Transcript No Slide Title
Oil Company LUKOIL
Leonid Fedun Vice President
2001 Oil and Gas Conference New Horizons
London June 7-8, 2001
II. Launching Pad for Future Growth
Strong Reserve Growth
Proven Oil & Gas Reserves
• Proven reserves up by 70% since 1995
20.0
14.9
14.2
• Reserve growth has come from
15.0
10.0
8.2
11.6
10.6
11.0
– Continued exploration
5.0
0.0
– Targeted acquisitions
1995 1996 1997 1998 1999 2000 Oil Gas
• Reserve base continues to shift out of the higher cost Western Siberia – Accounts for only 53% of proven reserves today – International reserves account for nearly 20% of total proven reserves* * This includes estimated proven reserves in West Qurna
Proven Oil & Gas Reserves Shift MM BOE 15,000 10,000 5,000 0 370 1,776 8,580 360 2,412 8,412 548 4,513 8,437 1998 W. S iberia 1999 E. Russia Int'l 2000
Consistent Production Growth
Crude production up every year since 1995 33% increase over 5 year period Annualized CAGR of 7.9% International production currently accounts for only 3% of total production But growth rate is very high Production outside of Russia has more than tripled from 1997 - 2000
LUKOIL’s Production ‘000 BBL/day 1,800 1,500 1,200 1,147 1,169 1,247 1,284 Int’l production as a % of LUKOIL’s total production 3.0% 1,513 1,555 2.0% 900 600 1.0% 300 0 0.0% 1995 1996 1997 1998 1999 2000 Russia International
Improving Upstream Efficiencies
• Marked improvement in operational efficiencies over the last 5 years • Average flow rates up by 15% in West Siberia • Efficiencies achieved through - Shut in of marginal wells - Continuing shift to higher quality reservoirs - Increased application of new technologies
Average Daily Flow Rate (W. Siberia) BBL/day 75 70 65 61 60 55 1996 1997 1998 70 1999 Oil Production MM BBL 500 400 300 New Technologies 200 100 0 1995 Traditional Technologies 1996 1997 1998 1999 2000
Strong Growth in Refining
• Refining output is up sharply 70% increase since 1995 • International expansion has been key driver of our refining growth - Accounts for 2/3 of our growth over the last five years - Today accounts for nearly 40% of our refining throughput
Refining runs ‘000 BBL/day Int’l refining as a % of LUKOIL’s total production 30.0% 1,000 800 600 400 200 0 380 386 380 359 581 647 1995 1996 1997 1998 Russia International 1999 2000 20.0% 10.0% 0.0%
International Downstream Assets
LUKOIL has built a leading position in R&M in South Eastern Europe LUKOIL’s Primary Refining Assets
Operating Data
Refinery
Petrotel (Romania) Neftochim (Bulgaria) Odessa Refinery Plant (Ukraine)
Capacity MMTY
4.7
10.5
3.8
Production MMTY
1.2
5.3
0.9
Utilization %
25.53% 50.48% 23.68%
Ownership %
51.00% 58.00% 51.90%
LUKOIL’s Primary European Refining Assets Arkhangelsk Ukhta Moscow Ventspils Perm Petrotel Neftokhim Odessa Volgograd Novorossiysk Baku
Advantaged International Assets
• Strategically advantaged refineries • low-cost crude supply • able to sell product to export markets – Strong regional refining margins projected through 2002 • Cost savings being achieved through refinery optimization • Upgrading underway to meet new EU specifications
$7 Mediterranean Refining Margins 1995 - 2002E $6 $5 $4 $3 $2 $1 $0 Jan-95 Jul-96 Jan-98 Jul-99 Margin Urals Crack US$/BBL Jan-01 Jul-02 $35 Urals Price 1995 - 2002E $30 $25 $20 $15 $10 $5 $0 Jan-95 Jul-96 Jan-98 Urals Med US$/bbl Morgan Stanley estimates Jul-99 Jan-01 Jul-02
