Russian Oil and Gas - Closing Short-Term Pair-Trade Idea

We are closing our short-term pair-trade idea for Novatek and Gazprom Neft. We opened the idea (long Novatek, short Gazprom Neft) on February 17 and it has delivered 3 pp, with Gazprom Neft down 17% and Novatek down 14% since then. By contrast, the RTS has dropped 15% and the MSCI EM Index has slipped 9% during the same period.We opened the idea ahead of the companies' 4Q19 results in anticipation of strong numbers from Novatek and disappointing ones from Gazprom Neft. The results were generally in line with our expectations. However, the performance of the pair trade was negatively impacted by the general market selloff triggered by the outbreak of the coronavirus. Novatek outperformed its peers during what was a weak quarter for the sector. The top line beat the consensus and our estimate by 2-3%, rising 18% Q-o-Q, supported by liquids sales. EBITDA (including affiliates) was up 20% Q-o-Q to $2.0 bln, 10% above our forecast. As we anticipated, the improvement was mainly driven by Yamal LNG and was also helped by the contribution from the LNG trading margin. The stock was up 5% on the day.Gazprom Neft's revenues declined 5% to $9.6 bln in 4Q19, while EBITDA slipped 16% to $2.2 bln and net income dropped 22% to $1.3 bln. The key negative factors were a 4.8% Q-o-Q decline in liquids production and the negative effect on the downstream from the new IMO fuel regulations. The share price remained flat on the day, supported by the management's confirmation that the company will switch to a 50% dividend payout starting with the 2H19 dividend.The key catalyst has played out, so we have closed the trade idea. Over the longer term, we maintain our HOLD recommendations on both stocks.