EUR 150.00 For Business Accounts Only

PGNiG: Hit by unfavourable macro and price spreads

We initiate coverage of PGNiG with a SELL rating and a FV of PLN 5.02. In the short term, we expect lower natural gas spot prices to continue mainly as a result of massive LNG capacity coming online in 2018-2020 and some of the ‘old’ flows being redirected from Asia due to the low adjusted JKM-TTF price spread. We note that weak macro along with lower upstream output in Norway can weigh on the Exploration and Production segment operating results until the Skogul and Ærfugl fields are launched in 2020. Secondly, since the majority of the gas portfolio is based on crude-linked contracts (Yamal, Qatar), the relatively higher Brent vs gas diff may keep the Trading Segment EBITDA comparable to 2018’s low result). On top of that, there is incessant pressure on distribution tariffs from the regulator which were cut in 1Q19 by another 5% yoy. We appreciate the robustness of FCFF generation, which we believe could have translated into a quite decent DPS payout in the coming years, but due to political pressure we think PGNiG will have to acquire new gas fields on the Norwegian Shelf to cover Baltic Pipe needs to some extent. Obviously this may result in higher production in the future, but in the short term it may lock in the DY at 2%. As for the dispute with Gazprom, based on the example of Ukraine’s Naftogaz, we think it may be hard to reclaim the money immediately even though the final ruling should be positive for PGNiG. Hence we put a 50% discount factor on the likelihood of its immediate recovery, which along with the time value of money gives us PLN 0.20 per share in the final valuation.