PJSC Rosneft Oil Company

Svyatoslav Slavinskiy - VP of Economics and Finance Eric Liron - First VP, Upstream

Kate Oat - Bank of America, Merrill Lynch

Good evening, ladies and gentlemen. Thank you for your attendance and participation in our conference call to review Rosneft's performance of Q2 2015 and for the first half of 2015.

My name is Svyatoslav Slavinskiy, I'm Vice President for Economics and Finance in the Company. We also have Eric Liron, the First Vice President in charge of Upstream; Andrey Lazeev, the Chief Geologist; Artem Prigoda, Presidential Advisor Director for Planning Performance Management, Development and Investments in Upstream.

Alexander [indiscernible], Director for Department for Planning Performance Management, Investments in Downstream; [indiscernible] Director for Planning and Reporting; Chief Accountant and the gas business department Director [indiscernible] and we'll be happy to answer your questions after the presentation. First of all, I'd like to draw your attention to slide number two and then a important note there.

Going into slide number three where the company's performance I'd like to note that despite the declining oil prices in [geogrpahy] by 1% quarter on quarter and 12% of six months. For six months the company demonstrated a robust financial performance and continued implementation of strategic initiatives to improve the efficiency.

The hydrocarbon's production in the first half of 2015 amounted to 5.2 million barrels of oil equivalent per day which exceeded the results of the first half of 2014 by 2%. The key source of growth is the gas segment.

Based on the first half of 2015 gas production increased by 16%, oil refining remained flat at 48% steadyfast, strong production results along with the performance improvement ensured high financial performance. Adjusted EBITDA increased by 14%, up to [325 billion] and free cash flow increased by 60% up to 310%.

I would like to say that the quarterly financial performance in the returns grew up at the [indiscernible]. The revenue increased by 20% as an adjusted EBITDA by 40% against the euro’s growth rate by 17% only.

The same dynamics was observed if we look at the six months performance. Let's look at each stream that has made it possible to demonstrate such dynamics.

The current year proves to be a key from the perspective of our equity driven service. The company increased the drilling footage by more than 30% in the first half of 2015 year on year.

And we put more than 800% stream with more than 30% horizontal wells that all in all exceeded 360% The drilling pace increased by 8%. Our captive service mainly possible to keep prices, market prices and [indiscernible] well cost and we can see the impact later this year and next year and production from new wells will keep growing.

Speaking about oil production into first half of 2015 then the biggest growth was demonstrated by this [indiscernible] gas since the optimization of service facilitates operation [indiscernible] field with a production peak of about 1 million tons was put on stream and the [indiscernible] edge of the Chaivo field where in May 2015 we produced the first million ton of borrowed. The company continued to see cut back oil production reduction rate by improving the efficiency and the daily production reduction was arrested by 3.6% in the first half of this year compared to 3.4% last year.

Gas production increased by 16% year on year thanks to commissioning of production facilitates and gas transport infrastructure [indiscernible] and implementation of the natural petroleum gas utilization. We've continued implementation of our strategy to put new results on stream.

We started development drilling in [Labaganskoy] and the first well is expected to be put on stream in -- the first well was put on stream in July. It is expected that in 2016 the company will reach production of about 1 million tons of oil equivalent.

We started full scale development in [indiscernible] and complete construction of 21 wells and we plan to reach a peak production of 7 million tons in late 2016. In terms of organic gas business development, we keep maintaining our leadership position and by actually working to expand the capacity of the [inner building core] gas plant of [Rosneft] and the launch is planned to be at the end of 2015.

We continue our cooperation with Statoil and in 2015 we drilled two horizontal wells together and the condition of the project will make it possible to develop the resources of northern [indiscernible] field 3P results of the field brief on PR is our estimated 889 million barrels of oil equivalent. Speaking about the efficient partnership I cannot but mention that 20% sheer buyout by BP, together with our company will keep developing eastern Siberia [indiscernible] oil and gas condensate field which is currently producing 20,000 tons per day applied to a production of 100,000 barrels per day.

