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Q2 2014 results: Berkut platform commissioned, daily hydrocarbon production increased by 4.6% EBITDA increased by 41%, net income increased by 5 times, net debt reduced by 365 billion roubles

25 July 2014

On July 25, 2014 Rosneft publishes its consolidated IFRS financial statements for Q2 2014.

   Q2 2014  Q2 2014 Change, % H1 2014  H1 2013  Change, %
Operating highlights            
Hydrocarbon production, th. boepd  5 005  4 786 4,6% 5 027 4 804  4,6%
Refinery throughput, mln t  23,62 23,61 0,0% 48,49 39,45 22,9%
Oil and petroleum products sales, mln t  52,9 52,2 1,3% 104,6 86,2 21,3%
Gas sales, bcm   11,32  8,50  32,2%  25,76  12,62  104,1%
Financial results, RUB bln            

Revenues (including equity share in profits of
associates and joint ventures)

 1 435  1 176 22,0%  2 810  1 988  41,3% 
EBITDA  304 215  41,4%  593  3712  59,8%
Net income  172 352   391,4% 260  1372   59,8%
Free cash flow1  112 35  220,0%  233  68  242,6% 
Net debt  1 495 1 862  (19,7)%  1 495  1 862  (19,7)% 
Net debt/EBITDA  1,28 1,79    1,28  1,79   

1 Net of the advance payment under long-term oil supply contracts
2 Exclusive of the effects of retrospective accounting for the results of revaluation of the acquired assets and liabilities of TNK
3 Reduction for 1H 2014 (as of the end of the reporting period on 30/06/14 and 31/12/13)

In 1H14, the Company continued to demonstrate strong financial results due to stable hydrocarbon production levels, successful development of new projects, capital discipline and control of operational expenses. Hydrocarbon production amounted to 5 million barrels of oil equivalent per day which is 4.6% higher than in 1H13.

Daily crude oil and liquids production amounted to 4,160 thousand barrels per day which is practically on a par with the production level in 1H13. Lower liquids production due to disposal of the stake in LLC Yugragaspererabotka was compensated by timely development and production growth in Uvat, Verkhnechonskoye and Vankor fields and also by a slowdown in the natural brownfield production decline in West Siberia.

The Company has commenced implementation of a large-scale drilling program on the offshore license areas in the Karskoe Sea, the Sea of Okhotsk and the Caspian Sea in collaboration with major international and Russian partners from the oil sector. In the current period, as part of the offshore development off the Sakhalin island, the Company commissioned the world’s biggest ice-resistant stationary production platform “Berkut” at the Arkutun-Dagi field. The platform’s drilling rig provides extended reach drilling with a step-out of at least 7 kilometers. “Berkut” is the world’s largest well pad, which provides drilling of 45 wells. Development of the North Chaivo offshore field off the Sakhalin island is supported by the Yastreb heavy-duty onshore drilling rig.

Building modern oil service business and availability of effective modern technologies are the prerequisites for successful execution of promising new projects.

In 2Q14, the Company continued to strengthen its oil services asset portfolio with a view to increasing the drilling efficiency. Within the framework of the Petersburg International Economic forum, the Company signed an Agreement on Investment and Cooperation with a leading international service company, Seadrill Limited. The agreement provides for establishment of long-term partnership to materialize any opportunities for developing the offshore and onshore projects of Rosneft for the period of at least until 2022. In July 2014, the Company signed an agreement to acquire the drilling and workover assets of Weatherford International plc in Russia and Venezuela thus ensuring engagement of drilling services at a competitive price as part of long-term cooperation.

The Company widely uses advanced technologies for maintaining leading positions in field development. Drilling horizontal wells with multi-stage fracturing ensured well oil flow rates which are twice as much as oil flow rates from vertical wells drilled in similar geological environment. In the near future, the amount of horizontal wells will exceed 25% of all wells planned to be commissioned.

Another important factor of increasing exploration efficiency is a more extensive use of multilateral wells for developing low porosity and heterogeneous reservoirs. Higher well productivity and enhanced reserves development are ensured by drilling one or several well bores which have a broader reach of the reservoir. As of today, the Company has drilled and is operating more than 40 multilateral wells in Udmurtneft, RN-Severnaya Neft, Samaraneftegaz and Vankorneft. Application of this technology resulted not only in incremental oil production and enhanced oil recovery but also in reduced drilling costs, field infrastructure setup and operation due to lower well stock on drilling pads. The Company is currently implementing a program which allows increasing the amount of such wells by a factor of 2.5 (to 100 wells).

The Company has developed and is introducing proprietary knowhow in monitoring and modeling of field development, well construction and completion, artificial lift and waterflood optimization. Proprietary well design created by engineers specializing in hydrofracturing reduced the period of well completion for a number of well design types from 20 to 12 days (by 40%) as compared to traditional well completion cycle in West Siberia , increased the oil rates to 40 tons per day compared to 30 tons per day at average new brownfield wells and saved up to 7% of the electric power consumption in upstream.

