds of thousands of dollars. Yes, we have lost some big money in Ukraine. We managed to sell [indiscernible] refinery, but we didn't have time to sell Kalush and correspondingly there was a big loss there. As far as the contractor situation is concerned, all the contractors are -- with the oil prices falling, they are the first to suffer because everybody decrease volumes, the competition grows, increases, price offerings are quite flexible. We don’t expect any growths even in rubles more than several percent for the drilling prices. With the dealer price decrease substantial in many companies lease equipment, but it’s up to them. Those who go for risks, the competition levels in Russian contractor services in 2015 will be substantially higher than in 2014. That’s why there are no issues for us in here. Again, there is a certain positive side linked to the oil prices drop. As I am saying, we don’t have any Ukrainian suppliers, no pressures whatsoever. The only thing that's certain, illogical things when on one side there is a talk that there will be a possible ban for the Ukrainians to work in Russia. Actually it’s coming from the Ukrainian side. If I am not mistaken, the Ukrainians who work in Russia, they receive billions of rubles which the money which later repatriated. For us it really doesn’t matter where our suppliers are coming from. We are not going to introduce any limitations, any limits, bans, et cetera.

[Unidentified Analyst:]

Can you comment please on Mr. Alekperov's commentary on Friday after the Board Meeting that dividends in 2015 would be unchanged on 2014 and just marry that commentary with what you said earlier in your presentation, please.

[Unidentified Company Representative:]

They will substantially increase in ruble denomination, as already mentioned. They will slightly increase in dollar denomination, basically meaning there will be particularly no increase in dollar. I can’t give you exact amount though it is within the budget, but it's linked to certain say RUB43 per dollar. I think it’s an objective price which we can expect most likely in 2015, varying between RUB43 to RUB45 per dollar most likely will be the price for next year. That’s why the ruble nominated dividends will increase substantially in rubles and slightly increase in dollar denomination. If dollar exchange rate is lower, then the growth of dividends will be even more higher. As already mentioned, the dividend price is fixed. Our budget is drafted in dollars and this item is protected.

[Koszenya Miszenkina:]

Koszenya Miszenkina from UBS. I've got a question on interest rate for Sberbank loan. Can you comment or give any indications?

[Unidentified Company Representative:]

This rate is basic rate of the bank, I can’t tell you exactly without the permission of the bank. But under current conditions, it doesn’t make sense. There is a deficit of reliable borrowers for the bank and I believe it’s quite a good deal. Unfortunately, the Central Bank’s rate is high, 9.5%, but it’s in rubles, ruble nominated loans, they can’t get any cheaper.

[Andrey Gaidamaka:]

From the room it looks like everything is so clear that we are running out of those. So I’ll switch to questions from the phone lines. We have the first question from Ildar Davletshin from RenCap. Can we let Ildar through with his question?

[Operator:]

Ildar, your line is now open. Please go ahead.

[Ildar Davletshin:]

[indiscernible] 10% for your production or less or more?

[Unidentified Company Representative:]

Thank you, Ildar. Yes, as far as Bashneft is concerned, yes, indeed we do have a joint venture, Bashneft-Polus with them. The operating and developing -- the company is approaching developing. The charter is awarded in such a way that we are protected, all decisions are taken collectively together. We don’t see any particular issues and Bashneft-Polus is operating within the business plan adopted by the Board of Directors. As far as the treasury shares are concerned, yes indeed Hong Kong is our objective, but at the same time we do not exclude any redemption of shares as soon as some favorable investment climate or legal aspects are included. As far as hedging our [Itar-Tass] (ph) operator hedged its oil for transporting from Russia to over suppliers. As for the term, this hedge is 15, maximum 30 days. That is why the fall of oil prices actually gave us additional profits to our Company because the oil price dropping, it actually worked to our favor. In this case we are protected. And the oil which we supplied after it is within the tanker, after the calculations, this oil is also hedged, both also delivered to Europe and within the transportation term, but it is not more than 30 days.

[Andrey Gaidamaka:]

We will take the next question from Alexander Kornilov from Alfa Bank. Can you come through, please? This is from Russian line.

[Operator:]

Alexander, your line is now open. Please go ahead.

[Alexander Kornilov:]

In fact there is only one question remaining. In your reporting, it says that after introducing of an MAT, I guess your NDP rate has decreased dramatically. Can you explain what actually factors were behind it? I understand that your competitors in Russia, this MAT rate for gas hasn’t changed dramatically after the formula has been introduced.

[Unidentified Company Representative:]

Starting from 1st of June, the formula for gas calculations changed for independent producers. As you remember, we are the most independent from independents. That's why we've got the most favorable rate. This is being regulated by the state.

[Andrey Gaidamaka:]

Question over the line, it's coming from Evgeny [indiscernible] of Renaissance Asset Management Company. Please come through.

[Operator:]

Evgeny, your line is now open. Evgeny, your line is now open. Please go ahead with your question.

[Andrey Gaidamaka:]

Well, if we don’t have, we seem to be experiencing some problems. We also have one question off the Internet from Andrey Gromadin from JPMorgan and there are quite a few questions, but Andrey, we will come back to you on some of them. But one of them is, on Page 35 we have the fact on EBITDA of Yarega field and whether they calculated with or without the tax maneuver and what operational costs per ton of production do we expect there.

[Unidentified Company Representative:]

We already said that currently this production there is the most efficient project for the Company taking into consideration this is the biggest tax benefit. Though we need to be said that it's the heaviest oil currently in Russia, but this is even without this -- excluding this tax maneuver because here we go to roughly the same tax rate 10% of export duty and tax rate for MAT. This doesn’t really affect this field.

[Andrey Gaidamaka:]

We don’t have any further questions. We will be concluding with this. And we would like to really thank you coming with such a good numbers to this presentation. Not all of the people in this room were from LUKOIL office, so that is always good. So thanks a lot.

[Unidentified Company Representative:]

Thank you so much. Attend for next meeting.