Novatek · RUS:NVTK
Novatek — Investor Day (April 2007)
63 slides from Novatek's investor day presentation, Apr 23, 2007
Slide 1: Strategy Day 2007
STRATEGY DAY 2007 NOVATEK London Representative Office, London, UK 23 April 2007
Slide 2: Disclaimer
Disclaimer This presentation is strictly confidential to the recipient, may not be distributed to the press or any other person, and may not be reproduced in any form. Failure to comply with this restriction may constitute a violation of applicable securities laws. This presentation does not constit
Slide 3: Presentation Team
Presentation Team Leonid V. Mikhelson Chief Executive Officer Chairman, Management Board Alexander M. Fridman Head of E&P Deputy Chairman, Management Board Mark A. Gyetvay Chief Financial Officer 3
Slide 4: Agenda
Agenda Speaker Market and Company Overview Leonid V. Mikhelson Strategy Introduction Exploration and Production Strategy Alexander M. Fridman Financial Strategy Mark Gyetvay Questions and Answers Presentation Team 4
Slide 5: Company Overview
SECTION 1 Company Overview == NOVATEK 5
Slide 6: Leveraging our intrinsic business strengths
Leveraging our intrinsic business strengths Highly favorable gas market Compelling business case, robust fundamentals model, clear strategy Simple and transparent group Organic growth platform based on structure ample reserves High standards of corporate Strong profitability and cost governance and
Slide 7: Clear and transparent structure
Clear and transparent structure Processing/ UPSTREAM DOWNSTREAM Marketing Yurkharovneftegas 100% Purovsky ZPK 100% 100% Novakhim 100% Novatek 100% 99.8% Tarkosaleneftegas Novatek-Polimer Transservice Purneftegasgeologia 95.2% 50.01% Energy North Co. Novatek-North 100% West Terneftegas 100% Novatek 1
Slide 8: NOVATEK at a glance
NOVATEK at a glance • Record 2006 production results – Natural gas production increased 13.9% to 28.7 bcm (1,013.5 bcf) – Liquids production decreased 3.5% to 2.5 mmt (21 mmbbl’s) – Total production increased 12.2% to 208 mm boe or 572.6 thousand bbl/day • Reserve appraisal results (as at 31 Decembe
Slide 9: NOVATEK at a glance
NOVATEK at a glance • Record revenues, EBITDA and net profits over the past three years • Strong balance sheet and liquidity ratios – net cash position • Increased dividend payout • Strong share price appreciation since IPO in July 2005 • One of the leading stock performers relative to the Russian T
Slide 10: SEC P1 Reserves movements
SEC P1 Reserves movements1 mm boe 297 4,664 4,573 (16) 45 (190) 252 407 381 4,149 4,178 (206) 3,931 380 350 362 4,192 4,257 3,769 3,828 3,569 2002 2003 2004 2005 Production Additions/ 2006 2 2006 Revisions 2006 Natural gas Liquids Notes: 1. Including the Company’s equity interest in proved reserves
Slide 11: Change in P1 natural gas reserves, bcm
Change in P1 natural gas reserves, bcm 641 651 577 585 546 140 260 196 241 258 511 389 381 305 319 2002 2003 2004 2005 2006 Proved developed Proved undeveloped 34.3% growth of proved developed gas reserves1 at appraised fields Notes: 1. Including the Company’s equity interest in proved reserves of a
Slide 12: Resources for sustained long-term growth
Resources for sustained long – term growth Reserves/production (years) Reserve category Gas Oil/liquids2 Total Proved (P1) 23 22 23 Proved + Probable (P2) 35 43 36 ABC1 30 38 30 Notes: 1. P1 reserves are in accordance with SEC standards; P2 reserves are SPE based appraised by DeGolyer & MacNaughton
Slide 13: Increasing gas production
Increasing gas production Monthly Gas Production, mmcm/day NOVATEK is one of the world’s largest independent producers 100 of natural gas 90 80 70 60 50 40 Decrease due to field development 30 Seasonality effect work at TSNG 20 10 0 Jan Jun Jan Jun Jun Jan Dec Dec Dec Mar Apr Mar Apr Mar Apr May May
