NOVATEK Building on Achievements United Financial Group OneonOne
NOVATEK “Building on Achievements” United Financial Group One-on-One Investor Conference Great Eastern Hotel London, UK February 9 -11, 2005 Mark A. Gyetvay Chief Financial Officer and Member of the Board of Directors
Novatek Highlights 2003 - 2004 ü Novatek is the second largest Russian natural gas producer Ø FY 2003 gross and net gas production - 19. 5 bcm and 13. 2 bcm Ø FY 2004 gross and net gas production - 21. 4 bcm and 15. 8 bcm ü Significant holder of proved natural gas reserves Ø Net SPE proved natural gas reserves of 574 bcm as of 31 December 2003 Ø Net ABC 1 natural gas reserves of 927 bcm as of 1 January 2004 ü 1 H 2004 IFRS reviewed financial results Ø 1 H 2004 revenue increased 1. 9 times versus 1 H 2003 Ø 1 H 2004 EBITDA increased 2 times versus 1 H 2003 2
Novatek Highlights 2003 – 2004 continued… ü Corporate development Ø Signed protocol on the purchase of a 25% + 1 share stake in Novatek by Total S. A. Ø Completed buy-out of minority shareholders in December 2004 Ø Completed divestiture and sale of the construction business and other non-core assets ü Capital Market Activities Ø Successful CLN issues totalling USD 100 mln in April 2004 and USD 200 mln in December 2004 Ø USD 120 mln 7 -year term sheet signed with IFC Ø Successful placement of 3% of Novatek’s equity to diverse global investor groups Ø Agreement with IFC/EBRD for the purchase by each of a 1% equity stake in Novatek Ø RTS/MICEX listing ü Vertically integrating Ø First phase of Purovsky gas condensate stabilisation plant and BOP film plant nearing completion Ø Consolidated shareholding in Truboizolyatsiya to 97. 9% 3
Strategy and Value Strategic objectives driving performance and creating value ü Operating a series of oil and gas fields acquired at their initial stage of development; ü Concentrating development activities in core areas to achieve economies of scale; ü Exploiting high margin natural gas properties; ü Focusing development activities to achieve volumetric natural gas reserve and production growth; ü Managing low cost production advantage; ü Enhancing production stream value through centralized marketing and processing activities; and ü Committing to build the company based on sustainable development principles. 4
Our Value Proposition – Key Factors Overall Scale Market Leadership Second largest natural gas producer in Russia, and one of the largest independent gas producers in the world Largest independent gas producer in Russia Growth Potential Profitability Cash Flow Generation 2003 to 2005 E CAGR of over 30%, with consensus analyst view of the highest production growth rate In the Russian energy universe Continued margin expansion with growth in gas tariffs; highly profitable in current pricing regime Strong cash flows with sufficient operating leverage 5
Our Value Proposition – Key Factors Capital Efficiency Highly disciplined approach toward investments and capital allocation Capital Structure Debt to total capitalization in line with industry peer group; target range between 30 to 35% Dividend Policy Formulated dividend policy but subject to meeting medium-term growth profile Strategic Focus Operations highly concentrated in key gas basin; reorganization and divestiture program almost completed Regulatory/Political Risk RF government’s commitment to WTO accession and EU gas reform; negative sentiment toward pace of domestic gas reform 6
