WOOD Flash – Novatek: 2Q18 results – stronger sales, good FCF, but costs ahead of estimates
Novatek’s results, published today (25 July), look strong generally, particularly on the revenue line (driven by higher volumes at Ust Luga and better LNG prices), with good FCF (due partially to seasonally low capex); however, most cost items increased more than we expected. We look forward to tomorrow’s (26 July) conference call to better understand the company’s plans, especially with regards to existing and new LNG projects. We rate Novatek a HOLD, with a USD 150/GDR price target (PT). While the company has delivered on its key projects and is on track to ramp up production at Yamal by mid-2019E, we believe that the share price broadly reflects this. In our view, the net contribution from Yamal LNG to Novatek could be c.USD 1.1bn in 2020E, which is just 2.5% of its current market cap. The legacy fields have broadly reached their peak, generating USD 2-2.5bn of FCF (a 4-5% FCF yield), and most other projects have a very back-loaded development schedule.
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