PGNiG cut to HOLD, TP PLN 4.40 - Weak oil and gas prices offset the benefits of regulated business

We turned neutral on PGNiG after the impressive recovery of the share price since mid-March (almost 100% appreciation), setting our new 12m target price at PLN 4.40 (prev. PLN 4.50), which accounts for an estimated PLN 6.0 bn cash compensation from Gazprom (PLN 0.85 impact on our new 12m TP). Upstream had an average contribution of 63% to the clean EBITDA in 2017-19 and despite the unfavourable price environment remains the backbone of PGNiGs operations. The downward revision of our crude oil and especially gas price forecast (gas production accounts for >75% of total output) had a strong impact on our short- and medium-term projections with the cumulative 2020-22e upstream EBITDA being 40% lower than previously projected. On the other hand, the long-awaited ruling of the Stockholm Arbitral Tribunal has improved the outlook of PGNiGs gas trading business by lowering the risk of negative gas margins due to the change of the oil-linked gas pricing formula, which was applied to gas imports from Russia. Thus, we project the Trade & Storage (T&S) segment to generate EBITDA of almost PLN 2.0 bn in 2020-22e vs. a loss of ca. PLN 0.2 bn previously. All in all, our 2020-22e cumulative clean EBITDA is only 5% lower than before.