On May 28, 2018, Lukoil released its condensed interim consolidated financial statements for the three-month period that ended on March 31, 2018 prepared in accordance with International Financial Reporting Standards (IFRS).

In the first quarter of 2018 the company’s sales were RUB1,630.7 billion, 13.9 percent higher year-on-year, mainly as a result of higher hydrocarbon prices. Lower refined products trading volumes, inventory build-up and a stronger ruble negatively impacted sales dynamics. The company’s sales decreased by 1.9 percent quarter-on-quarter as a consequence of lower oil trading volumes.

EBITDA

In the first quarter of 2018, the company’s EBITDA was RUB219.5 billion. The year-on-year and quarter-on-quarter EBITDA dynamics were supported by the increased share of high-margin barrels in total production, a better-refined product slate at the company’s refineries, and higher sales volumes via premium marketing channels. The EBITDA increased by 5.7 percent as compared to the first quarter of 2017. Additionally, the EBITDA was also pushed up by higher oil prices.

Quarter-on-quarter EBITDA decreased by 1.9 percent mainly due to lower positive crude oil export duty lag effect, a stronger ruble, as well as lower refining margins in Russia and in Europe. Lower operating and administrative (SG&A) expenses positively contributed to the EBITDA dynamics.

Profit

Lukoil’s profit to be allocated to the company’s shareholders stood at RUB109.1 billion, a figure reflecting an increase of 75 percent year-on-year. Profit growth was mainly driven by a significant negative non-cash foreign exchange effect in the first quarter of 2017. If one discounts the forex factor, profits to be allocated to Lukoil’s shareholders increased only by 13.5 percent.

The quarter-on-quarter profit declined by 9.5 percent mainly due to higher depreciation, depletion, and amortization (DD&A).

Capital expenditures

In the first quarter of 2018, capital expenditures were RUB121.1 billion, decreasing 12.1 percent quarter-on-quarter and 7.0 percent year-on-year due to lower investments in the international upstream segment.

Free cash flow

In the first quarter of 2018 adjusted free cash flow (before changes in working capital and the West Qurna-2 project) totaled a record number of RUB91.9 billion, up 19.4 percent quarter-on-quarter and 32.5 percent year-on-year. The growth was attributable to higher operating cash flow before changes in working capital, as well as lower capital expenditures.

Operational highlights

In the first quarter of 2018, Lukoil’s average daily hydrocarbon production, excluding the West Qurna-2, project amounted to 2,286 thousand barrels of oil equivalent (boe) per day, which is 3.3 percent higher year-on-year and flat quarter-on-quarter. The year-on-year growth was driven by the development of gas projects.

In terms of liquid hydrocarbons, starting in January 2017, Lukoil’s daily oil production volumes and dynamics have been mainly defined by the external limitations imposed on the Russian companies’ production volumes. In the first quarter of 2018, the production of liquids stood at 158.7 million barrels, excluding the West Qurna-2 project. The production figure in the reporting period corresponds to the volumes seen in the previous quarter in average daily terms.

Lukoil actively continued to develop its priority projects in the reporting period. In particular, oil production at the V. Filanovsky field reached 1.4 million tons in the first quarter of 2018, which is 1.5 times more than in the first quarter of 2017. Two wells were successfully completed as part of the second stage of field development. Further drilling will yield sustainable production of six million tons of oil per year. Lukoil also progressed with the second development stage at the Yu. Korchagin field, commencing drilling the first well at the site in May 2018. Lukoil’s efforts at the Yaregskoe field and the Permian reservoir at the Usinskoe field in the Timan-Pechora region allowed the company to increase high viscosity oil production by 45 percent year-on-year. Oil and gas condensate production at the Pyakyakhinskoe field in West Siberia increased by 12 percent year-on-year.

The share of these projects in Lukoil’s oil production excluding the West Qurna-2 project was 14 percent in the first quarter of 2018, which is four percentage points higher year-on-year.

Gas

In the first quarter of 2018, Lukoil’s gas production was 8.0 billion cubic meters, which is 24 percent higher year-on-year and flat quarter-on-quarter in average daily terms.

The main driver for gas production growth was the successful development of projects in Uzbekistan. In the first quarter of 2018, gas production at the Kandym and the Gissar projects doubled year-on-year to 2.9 billion cubic meters thanks to the launch of new gas treatment facilities.

Refined products

Product output at Lukoil’s refineries stood at 15.1 million tons in the first quarter of the current year. At the company’s facilities within Russia, refinery output grew by 1.6 percent year-on-year to 10.1 million tons due to higher utilization rates at the Volgograd refinery. A decline in refinery output in quarter-on-quarter terms was mainly due to facilities maintenance.

Light product yield at refineries in Russia increased by six percentage points year-on-year to 71 percent. Fuel oil and vacuum gasoil output decreased by 32 percent, and their share in the product mix decreased to 13 percent, as compared to 20 percent in the first quarter of 2017. The improvement in the operating efficiency of the company’s refineries in Russia was also driven by capacity use optimization, the augmentation of semi-finished products cross-supply among Lukoil’s refineries, and a change in the feedstock mix.

Lower refined product output in Europe both quarter-on-quarter and year-on-year was due to ongoing maintenance at refineries in Bulgaria and Italy.