Management of International Operations
• • •
Upstream - LUKOIL Overseas Holding
: Moscow based Headed by Andrei Kuzyaev Manages upstream projects outside of Russia
LUKOIL Overseas Holding (London - Moscow) OAO LUKOIL LUKOIL Europe Holding (London - Moscow) Safin
Caspian Iraq European R&M USA R&M • • •
Downstream - LUKOIL Europe Holding
London based Headed by Ralif Safin Manages European downstream assets Kazakhstan
World Class Reserves and Production
• LUKOIL ranks as a world-class company in terms of reserves and production • Our expansion strategy will deliver greater international diversification on par with other oil majors
2000 Reserves (Billion BOE) 2000 Production (M BOE/d) 22,060 19,882 15,548 14,900 11,660 10,687 9,504 6,081 4,725 1.19
0.70
2.11
1.64
1.59
2.74
3.75
3.30
4.47
Source: Company data
Strong Financial Growth
US$ MM Total revenues Operating profit Income before taxation Net income Cash and marketable securities
(as of December 31/June 30)
Financial debt
(as of December 31/June 30)
Total assets
(as of December 31/June 30)
Net cash provided by operating activities
(before changes in the working capital)
1998 6,619 (510) 877 729 158 2,074 9,643 752 1999 7,376 1,692 1,249 1,062 674 2,497 12,503 1,426 6 months, ended June 30 1999 2000 2,890 325 108 92 393 2,156 10,102 6,246 1,887 1,735 1,452 1,024 2,705 14,634 235 1,688
Monitoring Key Ratios to Maximize Efficiency
All data shown as %, unless otherwise noted Earnings per share, in US dollars 1998 1.15
Return on sales 11.0
Return on assets 7.6
Return on equity 13.1
Sales on assets ROACE 68.6
11.0
Net debt to net debt plus equity 25.6
1999 1.69
14.4
8.5
15.0
59.0
13.4
19.5
6 months, ended June 30 1999 2000 0.14
3.2
0.9
2.25
23.2
9.9
1.6
16.8
28.6
2.4
42.7
31.2
23.8
15.3
Rational Deployment of Capital
• High rates of reinvestment are ensuring continued growth • Special emphasis placed on R&M investments over last three years • up by 35% • targeted at balancing production and refining capacity
Annual Capital Expenditures US$ MM 800 700 600 500 400 300 200 100 0 1998 E&P 1999 2000 R&M Other
Proposed Dividend Payout and Share Swap
LUKOIL’s dividend payout has grown steadily over the last four years
LUKOIL Share Price Performance
Last Twelve Months, US$ per share
$20 $16 $12
The proposed share swap will benefit all shareholders • Strong recent performance in the pref shares • Simplify share structure • More equitable distribution of future dividends
$8 $4 11-A pr-2 000 01-J un-2 000 24-J ul-20 00 13-S ep-2 000 03-N ov-2 000 26-D ec-2 000 15-F eb-2 001 09-A pr-2 001 Lukoil Ord.
Lukoil Pref.
LUKOIL Historical Dividend Payments
US$ per share
2.50
2.00
1.50
1.00
0.50
0.00
0.04
0.16
0.02
0.19
0.12
0.7
Ord. Dividend Pref. Dividend
0.29
2.11
II. Growth and Efficiency Strategic Overview
Upstream Strategy - Potential and Efficiency Growth
• Continue steady production growth – Selective development of existing reserves – Opportunistic acquisitions • Lower production costs – Improve efficiencies in existing operations – Production expansion in lower cost regions (Timan Pechora, Caspian and Middle East) • Strengthen netbacks: Shifting production will...