This transaction in addition to ramping up the development of the field is a confirmation of the attractiveness of the Russian oil and gas sector and a confirmation of the ability to maintain the development of the eastern Siberian. I have already mentioned the impressive results of the gas business and I will not dwell on the revenue increase in the segment by 18% year-on-year.

And despite the fact that the regulated gas price was not revised the company managed to improve the increase the average gas price selling price by 4% and it is important to note that thanks to our efforts to justify if tariff or transportation is increased was reduced to 2%. And thanks to the savings, we managed to save 2.6 billion rubles per year and in accordance with the indexation as of the 1st of July by 7.5% in the second quarter of 2015 we expect to improve the net back.

Speaking about downstream, in Q2 2015 the company improved robust production Euro 4 and Euro 5 by 56% and we have started and the company is actually working to improve the profitability and improve the footprint and we have signed a contract with Chem China for ESPO upto 2.4 million tons, all in all our premium supplies in the eastern direction increased by 20% year on year. Summing up the company has made a strong effort to improve its efficiency despite the diverse dynamics of the oil price and the ruble exchange rate our revenue increased upto 1.3 trillion rubles or $25.2 billion and the net income improved by 13% year on year.

Rosneft is demonstrating an efficient cost control and the production cost in ruble prices are stable and the transportation costs have optimized. In terms of motor gas production our costs have increased because of high octane additives but these costs would improve our margins and the quality of our motor gas fuels has improved significantly.

Thanks to the cost control the EBITDA amounted to 326 billion rubles, $6.3 billion and improved by 14% compared to Q1 2015. The adjusted EBITDA margin reached 24.8% the time lag for export duty was forfeited because the tax renewals had a negative impact of 16 billion rubles in Q2 minus 37 billion in the first half of 2015.

The provision cost in the quarter amounted to 3 billion rubles and this is one of our strategic priorities. Net income more than doubled in Q2 upto RUB134 billion or $2.5 million and we reprieved our loans and closed a number of deals with derivatives and we managed to maintain the segment CapEx at $4.2 per barrel of oil equivalent.

Given the lowest OpEx sales for production of $3 per barrel of oil equivalent the company is one of the most efficient volume businesses in terms of production. The 2015 CapEx will amount to RUB600 billion, upto RUB650 billion and were flexible in terms of cutting back the CapEx but we will deliver our production target of 300 billion tons of oil equivalent and long-term wise.

And we expect that the CapEx will be reduced by about 15% to 20% in dollar terms and a proof of our competitive edge is that despite the external environment Rosneft have been generating a positive free cash flow throughout 13 portals in a row. And its volume its amount exceeds the total of free cash flow of Russian vertically integrated companies.

In dollar terms the ajdusted net free cash flow in the six months amounted was equivalent to the first-half of 2014 RUB6.7 billion , in Q2 we generated RUB312 billion, RUB4.3 million [indiscernible] said we replayed few syndicated loans that [indiscernible] 2011, 2012 buy it in kbp in an amount of RUB30 billion. The net income -- the net debt reduced by 9%, the total consolidated by 10% is upto 30 June, 2015 the company’s liquidity exceeded RUB14 billion or RUB798 billion or $14 billion.

Thank you your questions please.

I have three questions; the first question, despite the strong performance of the low oil price set your dividend continues to be pretty low, less than 4% which is below your nearest competitors. Do you plan to improve the dividend payments or maybe revise your dividend policy?

That’s my first question. And the second question is because of the sections and the low oil price, the offshore development in the Russian Federation maybe delayed, are you going about to engage your partners whom you plan to work together to get evelop offshore, to develop onshore resources.

Have you already devised your long-term strategy and when are you going to present it to the investmetn community? Thank you.

Ty for the question. As far as the dividend yield is concerned, the decision was back to the dividend payment is something that we still have to make and actually we are analyzig the market we’re comparing ourselves.