Slide 14: Global Energy Market Outlook
Global Energy Market Outlook 14
Slide 15: Global energy outlook
Global energy outlook • Strong long-term forecast for oil and gas demand and prices – Significant demand growth expected for both natural gas and liquid hydrocarbons – Global oil prices expected to remain robust throughout our forecast period • Volatile geopolitical climate in key producing regions
Slide 16: Russia straddles two crucial markets
Russia straddles two crucial markets The European markets have traditionally been the primary focus of Russian companies. Natural resources have been a crucial driver in Russia-EU trade relationships. The importance of the Asia markets is beginning to materialize. Asia’s potential has not been fully
Slide 17: Global gas balance – Call on Russian Gas
Global gas balance – “Call on Russian Gas” Other CIS Europe P1 Reserves: 8.0 tcm P1 Reserves: 5.4 tcm Russia P1 Reserves: 47.6 tcm N. America 286 P1 Reserves: 7.5 tcm (185) 193 139 (295) (476) (21) (62) Middle East (139) P1 Reserves: 72.6 tcm 144 Asia - Pacific 21 37 Latin America P1 Reserves: 11.1
Slide 18: Opportunity: natural gas market – Europe
Opportunity: natural gas market – Europe Gazprom European Market Share (%) European Indigenous Gas Production1 and Gazprom’s Supply (bcm) %chg 329 bcm 2002 2003 2004 2005 05/04 bcm 277 UK 102.1 101.8 94.5 86.2 -8.8 bcm 40% 38% Norway 65.5 73.1 78.5 84.9 +8.2 207 34% 166 130 bcm Denmark 7.3 6.9 8.3 9
Slide 19: General Business Climate & Domestic Gas Market
General Business Climate & Domestic Gas Market 19
Slide 20: General business climate - Russia
General business climate - Russia • Strong domestic GDP growth • Strengthening Russian rouble versus major currencies • Strong current account and trade surplus • Favorable domestic commodity pricing environment • Stable political and social environment • Reasonable corporate tax regime 20
Slide 21: Russia's energy market climate
Russia’s energy market climate • Continued strong domestic demand growth for natural gas by ~ 2.0 to 2.5% p.a. (average demand growth of ~ 2.2% from 2000 through 2006) • Liberalized natural gas pricing environment in process (full market based prices expected by 2011) • Continued competition for new
Slide 22: Growing market share for independents
Growing market share for independents Russian Gas Market: Demand, Supply, bcm Domestic European supply deficit demand 2000 - 2006 CAGR 2.2% growing 600 domestic demand CAGR was 2.2% 500 Gazprom export volumes increasing 2006 2015 400 101 bcm 248 bcm 300 Need for Independents’ gas increasing 200 Mark
Slide 23: Gas production in the Russian Federation, bcm
Gas production in the Russian Federation, bcm NVTK accounted for the largest Russian natural gas production, 2006 750 percentage of non-Gazprom production in the Russian Federation 723 709 NOVATEK 4.4% 700 SurgutNG 2.2% 681 667 Rosneft 2.1% 656 650 641 TNK BP 1.8% 634 620 Lukoil 2.2% Gazprom 592 584
Slide 24: Pricing update to achieve export netback parity
Pricing update to achieve export netback parity Based on current netback parity 150 METD is proposing a higher rate of increase in domestic gas $125.00 125 prices over planned announcement $102.20 100 $91.30 $80.80 75 $71.50 $63.30 $50.60 50 28% 28% 25 15% 25% 26% 25% 0 Jan 2007 Jul 2007 Jan 2008 Ju
Slide 25: Competitive industry challenges
Competitive industry challenges • Role of independent gas producers and the increased demand for natural gas in the overall Russian energy supply balance • Changes in the competitive landscape of the domestic market due to increased deliveries of natural gas • Necessity for expansion of the gas pipe
Slide 26: Our Strategy
Our Stategy == NOVATEK 28
