Oil and Gas - Expecting Neutral 4Q20 Earnings, Strong Improvements in 2021
The 4Q20 Russian oil and gas earnings season is to be kicked off by Rosneft at the end of this week, followed by Novatek and Gazprom Neft a week later. We have put together a wrap-up of our forecasts while pointing out that the market is already clearly looking forward to 2021 earnings, which promise a robust rebound.> We believe that EBITDA across the oil sector in 4Q20 should remain about flat Q-o-Q, with slightly stronger Urals prices and a modest rise in crude oil production offset mostly by a seasonally higher cost base. With European gas prices improving rapidly over 4Q20 and stronger export volumes, Gazprom appears set to show the strongest EBITDA growth (48% Q-o-Q, we estimate). We expect Novatek to post 26% Q-o-Q EBITDA growth on the back of higher production and inventory releases. Due to seasonally higher capex in the fourth quarter, the sector's overall FCF generation is likely to remain under pressure. We do not rule out some impairment charges in 4Q20, as the average oil price for reserves NPV testing dropped by 32% in dollars and by 25% in ruble terms in 2020.> We expect only modest payments in the coming dividend season (for 2020), as earnings and FCF remained under pressure in 2H20 and in 2020. We anticipate the highest dividend yield from Tatneft (8% on its final dividend of R43/share), followed by Lukoil (a 4% expected yield on its 2H20 dividend of R220/share) and Gazprom (a 4% expected yield on its 2020 dividend of R9/share.> While tallying the 2020 results, the market will also already be looking at the 1H21 financial performances. Taking into account the strong rise in oil and gas prices and a relatively weak ruble, we see upstream earnings indicators recovering close to 2H19 levels. For example, so far this quarter, the average Urals export netback less MET is up 20% from the 4Q20 average at $17/bbl (Urals is so far averaging $55/bbl) and Gazprom's average realized gas price is 11% above the 4Q20 average at $188/mcm (based on a basket of forwards), on our numbers, while only downstream margins are stubbornly refusing to improve. We recently upgraded our financial forecasts for the oil and gas sector (see our report, "Targeting Growth in a Low-Carbon World"), taking into account the very favorable market environment.
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.
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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