So with that competitors we are taking into account external and internal factors and I believe it will come back to this topic slightly later. As far as the offshore developments is concerned work offshore is being done according to the businesss point of the company, we are able to exceed all of the license obligations that goes forward.

The data collection we do 3D and 2D seismic acquisition, we do the kind of work which we have done several years ago now and as far as bringing in partners to our joint operations onshore. Yes indeed these are the kind of context which we have some of them already happen to results.

So we do know and we allow that we are currently considering consultations in as far as some of the onshore fields and the Russian federations are concerned. As for our long-term strategy is concerned, the company overall has i have stated dheres to 300 million tons of oil equivalent by 2020 and this sense is certainly is not changing, we've stated several times that we have prioritized drilling, we have prioritized the program to deter the production decline in the mature fields, this is a public information.

It doesn't mean that the long-term schedule is going to be revisited, that only means that we have slightly shifted our priorities without worsening our efficiencies, I will say that we didn't increase our CapEx program and we continue to work according to the schedule.

Good afternoon. Thank you.

My first question relates to Slide number 12, you have shown the status of the refinery upgrade program. What is demand needed to make sure that you have completed the program by 100%, that's the first question.

Slide number 9. Here, you have shown that Srednebotuobinskoye field is constructed in 2016, the production will be 1 million tons.

Into the production peak if it is not, what would be the production peak, and when are you going to achieve it. And other question regarding production, if I heard you rightly, you commented that as far as [indiscernible] is concerned you expect the peak production to be 7 million tons, when do you expect to reach the production peak in accordance with your current plan.

If you can give us some preliminary figure, some kidnd of schedule production profile, that would be great. Thank you.

We'll have [indiscernible] answering the first question and [indiscernible] and his colleagues will answer the second one. Well thank you very much for the question indeed in the current environment.

The decline of the refining margin is bought about by the tax manevour and when we ought to be very accurate and diligent about the project themselves and the capital spending, the total amount. To complete the projects, which are currently in the program in the Company we added about RUB400 billion, RUB500 billion.

And generally speaking, the Company is setting itself the plan of completing this upgrading program.

Regarding peak production of [indiscernible] peak production will be reach in 2021 as per today's plan and yes, it will reach a plateue of 7 million tons. As for our [indiscernible] the peak will be 1 million in 2016.

That's the answer for your questions.

Thank you a clarification regarding 450/RUB500 billion to complete the upgrading program. What is the timeline are we talking about 2016, 2017, 2018 or earlier, if you make a decision to implement the problem to upgrade the refineries.

As the timeframe has been identified and that does sound quite optimistic and we're going to adgere to this particular schedule indeed.

Good evening. I have two questions.

The first question relates to downstream, could you please comment on the 40% increase in cost in distribution and marketing costs. What is going on there and what is the currency of those costs.

And the second question is the upstream, could you please remind us over the Greenfield commissioning dates by year? Thank you.

Thank you. I shall repeat the question, because it sounds like the question not coming fast enough.

Now, what was the reason behind the growing cost in retail, which is about 40% and the second question was about the timing for commissioning into operation of the Vankor cluster fields, with it have -- Alexander [indiscernible] answering the first question and [indiscernible] who is the VP in charge of downstream as well as [indiscernible] will answer the second question.

Well, we shall begin with the second question, because the figure quoted 40% we are now verifying this data. I would ask Erik to answer the second question place.

Ive I won't give you an extreme precise sense, again the first commissioning that was taking about is really [indiscernible] which is part of the Vankor suite and this is in 2016. After every year, there is a series of projects, which will be commissioned.

Some of them, we're studying now to see if we can prepone like [indiscernible] in 2019. All the other ones are around 2020.

So 2017, 2018, 2019, 2020 and 2021.

Thank you. Now back to the first question.

I apologize we didn't have time to answer the previous question. Operational costs for the marketing divisions and as well as the operational costs are concerned, we're doing very diligent work to reduce it because we've got quite a program running to do the self estimation of what is being done through the internal benchmarking.

