OMV Petrom - No pain, no gain - Earnings Review from Concorde Securities Ltd. (Hungary)

OMV Petrom – Earnings Review

Rating: BUY (unch.)

Target Price (12-m): RON 0.463 (prev. RON 0.504)

Current share price: RON 0.307

 

The Romanian government has implemented an emergency ordinance to reduce the price of natural gas from the current domestic market levels (of over RON 80/MWh) to RON 68/MWh for producers and suppliers. The price will be capped at that level for a period of three years starting from 1 April 2019 to 28 February 2022. Furthermore, throughout this period, the regulator ANRE will be tasked to establish a formula whereby industrial and commercial consumers would be buying a mixture of domestically produced and imported gas, even though the latter has been historically significantly more expensive (say by 25-30%) than gas delivered from domestic production. Our best guess is that gas import may represent around 20% weight in the mixture the gas producers will be allowed to use for calculating their final prices. Before full market liberalization in early 2017 households represented around 30% of OMV Petrom’s quantities of gas sold.

 

Also importantly, electricity and gas companies would also have to pay an extra 2% annual turnover tax to ANRE (called as financial contribution) calculated on the basis of last year gas trading revenue. The household segment of electricity consumers, which had been liberalized, will also again be reregulated. The only good news is that plan that the government had elaborated earlier to link the so-called windfall tax to the CEGH prices and removing the deduction of the royalty and limiting the deductibility of investments recognized in the calculation of income tax on revenues from the gas market liberalization, which we asserted would wipe out the majority of profits eked out by suppliers on gas production, is not on the agenda at this point.

 

The total impact of capping gas prices and the 2% turnover tax should be around RON 700-800mn, or ca. 9%, on Petrom’s clean CCS-based EBITDA between 2019 and 2021 on our calculation.

Although oil prices have staged a remarkable comeback from their lows in last December, new supplies at a lower marginal cost at the juncture of increased inventory levels and shale production growth with barely visible cost inflation leaves us taking the view that prices will remain erratic amidst demand-side concerns. That said, we expect the recovery in oil prices to continue, provided that physical oil markets tighten further with evidence that the OPEC cuts are working and inventories revert to 5-year average levels. Our 2019 and 2020-average Brent price forecasts are now USD 65/bbl, respectively, down from USD 72/bbl and USD 70/bbl previously but still above current market forwards.