Slide 27: Our operating environment and our strategy
Our operating environment and our strategy Growing Higher domestic domestic & & international global demand prices for natural gas Opportunities for NOVATEK’s Core Strategy Access to downstream •Grow resource base resources more expansion challenging •Increase production •Expand processing capacity
Slide 28: E&P production and capex plan
E&P production and capex plan Natural gas production, bcm Capital expenditure program, MM $US 65.0 2,659 45.0 2,183 30.0 2007E 2010E 2015E Liquids, mmt 8.0 – 9.0 693 4.6 2.4 2007E 2008-10E 2011-15E 2007E 2010E 2015E Infrastructure Drilling Notes: Pipelines Booster stations 1. Net of VAT, nominal amo
Slide 29: Optimize gas sales portfolio
Optimize gas sales portfolio Portfolio optimization plan 2006 Gas sales portfolio 10% 56% 5% 1. Migrate sales away from wholesalers 2. Target growing power generation sector 3. Increase sales to Industrial end users 4. Active participation in gas exchange 29% Energos Reg. Distributors Industrial Tra
Slide 30: Liquids marketing strategy
Liquids marketing strategy • Increase sales volumes of stable gas condensate, LPG and crude oil • Launch 2nd stage of Purovsky Processing plant to 5 mmt p.a. by 4Q 2008 • Achieve economies of scale by lower processing and commercial costs • Partnership agreement with Russian Railways for delivery of
Slide 31: Gazprom: solidifying our business relationship
Gazprom: solidifying our business relationship Complementary, not competing business models • Equity stake in NOVATEK of 19.4% with two Board seats • Our domestic focus allows Gazprom to meet its long-term export commitments • Cooperation on expanding the UGSS pipeline network • Move towards longer-
Slide 32: Social and environmental responsibility
Social and environmental responsibility Joint environmental program with IFC subject to annual review Regular environmental monitoring at all operational facilities Yurkharovneftegas’ “Environmental, Health and Safety” management system certified for compliance with ISO 14001 standards and spe
Slide 33: Why NOVATEK is a compelling investment story
Why NOVATEK is a compelling investment story • Ideally positioned to fill the growing domestic gas supply gap Compelling • Cost efficient monetization of liquid hydrocarbons opportunity • Significant organic growth potential due to ample reserves • Market leader in a highly attractive industry Marke
Slide 34: Exploration and Production
SECTION 2 Exploration and Production 34
Slide 35: Production overview
Production overview Crude oil, mmt (Geoilbent) Natural gas, bcm Crude oil, mmt 28.7 Gas Condensate, mmt 25.2 2.8 2.6 2.5 20.9 19.8 2.0 13.9 1.4 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 4 year natural gas CAGR = 20% 4 year gas condensate CAGR = 42% Decrease in oil production due to disposal
Slide 36: E&P summary for 2006
E&P summary for 2006 • Completed driling 7 gas condensate production wells (2 at TSNG; 4 at KhNG; and 1 at YNG) • Confirmed project documentation at YNG – Projected annual peak production: 33.5 BCM natural gas & 2.55 mmt gas condensate – Peak production to be reached in 2012 – Projected # of wells –
Slide 37: Primary E&P Objectives (2007 – 2015)
Primary E&P Objectives (2007 – 2015) • Grow production and reserves at Yurkharovskoye field Continue core • Develop crude oil deposits at Tarkosaleneftegas field development • Maintain gas production levels Tarkosaleneftegas Develop new • Develop Termokarstvoye and Sterkhovoye fields fields • Increa
Slide 38: E&P Breakdown - 2007
E&P Breakdown - 2007 Capital Investment1 & Production Capital Investment 2007 MM $US mm boe 693 MM $US1 800 250 Exploration Drilling 700 16% 18% 200 600 500 150 Processing 9% 400 300 100 Compression Booster Stations 200 50 4% 100 Pipelines 0 0 13% Infrastructure 2004 2005 2006E 2007E 40% E&P Other P
