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Gazprom Neft Keeps Free Cash Flow in $16 Billion Growth Plan

OAO Gazprom Neft expects free cash flow, or the income it has left after spending on investment, to stay positive even as the oil arm of Russia’s natural gas exporter plans to use $16 billion over two years to expand.

The company gained from an unexpected $2 billion in free cash flow in 2013 on higher-than-forecast oil prices and lower spending, Chief Financial Officer Alexey Yankevich said. Free cash flow is typically viewed as money that can be distributed to investors without affecting funding for business operations.

“We are doing better than our estimates,” Yankevich said in an interview in St. Petersburg Feb. 26. “We thought we would have negative free cash in 2013. Cash flow might not go negative.”

Gazprom Neft is investing 574 billion rubles ($15.9 billion) under a plan to boost output by about 60 percent to 100 million metric tons of oil equivalent in 2020, with new fields in Iraq, the Arctic offshore and Siberia. That would be just short of the amount of crude Brazil produced in 2013, according to BP Plc data.

The producer plans to spend 304 billion rubles this year and 265 billion to 270 billion rubles in 2015, Yankevich said. It doesn’t intend to take on more debt.

“We did our main borrowing last year,” he said. “If we do something this year, it will be substituting other less profitable credit.”

‘Many Options’

The company expects its controlling stake in Naftna Industrija Srbije AD will bring cash flows of about $140 million this year and next year from dividend payouts and repayments on loans it made to the Serbian company, he said.

While Gazprom Neft is looking at INA Industrija Nafte d.d. in neighboring Croatia, there is no plan to acquire it, he said. The Balkan nation will consider taking a new partner for its oil and gas producer amid a management dispute with shareholder Hungarian Mol Nyrt., Economy Minister Ivan Vrdoljak said in January.

“It is one of many options that we are always looking at,” Yankevich said. “If we see an opportunity that fits into our system, brings synergies, where there is a good upside in value, we are always interested.”

Gazprom Neft net income in 2013 advanced 0.9 percent to 177.9 billion rubles, according to a statement on the company website today. Sales fell 1 percent to 1.5 trillion rubles.

Oil and gas output rose 4.2 percent to an average of 1.25 million barrels of oil equivalent a day in 2013, according to the statement.

Gazprom Discovery

Gazprom Neft may be brought into the development of an oil discovery by parent company OAO Gazprom off the coast of Sakhalin Island, Yankevich said on a conference call with investors today.

Gazprom may have found as much as 464 million tons of oil at the Yuzhno-Kirinskoe field at the Sakhalin-3 area, potentially making it one of Russia’s largest offshore deposits, newspaper Vedomosti reported on Feb. 20.

In Russia, Yankevich expects a weak ruble to support earnings as the company earns U.S. dollars for oil while paying for domestic services in the local currency. The ruble will probably strengthen from 36 rubles to the dollar, he said.

During the peak investment phase in Messoyakha, Kuyumba Novoport and other fields, Gazprom Neft will probably maintain dividend payouts at 25 percent of net income, he said. After 2016, the company may consider an increase, he said.

“We are interested in increasing returns for our shareholders, only for us, this would probably be better to do after 2016 when we get through our investment cycle.”

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