Corporate Governance and Transparency ü Adoption of Corporate Governance Policies and Procedures according to OECD and IFC “Best Practices” – Audit Committee – Strategy and investment Committee – Corporate Governance Committee ü Appointment of independent Board members (3 out of 8 members) ü History of producing IFRS consolidated and standalone financial statements audited by Pricewaterhouse. Coopers ü Independent reserve appraisals according to SPE and Russian Reserve Classifications ü Corporate reorganization and divestiture program of non-core assets ü Admitted to list equity on the RTS under symbol “NVTK” ü Successful completion of capital market transactions with a diverse portfolio of institutional investors 7
Novatek Corporate Structure, Before Novatek Exploration and production Yurkharovneftegas 100% Processing and Transport 34% 100% Tarkosaleneftegas Truboizolyatsiya 37. 3% 25. 1% Tambeyneftegas Nova. Trans Novasib Novakhim 100% 43% 50% 73. 23% Purneftegasgeologiya Terneftegas 77. 96% 41% 13. 2% 66% Yargeo Geoilbent 100% 8 62. 67% Truboplast 56. 1% Khancheyneftegas 97. 9% NOVA ZPK Selkupneftegas 32. 3% Industrial 100%
Corporate Re-structuring - 2004 Results Novatek Exploration and production Yurkharovneftegas 100% Processing and Transport 34% 100% Industrial 97. 9% NOVA ZPK Selkupneftegas Truboizolyatsiya 37. 3% Tarkosaleneftegas 100% 25. 1% Khancheyneftegas Purneftegasgeologiya Terneftegas 100% 50% 77. 96% 41% 100% 66% Tambeyneftegas Nova. Trans Novasib Novakhim Yargeo 100% 62. 67% Truboplast 100% • 2004 Restructuring results – Divestiture of construction business Geoilbent – Acquisition of remaining stake in Terneftegas – Board approval for disposal of stake in Geoilbent 9 – Full consolidation of TSNG and Kh. NG
Corporate Re-structuring – 2005 in process ü 2005 restructuring goals ü ü Disposal of stake in Geoilbent Re-organize TSNG corporate structure from OAO to LLC Merge LLC TSNG with LLC Kh. NG Acquire stake in LLC Pur-Land from TNG Energy AG Novatek Exploration and production 100% 34% Yurkharovneftegas Tarkosaleneftegas / Khancheyneftegas/ Pur-Land Purneftegasgeologiya Terneftegas Processing and Transport 100% Industrial 97. 9% NOVA ZPK Selkupneftegas Truboizolyatsiya 37. 3% 100% 25. 1% 77. 96% 50% 100% 41% Tambeyneftegas Nova. Trans Novasib Novakhim Yargeo 100% 62. 67% Truboplast 100% Re-branding of Industrial Subsidiaries - Nova. Polymer 10
Located in the Primary Natural Gas Resource Base of Russia Sources of future natural gas production in the Russian Federation West Siberia 2005: 92% 2010: 82% 2015: 81% Moscow Sakhalin 2005: 1% 2010: 2% 2015: 3% European Russia 2005: 6% 2010: 13% 2015: 13% NOVATEK’s current and future production is concentrated in the prolific YNAO Source: RF Energy Strategy to 2020 11 East Siberia 2005: 1% 2010: 3% 2015: 3%
Regional Russian Natural Gas Projections Russia, BCM 2000 2005 2010 2015 2020 584 580 - 600 615 - 655 640 - 690 660 - 700 7% 6% 13% - 14% 17% - 18% 0% 0% 65% 63% 70% % of Russian % of Regional European Region Barents sea W. Siberia Region 91% 92% - 93% 81% - 83% 79% - 81% 75% - 76% Nadym-Pur-Taz 87% 95% - 96% 95% 94% 80% - 84% Yamal 0% 0% 11% - 16% 1% 1% 2% - 3% 4% Irkutsk 0% 0% 60% - 73% 80% - 81% Far East Region 1% 1% 1% - 3% 2% - 3% Sakha Republic 44% 50% - 60% 25% - 45% 31% - 40% Sakhalin 53% 50% 40% - 50% 55% - 75% 60% - 69% E. Siberia Region 12
Pipeline System in Close Proximity to Primary Fields 13
Key Competitive Advantage: Reserve Location Yurkharovskoye Yamburgskoye ü Novatek’s fields are located in the Ya. NAO, the world’s largest natural gas producing region Severo Urengoiskoye ü Novatek’s fields are in close proximity to the UGSS Zapolyarnoye ü Novatek holds 17 licenses* for hydrocarbon exploration and development Urengoiskoye ü Novatek was granted 5 new exploration licenses in 2004 Khancheyskoye ü Novatek’s 3 main fields hold SPE proved reserves of: Natural gas: 574 bcm Liquids: 41 mm tonnes East Tarkosalinskoye 14