– lower transportation costs – increase proportion of sales in international market – improve quality of crude
Sustainable Growth Strategies Prospective Growth of Oil Production
Timan Pechora
2000 - 10.7 MM tons of oil 2010 2015Е - 20-25 MM toe
European Russia
2000 - 14.2 MM tons of oil 2010 2015Е - 13-15 MM toe
Western Siberia
2000 - 50.8 MM tons of oil 2010 2015Е - 45-50 MM toe; 30-40 bn cubic m of gas
Caspian region
2000 - 2 MM tons of oil 2010Е - 15 MM toe 2015Е - 20-25 MM toe
Iraq
2010Е - 15 MM tons of oil 2015Е - 20-25 MM toe
Downstream Strategy - Open New Markets
Expansion into Central and South Eastern Europe R&M • Exploit advantage as the low-cost crude supplier to region • Capture strong Mediterranean refining margins • Benefit from projected demand growth in region • Improve efficiencies through optimising operations among our regional refining assets
Global Strategies: LUKOIL International Operations
LUKOIL is active today in more than 20 countries
Our main strategic assets are situated in • Western Siberia • Timan Pechora • The Caspian Basin • S.E. Europe • N.E. United States LUKOIL’s most recent discovery in the Yamal region of Siberia will position us to become a major gas exporter
LUKOIL’s Principal Areas of Operation
Global Strategies: LUKOIL’s Regional Expansion
LUKOIL is rapidly expanding its downstream and upstream operations into neighboring regions
• Upstream: • Caspian • Kazakhstan • Middle East • Downstream: • Central Europe • Atlantic Basin
LUKOIL is poised to become Russia’s first truly international oil major Ventspils Arkhangelsk Downstream
: Expansion into Central Europe and Atlantic Basin
Moscow Ukhta Perm Upstream
: Expansion into Caspian Kazakhstan and Middle East
Petrotel Neftokhim Odessa Volgograd Novorossiysk Baku
Global Strategies: Why Expand Beyond Russia?
• Reduce our exposure to “single market risk” • Exploit competitive advantages – Low cost crude supplier – Superior knowledge of markets and geology • Shift production to lower cost reserves • Expand R&M business in markets with higher product prices • Capture margins further down value chain in markets supplied by our crude
Global Strategies: New Markets
Expansion into Atlantic Basin Marketing
• Region will increasingly become net product importer
North Sea Production
MM BBL/day
8.00
7.00
5.98
6.00
6.15
6.45
6.52
6.24
6.71
5.00
•
4.00
Upgrade our export-oriented refining assets to deliver to this market
3.00
2.00
1.00
0.00
• Secure a market for future Timan Pechora production
19 90 4.22
19 95 19 96 19 97 19 98 19 99 6.6
6.62
6.37
20 00 20 01 E 20 02 E 20 05 E 20 10 E 4.72
2MM BBL/ day decline in 2010
• Take market share from declining, higher-cost North Sea production – 2 MM BBL/day decline by 2010
Setting and Achieving Targets Corporate Growth: 2001 - 2005
Crude Oil Production Not less than 15% Domestic Refining To 600,000 - 700,000 BBL/day International Refining Cost Control Sales Net Income Capital Investment Dividends To 300,000 BBL/day Lower than global average US$20 - 25 bn @ $20/BBL US$3.5 BN US$2.5-3 BN p.a.
15-20% of net income
Leading the Way in Corporate Standards Creating Relative Value Among Peers
• Commitment to upholding international corporate governance and transparency standards • Progressive dividend policy • Upholding minority shareholder rights – Shareholder rights charter • High-caliber international management team and ethical standards • Participation in educational and philanthropic programs • International sponsorship and brand-building
Predictability and Accountability Delivering for the Investment Community
• LUKOIL has embarked on a regular process of reporting financial and operating results to the international financial community, which will include: – Interim publishing of US GAAP financial statements – By press release and over the web – Quarterly analyst conference calls for discussion of results – Semi-annual roadshows for discussions with investment community – Improved investor relations web site
LUKOIL’s Competitive Advantages
• • Russia’s most balanced integrated oil company – Growing downstream presence provides cushion from downward oil price movements • Superior asset base – Growing geographical diversification • International experience unique among peers – – International mergers and acquisitions expertise Shares are legitimate acquisition currency • Strategic foothold in the North American downstream market Financial discipline and reporting standards to judge opportunities according to strict strategic and financial return standards
Sustainable Production Growth
• Production growth well above the Russian average – Nearly a quarter of Russia’s 2000 production – Sustainable growth since the beginning of privatization (1995)
Crude Oil Production
% of Russia’s total
40.0% 30.0% 20.0% 18.7% 20.2% 22.0% 24.0% 27.0% 30.0% 13.8% 10.0% 0.0% 1993 1995 1997 1999 2000E 2005E 2010E
• Sustainable growth of the share in Russian crude exports
Crude Oil Export Sales
% of Russia’s total
30.0% 20.1% 22.0% 20.0% 14.0% 9.5% 10.0% 6.8% 23.0% 25.0% 0.0% 1993 1995 1997 1999 2000E 2005E 2010E
Macroconditions for Growth
– Economic growth. GDP growth tendency is not less than 3-4% p.a.
