RUSSNEFT MAY RESTORE ITS OUTPUT TO PRE-OPEC+ DEAL LEVEL WITHIN 2-3 MONTH

Mikhail Gutseriev`s RussNeft, which in 2016 conducted IPO at MOEX, expects to restore its output level within 2-3 month period after the expiration of the OPEC+deal, according to the President of the Company. In his interview to Interfax he narrated about Company`s plans for debt repayment, participation in project for transition to additional income tax from hydrocarbon production, assets acquisition, and overseas projects.

-        - One and a half year ago, the important event took place – RussNeft went public, having placed its shares at the Moscow Stock Exchange. As time passed by, what is your opinion on whether your expectations were implemented?

-         - The MOEX placement significantly changed our management structure. The independent directors have been incorporated into the Board of Directors, they brought new approach to the management structure and decision making.  We have things significantly improved since then. In September the MOEX included our shares into its indexes, which is also a good sign for the market.

-        Everything has occurred according to plan. To be honest, even the result we obtained, probably, went beyond our expectations in terms of both price range and financial position of the Company, its operating performance.

-        In fact, it improved the position of the company. It was a right thing to do.

-         - Opportunity for additional public offerings on the international stock exchanges was mentioned before. Is this issue yet on the agenda?

-         - Each action shall be motivated and goal-oriented. I have already talked about reasonability and results of IPO on the Russian market. As to the international placement, this issue is probably less acute now. Why? We have received a few assessments made by rating agencies which enable us to get cheaper external funding. Therefore, our current task has been solved.

-        - RussNeft is planning to acquire the production assets of ForteInvest in Orenburg Region. What is their value at the moment?

-         - We estimate them at USD 390 million. The assets are growing, they are gathering pace. They are very interesting from both geological perspective and from perspective of production growth. The acquisition of such assets is a good thing.

-         - So, you don’t think that asset acquisition would be unprofitable because of debt increase?

-         - Absolutely not. The category of debt is not an objective criterion for company`s performance assessment. Use of debt to EBITDA ratio would be more appropriate. We are going to increase both debt and EBITDA, therefore debt to EBITDA ratio is not expected to change significantly.

-        - What is your expectation for EBITDA for this year?

-         - In 2017, EBITDA was around RUB 30 billion. This year, I can say for certain, it will not be less than that.  But the extent on which it would be bigger depends on the macroeconomics. Due to high volatility of the market, projections are very difficult to make.

-         - What factors may contribute to the increase in EBITDA?

-         - Two key factors will enable the growth. First, it will be the favorable macroeconomic situation, which in turn derives from the existing OPEC+ agreement and number of external political events. Second factor will be the increase in marginality of oil production due to the increase in production drilling at the hard-to-recover reserves fields, resulting in the increase of high margin oil in total volume of production.

-         - What do you think is a comfortable level of debt to EBITDA ratio for the company?

-         - We feel great at current 2.7 ratio. The index will diminish naturally. We are working under concluded contracts, loan agreements, towards compliance with all covenants specified in those loan agreements. Therefore, the debt will be reducing gradually.

-         - What volume of debt to VTB is planned to be paid off this year?

-        - We have a grace period now (the preferential lending period - Interfax), this year we are paying off only the interests. We will be paying the principal of the loan a bit later. Since 2017, we have been going through the phase of significant investments, replacing the low-margin oil by high-margin one due to new drilling. We are raising the EBITDA, reaching the certain level. After that our strategy stipulates slight decline in investments and beginning of repayment of the principal debt. So far, we strictly follow our strategy.

-         - What amount of interests are you going to pay and when exactly do you intend to start repayment of principal debt?

-         - The principal debt`s repayment is scheduled to begin in 2019. As to the interests amount, I don’t want to voice it.

-         - Your company recently declared that it plans the investments at a level of RUB 23 billion. What is the reason for such decline as compared to 2017?

-         - This is connected primarily with the strategy. Last year we drilled 126 wells and spent RUB 26 billion. This year we intend to drill 156 wells and to spend RUB 23 billion. We have optimized and improved the construction of the wells, having made them less costly, but not less productive. This enabled us to amend the initial investment plan for RUB 2 billion.

-         - So, the investments will be mainly allocated to the production segment?

-         - In 2017 we spent more than 70% of investments to drilling, and this trend has not changed at all. In 2018, this share would remain approximately the same, while the share of production will be even bigger.

-         - What measures does the company undertake to curb output under OPEC+ agreement? Have you continued the practice of last year to shut down the low-profit wells?

-         - We chose the strategy suitable to us. We don’t cut output because we drill the high-margin wells. We construct new wells but shut down the low-profit ones in order to comply with the production quota. Only for the first quarter we shut down more than 100 wells and are going to shut down additional 60-80 wells until the end of the year.

-         - As reported earlier, your plans included production increase to 10 million tonnes by 2019. Given the OPEC+ deal, how was the strategy adjusted? Due to what projects could there be an increase in production in the future and to what level?

-         - We spoke about 10 million tonnes within RussNeft Group, bearing in mind our Azerbaijan block and production assets of ForteInvest. As soon as we can increase the production, as soon as we are permitted to do so, we will be able to quickly get to the levels we used to have, and even sharply increase the production.

-         - How much time do you need to restore the production level which was observed before the OPEC+ agreement?

-         - I think, no more than two month.  Everything depends on the season. If the end of the existing commitments is to be in the summer, it will be two months. If it's winter, then it'll take a little longer, about a quarter.

- Did RussNeft reapply for having its fields included in the list for the pilot project on additional income tax? Were they included?

 - We are working with subject ministry quite closely and actively, having regular consultations. Like all other companies, we have applied for the inclusion of a number of our license areas in this pilot project. Unfortunately, our fields were not included in the initial project. According to the Ministry of Energy, this version of the list is not final, so there is still hope that our fields will be included.

-        We consulted with the Ministry of Energy and requested that our greenfield, the Vostochno-Kamennoye field with recoverable proven reserves of more than 60 million tonnes, be included in this project on additional income tax. The development of this field will require the construction of infrastructure, and this is a lot of money. Therefore, without AIT, the project is "not breathing." In the new tax frameцщкл, the project will immediately reach a positive profitability and begin to develop. The Vostochno-Kamennoye for us now is a key asset, being good both for us and the country. But, unfortunately, today it fails to meet some criteria, first and foremost, the size of reserves: 60 million tonnes is a huge reserve. We had an agreement with the Ministry of Energy that as soon as the first pilot project was launched, the next stage would be the launch of the Vostochno Kamennoye project. The quality of reserves is downgrading today, and the new ones are needed to be involved. The Ministry of Energy in this issue is on our side, the side of the subsoil user.

-         - Gazprom Neft told us that you are working together on the “Bazhen” project. What kind of cooperation is this?

-         - We are engaged, indeed, in the problem of the development of the Bazhenov formation. We conducted a number of trial operations in 2017, we continue this work in 2018, but not so actively. We have moved to the stage of analysis and selection of technologies, we are bringing in science and research. We regularly communicate with our colleagues from Gazprom Neft, who have the idea of creating a study hub for the Bazhenov formation. So far, we participate at a conceptual level, at a level of information exchange.

-        Actually, the problem is not trivia