Exploration and Development - 2005 Production Profile Assets are concentrated in the development stage and not yet fully exploited Concept, Exploration & Appraisal Tarkosaleneftegas Development Decline Restoration Geoilbent JV/YUKOS LLC Yurkharovneftegas Khancheyneftegas Purneftegasgeologia Pur-Land Selkupneftegas JV/Rosneft Novatek’s licenses Time Significant development opportunities within existing mineral licenses and exploration activities through the acquisition of new mineral licenses 15
Exploration and Development – Gas Profile Exploration potential vs development needs Early stage of our natural gas reserve base development Tarkosaleneftegas ü Major exploration potential üProved developed reserves account for 56% of total proved reserves Novatek Average Khancheyneftegas ü Proved reserves account for 50% of total reserves Yurkharovneftegas ü The Company has 1. 6 tcm of ABC 1+C 2 reserves, of which 57% are ABC 1 Significant future growth potential ü SPE Proved reserves are only 56% of ABC 1 reserves Source: De. Golyer and Mac. Naughton reserve appraisals as of 12/31/2003 16
Gross Reserve Base Profile 3. 02 1. 81 1. 94 2. 24 Source: De. Golyer and Mac. Naughton and Ryder Scott for SPE reserves, Novatek for technical reserves 17
Top Global Gas Reserve Rankings 575, 496 A 35. 9% increase in proved gas reserves post consolidation of minority stakes in Tarkosaleneftegas and Khancheyneftegas *SEC filings and annual reports, OAO NOVATEK reserves per De. Golyer & Mac. Naughton and Ryder Scott for 5 entities 18
Novatek vs. Majors and Peers ü Novatek has proved SPE gas reserves of 574 bcm as of 31 December 2003 ü Novatek ranks favourably amongst global gas reserve leaders ü Novatek has proved SPE liquids reserves of 41 mln tons as of 31 December 2003 ü Novatek is the largest company based on proven gas reserves in a peer group of US independent gas producers ü Novatek has 2. 5 times the reserves of its closest US Independent producer, Burlington Resources 19
Leadership by Production - 2003 Natural gas production, mln cm per day ü Novatek ranked 5 th versus independent gas producer peer group ü Novatek’s gas production is 41% of the largest 2003 independent producer, Devon Energy ü Novatek’s gross gas production potential is over 50 bcm p. a. at full capacity *Source: Company data, TRUST Investment Bank 20
Production Growth CAGR ’ 03 – ’ 05 E Source: UBS Warburg and Company data 21
Resources for Sustained Long – Term Growth Reserve Category R/P years Oil/Liquids Gas Total ABC 1 C 2 133 123 Proved, Probable, Possible (“P 3”) 88 85 85 Proved + Probable (“P 2”) 49 54 53 Proved (“P 1”) 24 37 35 Based on 2003 net actual production and SPE reserve appraisals as of 31 December 2003 22
Peer Valuation Comparison Market Capitalization (USD) to Production (mln cm / day) Market Capitalization (USD) to Net Proven Gas Reserves (SPE defined, bcm) Source: Bloomberg, Troika Dialog and Company data 23
Peer Valuation Comparison Comparative Enterprise Value $ per BCM Low Net Debt $ per BCM Apache Devon Energy Anadarko Energy Burlington Res. Devon Energy Apache Unocal Burlington Res. Novatek Source: Troika Dialog and Company Data 24 Anadarko Energy
Financial Position: Rapid Growth in Performance Novatek’s key financial information (consolidated), RUR mln Gross Revenue Comparison of 1 H 2004 vs. FY 2003 consolidated results 17 177 3. 0 x EBITDA ü 1 H 2004 Revenue - 74% Net Profit ü 1 H 2004 EBITDA - 68% 12 793 1. 9 x ü 1 H 2004 Net profit - 71% ü Rapid increase in revenue, EBITDA and net profit attributable to growth in production and price increases 6 636 5 654 3. 3 x 5 575 Profitability measures 2. 0 x 3 782 3 281 1 890 1 718 644 1 103 5. 1 x 2002 2. 1 x 2003 As a % of sales 2003 2002 EBITDA* 32. 5% 30. 4% Net profit 19. 1% 11. 4% 2 318 1 H 2003 1 H 2004 25 * Based on Trust Investment Bank