As a result of its activities, the Company ensures higher operational efficiency in upstream. In 1H14, its capital expenditure unit costs reduced to USD 5.5 per barrel of oil equivalent while operational unit costs in upstream amounted to USD 4.0 per barrel of oil equivalent.

In 2Q14, gas production reached 13.50 billion cubic meters, which is a 45% increase as compared to 2Q13. The Company continues to implement its program for increasing the level of associated gas utilization. As part of the program, pumping units, compression station and gas-pipeline were commissioned at Vankor, which will provide gas supply to UGSS Gazprom of up to 2.8 billion cubic meters from the field this year. In 2Q14 gas sales increased by 33.2% up to 11.32 billion cubic meters compared to 2Q13.

In 2Q14, the Company’s Russian and international refineries processed 23.62 mln t of crude oil. The Euro-4/5 fraction increased to 4.3 mln t in the total volume of motor fuel production which resulted in a positive economic effect of about 1.3 billion roubles. While the startup works were being carried out after a turnaround at the Achinsk refinery, an accident occurred with subsequent suspension of refinery operations. An off-schedule maintenance is being carried out at the refinery at the moment. The startup of primary processing at the Achinsk refinery and commencement of production of the key types of petroleum products are planned to take place this autumn. Despite the emergency suspension of refinery operations, East Siberia and the Far East will be fully supplied with petroleum products.

In the current period, the Company continued to expand its cooperation with strategic partners on advance payment terms. In June 2014, a long-term contract was signed for supply of up to 12 million tons of crude oil and petroleum products over 5 years with a strategic partner, BP, on the terms of advance payment of about USD 2 billion, out of which USD 1.9 billion was received in July 2014.

In 2Q14, the Company proceeded with expanding its premium sales channels. The volume of jet fuel sales to end users was increased by expanding collaboration with major airlines and the Ministry of Defense. The bunkering volume amounted to 1.0 million tons in 2Q14, which is 33% higher than in 2Q13 mainly due to entering into new contracts in the Far East.

In 2Q14, the abovementioned activities resulted in oil and petroleum products sales growth of 1.3% and amounted to 52.9 million tons.

The sales proceeds (including the revenue from the affiliates and associates) amounted to 1,435 billion roubles, which is 22% higher than in 2Q13. The increase is mainly due to the higher sales volumes. Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) grew by 41% to 304 billion roubles as a result of successful implementation of the program of increasing operational efficiency and ongoing control of operating and administrative expenses despite the negative effect of the mineral extraction tax (MET) and increased export duties.

In 2Q14, Rosneft’s net income amounted to 172 billion roubles, which is five times higher year-on-year. The net income increase exclusive of the foreign exchange effect is 88% year-on-year which offset the negative foreign exchange effect in 1Q14. The Company’s net income for 1H14 was 260 billion roubles. Exclusive of the foreign exchange effect, the net income growth in 1H14 equaled 60%.

The Company’s free cash flow was 112 billion roubles, which is three times higher than in 2Q13.

In 2Q14, the Net Debt/EBITDA ratio was 1.28. The Company’s net debt in the reporting period significantly decreased to 1,495 billion roubles (about USD 44.5 billion).

Commenting on the results of 2Q14, Igor Sechin, President of Rosneft, said:

‘In the reporting quarter the Company continued successful implementation of key projects and once again demonstrated strong financial results. Our operational efficiency allowed increasing free cash flow almost threefold relative to the second quarter last year. Our Net Debt to EBITDA ratio reached the target level of 1.3.

The Company’s sound financial position is supported by sustainably high production level of 5 million barrels of oil equivalent per day and timely execution of investment programs. Rosneft has been intensifying its effort in developing promising projects on the Russian offshore. President of Russia Vladimir Putin participated in the inauguration ceremony of commissioning of the unique Berkut platform, which will add up to 4.5 million tons of oil to the annual production of the Sakhalin-1 project. We continued successful preparation for drilling the first well in the Kara Sea: worked to modify the West Alpha drilling rig, import the equipment and materials, arrange the onshore support base and transport the drilling rig to the drilling site. The Company’s operational cash flow is synchronized with the current project execution.

Together with our partners – the world’s leading oil companies – we are working on a plan to minimize the consequences of including Rosneft on the sanction lists.’

Rosneft Information Division
tel.: +7 (495) 411 54 20
fax: +7 (495) 411-54-21
July 25, 2014

These materials contain statements about future events and expectations that are forward-looking in nature. Any statement in these materials that is not a statement of historical fact is a forward-looking statement that involves known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements expressed or implied by such forward-looking statements to differ. We assume no obligations to update the forward-looking statements contained herein to reflect actual results, changes in assumptions or changes in factors affecting these statements.