Slide 39: E&P Breakdown
E&P Breakdown Capital Investment 2008 – 2010 Capital Investment 2011 – 20151 2.66 Bln $US2 2.18 Bln $US2 Processing Exploration Exploration Compression Compression 6% 6% 5% booster booster stations stations 8% 6% Drilling Pipelines 32% 6% Pipelines Drilling 18% 57% Infrastructure 26% Infrastructure
Slide 40: Yurkharovneftegas development plan
Yurkharovneftegas development plan • Complete stages I – IV of second phase development of the Yurkharovskoye field (additional 24 bcm) • Construction of artificial island to optimize drilling program • Construction of de-ethanization plant and methanol plant • Construction of gas condensate pipelin
Slide 41: Yurkharovskoye & New Yurkharovskoye Fields
Yurkharovskoye & New Yurkharovskoye Fields Natural gas production, bcm 41.30 Gas condensate production, mmt 4.88 24.60 2.13 8.97 9.60 9.80 0.72 0.73 0.72 2005 2006 2007 2010 2015 2005 2006 2007 2010 2015 595 bcm of P2 gas reserves at 12/31/2006 Capex (MM $US)1 2006 2007 2008-10 2011-15 Drilling 89 6
Slide 42: Yurkharovskoye field development
Yurkharovskoye field development Well # 205 • Well debit – 4 mmcm/day • Diameter – 168 mm • Length of horizontal run 500m • 3 yr cumulative production – 4 bcm Drilling plan to continue focusing on high debit large diameter horizontal wells (up to 600m) in the BY1-2 layer Legend Well #318 to be drill
Slide 43: Yurkharovskoye Field Development
Yurkharovskoye Field Development1 Notes: 1. Full development of second phase (stages I – IV) 43
Slide 44: Tarkosaleneftegas development plan
Tarkosaleneftegas development plan • Maintain gas production levels at East Tarkosalinskoye field • Maintain gas production levels at Khancheyskoye field • Develop northern, central and southern sections of East Tarkosalinskoye oil field • Develop oil layer of Khancheyskoye field 44
Slide 45: East Tarkosalinskoye Field
East Tarkosalinskoye Field Crude oil production, mmt Natural gas production, bcm Gas condensate production, mmt 1.84 1.66 15.82 15.80 15.80 13.39 12.50 0.99 0.91 1.23 0.90 0.77 0.19 0.12 0.13 0.64 0.78 0.80 0.75 0.61 2005 2006 2007 2010 2015 2005 2006 2007 2010 2015 315 bcm of P2 gas reserves at 12/
Slide 46: East Tarkosalinskoye field development
East Tarkosalinskoye field development East Tarkosalinskoye Oil Layer • Well # 22010 – Shaft 22010-1: 4,055 meters (500 meter horizontal section) – Shaft 22010-2: drilling in process Main shaft 2210 Shaft 2210-2 Shaft 2210-1 46
Slide 47: Khancheyskoye Field
Khancheyskoye Field Natural gas production, bcm Crude oil production, mmt 5.00 4.90 Gas condensate production, mmt 0.88 0.70 0.76 0.72 0.71 3.30 3.20 0.01 0.05 2.80 0.51 0.70 0.76 0.71 0.66 0.37 2005 2006 2007 2010 2015 2005 2006 2007 2010 2015 69 bcm of P2 gas reserves at 12/31/2006 Capex (MM $US)
Slide 48: Sterkhovoye Field
Sterkhovoye Field Phase I and II of gas condensate development plan Natural gas production, bcm Gas condensate production, mmt 3.10 0.89 0.25 0.70 - - - - - - 2005 2006 2007 2010 2015 2005 2006 2007 2010 2015 11 bcm of P2 gas reserves at 12/31/2006 Capex (MM $US) 2006 2007 2008-10 2011-15 Drilling (
Slide 49: Termokarstovoye Field
Termokarstovoye Field Gas condensate field development including – gas cycling, de-ethanization plant and gas condensate pipeline Natural gas production, bcm Gas condensate production, mmt 2.70 0.63 0.20 - - - - - - 2005 2006 2010 2015 2005 2006 2007 2010 2015 24 bcm of 2P gas reserves at 12/31/2006
Slide 50: Purovsky processing plant
Purovsky processing plant • Purovsky Stage I - completed – Stage I capex – 210 MM $US – 2 million tons per annum de-ethanized gas condensate processing capacity – Plant storage capacity - stable gas condensate 30,000 m3 LPG 10,000 m3 – Plant production - approximately 80% stable gas condensate 20% L