Focus on Core Operating Activities Novatek’s consolidated revenue structure 1 H 2004 2003 2002 Sales of gas and liquid hydrocarbons ü Since 2002, Novatek’s operations have been focused on the production and sale of gas and liquid hydrocarbons Construction ü The share of revenues from construction has been steadily declining, and at the end of 1 H 2004, Novatek completed the divestiture of this business Other revenue Source: company data ü Other revenues come mainly from the production and sale of polymers and film for pipeline insulation as well as oil and oil product transportation services 26
Sales and Marketing – Oil and Gas Structure of Gas Sales 1 H 2003 ü FY 2003 net gas sales of 13. 5 bcm ü Key competitive advantages 1 H 2004 Ø Proximity of reserves to gas pipelines (UGSS) Ø Large share of end users Ø Constructive relationship with Gazprom ü Oil exports accounted for 32% of FY 2003 production in 2003 Industrial and metals companies ü Plans for 2005: Ø Commissioning of Purovsky Gas Condensate Stabilization Plant Traders Energy companies Gazprom Regional distributors Source: company data 27 Ø Premium price to Ural’s crude oil blend Ø Planned output of more than 1 mln tonnes
Upstream Operating efficiency (source: Companies data (SFAS 69)) Lifting Costs, 2003 Finding & development Costs, 2001 -03 average Note: Lifting costs for Novatek subsidiaries were restated to exclude production taxes * Data for 2002 28 *Yukos data is 2000 – 2002 average ** Novatek data is for 2003 only
De-mystifying our Gazprom Relationship ü Co-operative not competing business models ü Domestic focus to allow Gazprom to meet its long-term export commitments ü Cooperation on expanding the UGSS pipeline network ü Supply specific regional markets according to Protocol with Gazprom at FTS prices (i. e. , Kurgan and Tyumen) ü Sell gas directly to Gazprom (approximately 10 to 15% of production) ü Matching long-term sales contracts with requisite access rights (currently under discussion) ü Reliable natural gas producer with large resource base to meet growing domestic demand ü Novatek’s gas already factored into the RF gas balance ü Novatek supplies gas to large industrial regions (i. e. , Tyumen, Sverdlovsk and Samara), which minimizes the likelihood of supply interruptions ü Limits (or reduces) the need for expensive import of Central Asian gas 29
De-mystifying our Gazprom Relationship ü A history of amicable resolutions to all disputes between parties üPotential cooperation in Gazprom’s petrochemical project in Novy Urengoi üAgreement on Strategic Cooperation between Gazprom and Novatek under negotiation covering: ü Novatek’s future development plans ü Access to pipeline network to meet increasing production profile ü Novatek’s participation in regional gasification programs ü Mutual interest in price and transport tariff reform 30
Status of the Total transaction • Market transaction announcement and FAS consent filings on September 22, 2004 • Various requests from FAS to Total for additional information • Statement issued by FAS in the press in late December 2004 indicating • likely positive announcement but subject to further review Recent press reports indicating additional information required on announced 2005 restructuring plans Recent trend in FAS approval process indicates that the Ministry is taking a longer time to review Strategic market transactions (i. e. , Alcoa; Siemens, Inter. Brew, Total) 31
Strategic Projects to Fuel Growth Year 2004 2005 2007 2010 Phase III 9 Bcm 18 Bcm 27 Bcm Phase II 2. 3 Bcm 5. 2 Bcm Projects YNG Field Development Kh. NG Field Development Exploration Projects Purovskiy Condensate Stabilization Plant Ongoing seismic, geological and exploratory activities Phase II 2 mm tons p. a. 5 mm tons p. a. White Sea Port Facility BOPP film plant Expand port facility 1 H 2005 - 25 m tons p. a. Petrochemical Complex Feasibility plan completed, financing structure in discussion stages Liquefied Natural Gas Working group formed, preliminary sites and economics under discussion 32
