Novatek 3Q 20 - FCF turned positive, while North-Russkoye kept development

-Revenue and EBITDA in line with our estimates, while NI ahead of forecasts
-NOCF exceeded projections on higher effect from WC changes
-FCF beat expectations, while North-Russkoye cluster keeps on increasing output

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Today, Novatek published its 3Q 20 results, which came in line with our forecasts on both revenue and EBITDA, while net income exceeded our projections due to higher than expected share in profit of associates. As compared to the consensus, the results turned out to be slightly weaker on revenue and EBITDA, whereas net income was above the market expectations. More importantly, Novateks net operating cash flow came in stronger than our estimates mainly due to higher than expected positive effect from changes in working capital. In turn, the companys capital expenditures were close to our projections of about USD 0.55 bn. Overall, Novateks 3Q 20 free cash flow beat our forecasts and became positive of USD 129 mn. We should also mention that in 3Q 20 the companys newly launched North-Russkoye cluster kept ramping-up production of natural gas (1.4 bcm or +143% vs 2Q) and also started-up liquids output (0.12 mn tons). We treat the news as marginally positive, but do not anticipate any significant market reaction as the market is focused on gas prices and LNG long-term projects.

Revenue: The companys 3Q 20 revenue came in 24% weaker yoy due to lower yoy both crude oil prices (-29% yoy) and LNG prices on international markets (-30% yoy). Besides, revenue was also pressed by lower yoy sales volumes of gas (-0.8% yoy), crude oil (-13.6% yoy) and oil products (-13.1% yoy). At the same time, these negative factors for Novateks revenue were partially offset by relatively stable domestic gas prices as well as by an increase in stable gas condensate sales (+23.3% yoy) and increase in liquefied petroleum gas sales (+5.7% yoy).

Profitability: Novateks EBITDA (excl. share in JVs) reduced by almost 26% yoy to USD 651 mn in 3Q 20 following a decline in EBITDA/boe by over 28% yoy to USD 8.5/bbl. In turn, the companys net income deceased to USD 179 mn from USD 5.7 bn in 3Q 19, when Novatek reported over USD 5.6 bn gain on disposal of 30% share in Arctic LNG 2 project. The companys net operating cash flow diminished by 20% yoy to USD 671 mn because of decline yoy in EBITDA, though it came in above our estimates on both lower income tax paid and higher contribution from WC changes compared to our forecasts. In total, Novateks free cash flow halved yoy to USD 129 mn, however it remained positive in 3Q 20, while we expected it to come in slightly negative.

Outlook and recommendation: We treat the results as marginally positive for the stock, as the excess in the companys FCF over our estimates was driven by changes in WC. We also welcome Novateks progress of development its new North-Russkoye cluster, which was launched in late 2019 and is expected to become one of the key sources of production growth of the company in the next years.