Gazprom Neft to Boost Output Spending, Weigh Buying Hess Unit

OAO Gazprom Neft, the oil arm of Russia’s largest natural-gas producer, will boost spending 23 percent as tax incentives spur drilling, as it plots acquisitions that could include a Russian unit of Hess Corp.

Gazprom Neft earmarked investment of $7.5 billion in 2013 compared with about $6.1 billion this year, Chief Financial Officer Alexey Yankevich said in an interview. The company plans to spend $23.3 billion from 2013-2015 with $10.2 billion of that going to tap new deposits, according to a presentation today.

The goal is to almost double oil and gas output to 100 million metric tons a year by 2020 as Gazprom Neft develops Siberia’s largest new deposits. New developments in Yamal, Orenburg, the Barents Sea Offshore, East Siberia, Venezuela and Iraq currently producing less than 5 million tons of oil a year will gradually rise to just under 40 million tons in 2020, according to the presentation.

“We have a lot of reserves that are ready for development,” Yankevich said in Moscow. “We have had a number of things come together for us, mainly that we have clarity, more or less, on taxes.”

Russia, which earns about half its revenue from an oil and gas industry dependent on Soviet-legacy fields, is seeking to balance budget needs and tax breaks to spur investment in new deposits. Putin’s call to keep oil output above 10 million barrels a day for at least the next decade has seen companies such as OAO Rosneft and OAO Lukoil increase investments in drilling.

Potential Acquisitions

The St. Petersburg, Russia-based company will set aside about $800 million of next year’s spending for acquisitions including for Russian state licensing auctions where the Imilorskoye field will be offered, Yankevich said.

Hess’s Samara-Nafta asset in Russia’s Volga region has also drawn Gazprom Neft’s interest, according to Vadim Yakovlev, Gazprom Neft’s deputy chief executive officer. He did not provide further details.

Hess has retained Goldman Sachs Group Inc. as financial adviser as it seeks to sell the unit, which produces 50,000 barrels a day of oil equivalent, according to a Nov. 12 statement.

OAO Gazprom, the world’s largest gas producer, is transfering oilfield licenses to Gazprom Neft for development. Gazprom Neft gained control of the Novoport field in the Yamal region last week and expects to get the Prirazlomnoye field in the Barents Sea next year, Yankevich said. Gazprom Neft will spend $600 million on Novoport next year and $1.1 billion the following year, according to the presentation.

Gazprom Neft is also in talks with Gazprom on operating some oil output from the parent company’s gas fields, Yakovlev said.

Cash Flow

Free cash flow will be negative until 2015 due to investment in projects, according to the presentation. Free cash flow will rise above $5 billion after 2017 and above $10 billion in 2020 as output is ramped up, according to the presentation. Dividend payments will remain at 22 percent of net income next year and may increase after 2016, Yankevich said.

Gazprom Neft is confident it can recoup spending as it secures breaks on mineral-extraction taxes and lower export duties at some northern fields, Yankevich said. “The extra investment is mainly linked to this,” he said. The board will meet to review the business plan on Dec. 21, he said.

Gazprom Licenses

With the addition of projects from Gazprom, including fields in the Orenburg region transfered last year, Gazprom Neft has outstripped competitors on output growth. Production rose 4.4 percent to 1.19 million barrels of oil equivalent a day in the first nine months of this year, according to Gazprom Neft’s website. That beat state-run Rosneft, Russia’s largest producer, which increased oil and gas output 3.4 percent, its website shows.

Output will rise 4.4 percent to an estimated 59.8 million tons of oil equivalent this year, according to the presentation. Gazprom Neft will refine 43.5 million tons this year, up from 40.5 million tons the previous year.

Borrowing will remain at this year’s level, or about $2 billion to $2.2 billion, even as spending rises, Yankevich said. Gazprom Neft will consider dollar, euro and ruble debt and has plenty of room to borrow more, he said. No debt sales are planned before the end of the year, he said.

“It’s a sin not to borrow with such a low debt load and good rates,” Yankevich said.

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