Oil and Gas - Expecting a Strong Rebound in Earnings and FCF in 1Q21
We expect 1Q21 earnings season to reveal robust financial improvements across the board from Russia's oil and gas producers. We believe the results are likely to provide a strong catalyst for the sector shares, mainly thanks to an anticipated improvement in FCF, which we expect to almost triple Q-o-Q in aggregate terms. Novatek will kick things off on April 28, with Rosneft and Gazprom Neft following in mid-May (after the holidays) and the rest closing out the season at the end of May. > Despite only modest Q-o-Q operating growth in the sector due to the OPEC+ deal production curbs, we forecast robust improvements in the oil companies' financials, with EBITDA growing by an average of 48% Q-o-Q and FCF ballooning by 59% Q-o-Q on the back of the strong rise in oil prices (Brent jumped 35% Q-o-Q and Urals gained 32% over the period) with just modest ruble appreciation. We expect Rosneft (thanks to additional tax benefits kicking in) and Lukoil (thanks to a gradual recovery in profitability across the board) to perform better than peers Q-o-Q, while Gazprom Neft should shine on a y-o-y basis due to a low base.> Gazprom is the only company in the sector yet to report 4Q20 results. We expect solid financials in 4Q20, and our view was recently supported by the management's dividend recommendation (implying strong adjusted net income). We now have even stronger expectations for 1Q21 given a 28% y-o-y rise in gas exports to Europe and what we expect to be a 23% y-o-y jump in the average realized price. We project 1Q21 EBITDA of $10.0 bln (up 35% y-o-y and 59% Q-o-Q) and FCF of $4.5 bln, the highest quarterly values for both lines since 2018.> Novatek appears set to see a further gradual improvement in its financials. We estimate EBITDA growth (including the company's shares in its JVs) of 23% Q-o-Q to $2.0 bln (and by 21% to $1.1 bln excluding the JVs) and see net income surging 47% Q-o-Q to $845 mln. We expect FCF at $0.5 bln, returning to positive territory.
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.
Novatek is an independent gas producer and natural gas producer in Russia. Co. is engaged in the exploration, production, and processing of natural gas and liquid hydrocarbons. Co.'s upstream activities are concentrated in the Yamal-Nenets region, which is a natural gas producing area and accounts for a significant part of Russia's natural gas production. Co.'s three core fields are located in the regions of Yurkharovskoye, East Tarkosalinskoye and Khancheyskoye. Co. maintains natural gas reserves of approximately 1,144 bcm. Co.'s total net proved reserves totals around 8,088 million barrels of oil equivalent (boe).
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.
Transneft is an oil pipeline group based in the Russian Federation. Co. and its subsidiaries operate a crude oil pipeline system totalling 50,142 km. Co. transport millions of tons of crude oil to domestic and export markets. Co. produces a substantial majority of the crude oil in the territory of the Russian Federation. In addition, Co., through Group Transnefteproduct operates an oil products pipeline system in the Russian Federation and in the Republics of Belarus and Ukraine totalling 18,746 km. Through its associate OOO LatRosTrans, Co. operates an interconnected system in the Latvian Republic.
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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