Novatek’s energy value chain 1 st Stage capacity 2 mln tonne p. a 2 nd Stage capacity 5 mln tonne pa White Sea Port Facilities Purovsky ZPK Acquired five new exploration licenses and various seismic and geological data Tarkosaleneftegas Khancheyneftegas Yurkharovneftegas Purneftegasgeologia Novatrans Samara PCC 420 LPG railway tank cars Core Natural gas and liquids Production Companies BOP Plant Pipes and Pipe Insulation Truboizolyatsiya Truboplast 33 Packaging film High Grade Polypropylene and Polyethylene
Novatek CLN Allocation Details USD 200 million, 18 months 7. 75% due June 2006 credit-linked notes Number of allocated accounts – 63; Countries – 13; Book 1. 5 x overscribed Distribution by Geography Distribution by Type 34
CLN YTMs – Downward Trending Debt investors’ positive outlook on the quality of Novatek’s CLNs is driving down yields CLN 2005 YTM – 6. 2325 CLN 2006 YTM – 6. 561% YTM affect from Total announcement Announcement of Yukos/YNG auction Source: Trust Investment Bank and Bloomberg 35
Novatek RTS Trading Activity – As of Feb. 7 th Implied market capitalization from initial trading activities is $3. 643 billion; consensus view toward Total announced valuation Closed 3% private placement to a diverse group of international and regional investors IFC/EBRD Board approval for the purchase of 1% equity stake 36
Private Equity Placement - Allocation Novatek successfully concluded the placement of a 3% equity stake to a diverse group of international and regional institutional investors for USD 100 million; The subscription was allocated to 84 accounts and was 20% over-subscribed Source: Trust Bank and Bloomberg 37
Disclaimer – Safe Harbor Act The following document contains certain “forward-looking” information as defined by the Private Securities Litigation Reform Act of 1995 including, without limitation, estimates, expectations, plans and goals regarding NOVATEK’s forecasted production, reserves, financial position, business strategy and plans and objectives of management for future operations and development. Such forwardlooking information (forward looking statements are all statements other than those of historical fact) involves estimates, assumptions and uncertainties that involve risks and uncertainties, including price volatility, development, operational, implementation and opportunity risks, and other factors, which could cause actual results to differ materially. No assurance can be given that NOVATEK’s expectations or goals will be realized, and actual results may differ materially from those expressed in the forward-looking information. The words “aims”, “believes”, “seeks”, “anticipates”, “plans”, “expects”, “intends”, “estimates”, “should”, “will”, “may” and similar expressions are intended to identify forwardlooking statements. This presentation does not constitute an offer or invitation to sell or issue, or any solicitation of any offer to subscribe or purchase, any securities and may not be used or relied upon in connection with any contract or investment decision or commitment whatsoever. 38
Calculation of key financial indicators used in Novatek’s presentation ü EBITDA (earnings before interest, income tax, depreciation and amortisation) This indicator is based on the sum of the following items of Novatek’s IAS Income Statement : (Net profit + Income tax + Interest expense + Depreciation and amortisation expenses) ü Total debt (Debt) This indicator is calculated as the sum of the following items of Novatek’s IAS balance sheet : (Long-term loans received + Short-term loans received) ü Current ratio is calculated as a ratio between the following items of Novatek’s IAS balance sheet : Current assets / Current liabilities 39
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