So in as far as the organic growth, in the marketing operations, we're not seeing them, but whatever we see in our reporting that is the changes in the stocks that we're having, which does affect this particular line in the MD&A.

Alexandra, please go ahead with your question.

The first question regards the acquisition of Trican. What is the economic effect that is expected as a result of cost savings and what are the upside opportunities associated with it?

And the second question is more detailed regarding the Company's debt burden. The Company has more than RUB1 trillion of short-term.

How does the Company plan to refinance it? What kind of instruments are you going to use?

And would it be possible to get prepayments from your Chinese partners and expand some other forms of business? Thank you.

Well, thank you. As far as Trican is concerned, I would ask Erik to answer the question was, what were the main reasons that forced the Company to acquire Trican's business and what does it give us.

The reason to acquire Trican is exactly the same as to acquire OBK and Weatherford drilling services. Again basically we won't have the ability and one of our key services, which is critical for the production to be able to moderate the market to avoid this sharp escalation of prices.

We need to have this minimal amount of equipment within our control. And at this time, this gives us a possibility to expand around this core business eventually to acquire, to compete on the manufacturing market and develop a little bit to mitigate to even more the market to address basically how to recover reserves in-house.

Yes, thank you very much for the question. And I would like to know that the Company continues on a permanent basis to work both with the Russian as well as the international financial institutions we have.

Sufficient number of available instruments which we can use to refinance our debt as well as to finance our operations. And as far as working with data protocol is concerned, I don't think this is a secret to anyone.

And everybody can clearly see as any stable trend towards the reduction of the debt burden now for more than seven quarters in a row. The Company has consistently been reducing its debt during the past six months.

We have been able to bring down the amount of overall debt by more than 10%. And as far as net debt, almost 9%.

As far as the available instruments are concerned, they remain exactly the ones that we used back in 2014 and during 2015 as well that means bilateral loans as well as the instruments of all other ways to fund and this is information that you can see in part 17 of our report. Thank you.

I have a brief question, do you believe that your market share, the price of your shares in the market is undervalued, if you believe that you are undervalued, are you thinking about a buyback? Thank you.

I don't think that there is a single company that one which would say that it's fully satisfied with the level of its stock value and Rosneft is amongst them. As far as the buyback program is concerned, if this was the program to be announced, we would have gone forward with it, if we haven't announced it yes, then that this question about this program means [a good one] they were quite clear about we are not going to announce it.

Thank you.

Could you please give us an update regarding your CapEx program? It seems that your CapEx program during the first half of 2015 does not differ much from the similar period in 2014.

Do you have any information regarding the Vankorneft deals? Will it be one deal, several deals, what can we expect?

Thank you.

The Capital expenditure program is not very much different from last year. As it is different slightly in terms of being bigger and it complies with the business plan which we have adopted a little bit less than year ago, as opposed to last year we can see that we're much closer to performing completely our capital spending as opposed to last year.

We see a very promising trend towards the closing in on the kind of level that we are going to actually spend and the kind of figure that I mentioned which is RUB657 billion are going to be in the kind of range within which we shall remain. At the same time, we are naturally aware that the market remains quite volatile and the oil prices may go upwards but at the same time may go downwards and we're trying to maintain flexibility and we have diligently gone through our plans to reallocate and the possibility to reduce our short-term capital spending program, but being able to stick to the trend in terms of the outwards production.

Now the question, about Vankorneft will be answered by Eric Liron.

But again, not a straight answer again, we're looking for some partners and we are probably close to some deals and it could be one, it could be two, it could be more. Thank you.

A brief question regarding the development of concept, well could you please elaborate on the messages that you've given in press during the past months regarding the vision of the Rosneft gas sector. And would if the likelihood that you would get access to export within the next four to five years?

Thank you.

Good afternoon. Indeed we're current working with the Ministry of Energy to develop the general plan for the development of the gas industry partner, which will be the concept of the domestic gas market.

