Oil and Gas - 2Q20 Results to Show the Trough
The impact from the rapid deterioration in market conditions this year was already visible in Russian oil and gas companies' 1Q20 results, mainly through a negative export duty lag effect and export price discounts. However, 2Q20 was even more challenging. Although the basis for upstream profitability improved Q-o-Q, the OPEC+ production cuts, shrinking tax benefits and deeper struggles in the downstream (from depressed product crack spreads and slumping demand) weighed heavily on the sector. Our 2Q20 financial forecasts suggest this reporting season will see a trough in both earnings and cash flows. > We estimate that the four Russian oil majors' combined EBITDA declined by 32% Q-o-Q and 65% y-o-y in 2Q20. Most of the pressure came from a drop in the value of tax benefits and collapse in downstream margins. We expect the results of Rosneft and Gazprom Neft to be the weakest in the oil sector, translating into correspondingly weak interim dividends. Both companies are likely to report negative FCF before working capital changes, though we expect on balance a working capital release for Rosneft in 2Q20. The quarter was likely similarly challenging for Lukoil given its larger presence in the downstream, though, based on our forecasts, its shareholders can still expect a 2% yield on the interim dividend. > Tatneft's operating flexibility probably made a substantial difference in 2Q20. It managed to cut its production almost in line with the OPEC+ deal in April (a loss-making period for the upstream) while boosting its refining throughput by roughly 25% from the March level. As a result, its profitability probably held up better than peers'. We expect Tatneft's next interim dividend to be based on 9m20 FCF and yield a solid 7%.> Gazprom's 2Q20 financial performance is likely to be the weakest in the entire oil and gas sector, as the slump in gas export prices close to the opex breakeven level made little room for margin in this core segment for the company. We expect it to post a 75% y-o-y decline in EBITDA, to just below $2.0 bln, and negative $1.4 bln in FCF, even assuming that it started optimizing capex as guided. The 2Q20 contribution to the annual dividend is likely to be negligible. > Generally speaking, the quarterly results were much more difficult to forecast than usual due to the highly volatile macro conditions during the quarter. We acknowledge that there could be significant deviation from our forecasts. However, because 2Q20 will make a very small contribution to FCF - our valuations are based on FCF - the quarter is unlikely to have a material read-through for future quarters and will therefore not likely affect valuations. In that sense, it can be treated as something of a one-off.
Gazprom Neft PJSC is vertically integrated oil company operating in the Russian Federation, CIS and internationally. Co.'s principal activities include exploration, production and development of crude oil and gas, production of refined petroleum products and distribution and market ing operations through its retail outlets. Co.'s Upstream segment includes the exploration, development and production of crude oil and natural gas (including joint ventures results), oil field services. Co.'s Downstream segment processes crude into refined products and purchases and sells and transports crude and refined petroleum products (refining and marketing).
PJSC Gazprom is a gas company based in Russia. Co.'s principal activity is the sale of gas. Co. is also involved in other types of activities which include leasing of assets, gas transportation and storage services, sale of gas condensate and refined products. Co. and its subsidiaries and associates operates gas pipelines systems in Russia. Co. is responsible for substantially all gas production and high pressure gas transportation in the Russian Federation. Co. is also a major exporter of gas to European countries. Co. is directly involved in exploration and drilling for hydrocarbons, production of gas and other hydrocarbons and domestic and export sale of gas and other hydrocarbons.
PJSC Lukoil is a vertically-integrated oil company engaged in the exploration and production of crude oil and natural gas. Co. is engaged in all main sectors of the modern oil business including supplies, refining, marketing, transportation, petrochemicals and oil-related activities. Co.'s operations are divided into five business segments: Exploration and Production; Refining, Marketing and Distribution; Chemicals; Power Generation and Other Business Segments. Co. owns and operates refineries in Bulgaria (LUKOIL Neftochim Bourgas AD) and Romania (Petrotel-LUKOIL).
OJSC OC Rosneft is a vertically-integrated Russian oil and gas company with upstream and downstream operations in each of Russia's oil-producing regions. Headquartered in Moscow, Co. operates ten oil and gas producing enterprises across Russia and is involved in over ten exploration projects. In addition to its upstream operations, Co. also owns two refineries, which have a combined capacity of 10 million tons per year, as well as four main oil export terminals and a nationwide network of over 600 service stations. Co.'s downstream operations consist of its crude oil export structure, refining operations and nationwide network of marketing subsidiaries.
Tatneft PJSC and its subsidiaries are engaged in crude oil exploration, development and production principally in the Republic of Tatarstan, Russia. Co. is a holding structure, which incorporates oil and gas production boards, crude oil and gas refining companies, as well as enterprises and servicing works selling the crude oil and also the products of crude oil and gas refining and petrochemical products. In addition to this, Co. is also participating in the banking and insurance activities. Co.'s operations are divided into the following main segments: Exploration and Production; Refining and Marketing; and Petrochemicals.
Sberbank CIB Investment Research is a research firm offering equity, fixed income, economics, and strategy research. It covers analysis on all aspects of Russia’s capital markets, issues and industries. The firm analyzes trends in Russia and combines local knowledge with a global perspective. It processes macroeconomic data, market and company-specific news, stock quotes and other information for providing research reports. The firm provides details and latest prices on the most traded names and most traded paper on all segments Russian market. In strategy research, it provides thematic research, tips and descriptions of the methodology used to evaluate companies.
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