Budget surplus. Growth of gold and currency reserves. Improved solvency and tax collection – Favorable market environment. Long-term supply and demand forecast under a regulating OPEC role shows that Russian crude oil price will be maintained at the level not lower than $18 20/barrels. Convergence of domestic and international oil and petroleum product prices – Improvement of legislation. Stabilization of the PSA regime is in its final stage. Enhancement of taxation regime, including taxation regime for oil companies.
Nondiscriminative access of oil companies to gas transportation facilities – Complications. Inflation growth. Low pace of structural reforms in Russia
LUKOIL’s International Operations. Case Study: Bulgaria
• Operations launched in 1999. Largest refinery in the Balkans. Retail chain.
2001 revenues amounted to $1.5bn, an equivalent to 7% of GDP and 25% of tax revenues of the country • Active development of the Mediterranean markets (Turkey, Greece, Serbia, Macedonia and other countries) in the sphere of oil, petrochemical products and polymers. Annual sales growth by 3-15% • Over 2 years Neftochem became profitable. $120m of old debt was paid.
Production of petroleum products in accordance with European standards.
Output growth by 20%. Environmental safety • Attractive perspectives in terms of supplies of various types of products, including liquefied gas, in the Balkans and on the Black Sea. Raising of product quality to international standards. Joint integrated efficient development with Petrotel (Romania) and Odessa refinery (Ukraine)
Focus Regions of LUKOIL Overseas Holding
LUKOIL Overseas Holding participates in major projects in highly prospective hydrocarbon basins • Russia – JV mature production • Caspian & Kazakhstan – exploration – early production • Middle East – new ventures • North Africa – JV production MAP
Expanding Production Outside Russia
Efficiency
• Diversify E&P portfolio • Find and develop new, lower cost reserves • Exploit LUKOIL’s competitive advantages – regional expertise – advantaged logistics • Mitigate “single market risk”
Geographic Breakdown of Production, MM tons/year 120 100 80 60 40 20 0 2 73 15 10 79 Russia 1999 Caspian ROW 2010 Goal: Increase share of international
efficient projects in LUKOIL’s production portfolio
Strategic Interest in Getty Petroleum Marketing
Upon completion of Timan-Pechora and its associated refinery, LUKOIL plans to deliver gasoline to the United States East Coast — The sale of gasoline directly through controlled sites could enhance profit margins by 18 to 20% Getty Petroleum Marketing ("GPM") key strategic strengths: — Over 1 billion gallons of annual gasoline sales — 1,300 retail sites in the northeastern United States — Strong brand recognition — Significant market share in core urban areas The acquisition of GPM is expected to be the beginning of a significant expansion in the eastern U.S. retail market
GPM: Growth Strategy
Ancillary Business Expansion — Formalize, modernize and revitalize “other uses” — New revenue streams — Mitigate earnings volatility — Support volume growth Discretionary Spending — Internal growth — Image upgrade — Improve customer experience — Attractive return characteristics Acquisitions — Ample opportunities — Increase utilization of distribution capacity more quickly Capitalize on Parent Company Resources
LUKOIL Going Global AGENDA
• • • • • • • • Introduction Update on Company Strategy Focus on International Growth – Upstream: Former Soviet Union and Middle East – Downstream: Eastern Europe and Atlantic Basin Growth Targets Update on Other Recent Developments US GAAP Financials Dividend and Proposed Preference Share Conversion Corporate Governance Initiatives