The basic objective that has been set there, while ensuring -- points to increase the government revenue as well as the production of gas, we all know that throughout the whole country gas production is not growing it was stagnating and there was a need to create the conditions in order to turn this situation around and produce various stimulus and -- industry to develop further. So these are the concept which are currentl being debated by the Working Group and that is exactly where the discussions account to taking place about how to create those conditions for the industry to develop further and we are actively participating in it with hope that our ideas will be fully reflected.

Thank you.

Hello and thank you. I just wanted to ask a follow up question about the debt revision.

It looks like quite a lot of [indiscernible] for a lot of debt has been maintained in 2016. It looks like you announced [indiscernible] in 2015 have risen quite a lot in the last six months.

Can you talk about what your leverage at this point, is EBITDA falling because of the oil price and I realize that you haven't [mentioned in the first half of this year. But do you expect that will take either first half outlook years].

Good afternoon Kate. Well first I would like to repeat what we mentioned during the conference call dedicated to the first quarter that a considerable amount of instrument that exists as a short term debt having the kind of mechanism which enables one to extend the maturity.

Along with reaching such agreements we will reflect it in our reporting and you will see results but not everything that you see as being [indiscernible] for maturity falls into the category of the short term debt. As far as the expectations are concerned to reduce the debt and to achieve the target indicators, we are of the opinion that the coorelation of the net debt to EBITDA 1.3, 1.4, it remains target and we are quit confident in our ability to achieve these results within the near term perspective which is the next three to four years.

Hello good afternoon. Could you please let me know the following.

Thank you very much for the question, we are continuing to be guided by we believe very conservative dollar exchange rate $50 per barrel. Or RUB3100 per barrel which is as far the oil price is concerned so the ruble exchange rate we'll see RUB70 to 1$.

This is within the short term perspective that is the correlation because, that is the level that the exchange rate which did so long ago. And in an as far, speaking about the flexibility in our business [indiscernible] last year we been testing throughout the company the level of $40 per barrel and we were able to see the company remains quite stable against our slow results, many were saying about testing at the level of 40 we do see the company remains liquid and the business continues without any major changes in our business planning.

Thank you very much for your answer, another question, based on the first-half of 2015 the [indiscernible] effect was RUB37 billion. Did you expect a positive effect long-term wise?

Well in the current [indiscernible] it is we do not see the where this positive effect can come against the current correlation between the oil prices, the ruble exchange rate and then decline in refining margin in terms of tax manuveur results. It's highly probable to expect good effect without any substantial price growth in the market we do not see the way it may happen.

Hello. Could you please elaborate on the situation with prepayment and the contracts with your Chinese partners.

I know that traditionally you declined comments, but still can we expect any prepayment by the end of this year? Do you see any potential amounts that maybe prepaid?

Thank you.

Thank you very much for the question you asked, but as we stated but we cannot comment because we are bound by various obligations of our partners in terms of confidentiality.

Thank you. I have another question, so as to what you have received as prepayment under all supply contracts.

Could you please tell us how the negative ForEx effect is reflected when you show us particular prepayment amounts on the balance sheet because we see the historic ruble exchange rates on your balance sheet? Do you -- does it have any effect on the wholesale price?

Thank you.

Yes, one of the example when we are accounting for the prepayment amount of revenue that is reflected in our accounting in rubles turns out to be lower than it would have been if there were no prepayments and the oil was to be sold and the prices which are being defined for the current date of sale. So the amount of revenue currently is lower in rubles.

Which means that we cannot see any other specific points related to foreign exchange that makes an impact on your revenue?

If you're talking about prepayment, no, simply becuase as you have stated yourself prepayments is being revalued and remains the accounts and exchange rate effective on the value date of the credit in amounts. And so that doesn’t bring about any exchange rate differences as long as the money is on the books.

And no way generates an exchange rate differences at the point of sale, so revenue as I said is being accounted at current exchange rate.

Dear colleagues, thank you very much for your participation in our conference call. I would like to congratulate you on the 1st of September and hopefully we’ll stay in touch and we do hope that you will take part in our offsite events and visit our refineries and fields this year.