Slide 51: Exploration results - 2006
Exploration results - 2006 Seismic Drilling Reserve growth Company Capex2 Gas Condensate Oil 2D km 3D km2 Meters # wells1 MM $US BCM Mmt Mmt YNG 160.1 4,045 1/0 8 31.8 3.0 TSNG 230.5 5,230 1/1 6 Purnovagas 0.67 Purneft 305 1/0 0.66 Terneftegas 200.0 4 Novatek3 1 0.5 0.1 Novasib 134.1 3 Yargeo 500.0
Slide 52: Exploration program - 2007
Exploration program - 2007 Seismic Drilling Est. reserve growth Company Capex2 Gas Condensate Oil 2D km 3D km2 Meters # wells1 MM $US BCM Mmt Mmt YNG 6,232 4/3 29 128.0 9.2 TSNG 237 13,130 5/4 20 10.0 1.0 5.2 Purnovagas 300 1/0 9 Purneft 134.0 5,000 3/3 12 1.1 Terneftegas 200.0 0.47 Novatek 2,850 1/
Slide 53: Exploration plan for Yurkharovneftegas' licenses
Exploration plan for Yurkharovneftegas’ licenses Yurkharovskoye and New Yurkharovskoye license areas 53
Slide 54: Exploration activities 2008 - 2015
Exploration activities 2008 - 2015 2008 - 2010, 199 MM $US1 2011 - 2015, 119 MM $US1 154 98 122 79 36 13 30 9 8 6 32 3 8 5 19 3 6 5 Seismic Drilling Interpretation Seismic Drilling Interpretation Existing fields Prospective license areas Existing fields Prospective license areas # of wells – 21 # of
Slide 55: Resource base for prospective license areas
Resource base for prospective license areas C2 Resource Current Reserve Base for Gas Liquids Gas Liquids Prospective lic. areas bcm mmt bcm mmt Achimov & Jurassic layers Yurkharovskiy lic. area 285.3 24.0 200.0 12.0 New Yurkharovskiy lic. area 220.0 18.0 Achimov layers Olimpiskiy lic. area 71.4 13.7
Slide 56: Financial Strategy
SECTION 3 Financial Strategy 56
Slide 57: Financial management objectives
Financial management objectives • Maintain Net Debt – to – EBITDA target of below 1.0x over the cycle Financial • Maintain EBITDA Net Interest Coverage of 10x to 15x over the cycle targets • Maintain Operating Cashflow/Capex coverage of 100% over the cycle • Maintain unrestricted balance sheet cash
Slide 58: Financial guidance
Financial guidance Metric 2003 2004 2005 2006E Guidance EBITDA, %1 30% 36% 54% 48% 43 – 45% EBITDA (net of disposals) - - 50% - - Effective tax rate2 33.1% 28.3% 27.3% 26.7% 26 – 28% Net Income, %3 19% 23% 32% 29% 23 – 25% ROE, %4 27% 13% 24% 21% 21 – 23% ROACE, %5 21% 13% 20% 20% 18 – 20% Net debt
Slide 59: Operational guidance
Operational guidance Metric 2003 2004 2005 2006E Guidance Lifting costs, $/boe 0.43 0.38 0.52 0.45 0.50 – 0.55 F &D costs, $/boe 0.72 1.06 0.30 0.57 0.62 – 0.68 RR costs, $/boe1,2 0.72 0.69 0.30 0.66 0.70 – 0.75 RR rate3 249% 118% 313% 144% 125% Notes: 1. Includes acquisition cost for oil and gas as
Slide 60: Growing value
Growing value Share performance IPO to 12/31/2006 Growth in PV-10 value1, MM $US 300% 7,010 250% 5,367 200% 4,342 3,939 150% 100% 50% 0% 2003 2004 2005 2006 J-05 A-05 S-05 O-05 N-05 A-06 D-05 J-06 F-06 M-06 M-06 J-06 J-06 A-06 S-06 O-06 N-06 D-06 NVTK GDR, % RTSI,% PV-10 Value Notes: 1. PV-10 value
Slide 61: Value formula
Value formula 23 year R/P life 651 bcm P1 Gas reserves 78.5% Proved Developed Low-risk Net cash position Efficient 1.3+ tcm of natural gas Strong liquidity ratios Assets 185+ mmt of liquids Substantially de-levered Approx. 10 billion boe He l ntia Ba alth sta oked la y b Sh nce Su -bo rce ee t un so
Slide 62: How do we deliver value?
How do we deliver value? • Growing reserves and production according to sustainable development principles • Exercising financial and capital discipline • Maximizing value from production and processing assets • Maintaining low-cost unit structure • Preserving financial flexibility Low Risk Low Cost
Slide 63: Questions & Answers
Questons & Answers == NOVATEK e