Romanian Oil and Gas: Time to CAPitulate to CAPricious regulation? (downgrading OMV Petrom and Romgaz to HOLD) - corrected

From a fundamental point of view it is difficult not to like the Romanian oil and gas sector. Two companies command the bulk of the market. They have resilient business models and pay regular dividends, yet have historically traded at a discount to their peers. The regulatory tribulations over the past couple of years have called into question the wisdom of this view, however. The offshore law, passed after years of procrastination, delivered less than promised; and a price cap on natural gas prices is likely to result in a serious blow to profitability. We would have liked to wax lyrical about exporting gas to Hungary; and about the largest investment in the hydrocarbons industry in Romania’s long and illustrious history. We should be discussing the robust growth of the gas market, in a distinct break from the recent past; the positive outlook for refining margins; and the growth in the nation’s vehicle park. It is with great regret, therefore, that while these things are important, they have been overridden by negative regulatory developments. For these reasons, we downgrade both OMV Petrom (12M PT RON 0.34, 3.4% downside), and Romgaz (12M PT RON 31.9, 2.2% upside) to HOLD.