Last year, Gazprom Neft was among the leaders in capitalization growth in the Russian stock market. She went up by 42%. The company’s shares have good potential, remaining underestimated relative to the industry and making a correction.
Gazprom Neft is one of the three largest Russian companies in terms of oil production and refining.
She is actively building up stocks. Compensation for production from new reserves was 163% last year.
Gazprom Neft’s hydrocarbon reserves last for 17 years (according to PRMS standards).
The company’s revenue, EBITDA and net profit showed dynamic growth for the year. This happened due to an increase in oil production and price recovery in 2-3 quarters..
Gazprom Neft has a comfortable net debt. In terms of major multipliers, the company looks underestimated (relative to similar oil and gas companies).
Among the risks is a very low free float and the concentration of the main volume of shares at the state-owned Gazprom.
There is a risk of sanctions pressure on the company’s foreign projects and government regulation of the domestic oil products market.
Summary of Key Figures
Analysts of the Finam brokerage company recommend buying Gazprom Neft shares with a target price of 402.00 rubles.
Short description of the issuer
Gazprom Neft is a vertically integrated oil and gas company. The structure of the group includes more than 70 oil producing, oil refining and marketing enterprises. They are located in Russia, countries of near and far abroad. Gazprom Neft is the first company to start oil production on the Russian shelf of the Arctic.
Dynamics of Gazprom Neft shares and RTS index
According to international PRMS standards, as of December 31, 2018, the total hydrocarbon reserves of Gazprom Neft (taking into account the share in joint ventures) of the “proved” and “probable” categories increased by 2.2%, to 2.84 billion tons of oil equivalent. e. (oil equivalent).
Proved hydrocarbon reserves at the end of 2018 are estimated at 1.56 billion tons of oil. e., which is 2.8% higher than at the end of 2017.
In 2018, Gazprom Neft increased oil and gas condensate production by 0.9% compared to 2017 – up to 62.99 million tons. Gas production increased by 9.4% to 37.2 billion cubic meters. In general, the company increased its hydrocarbon production in 2018 by 3.5% compared to the previous year, to 92.88 million tons of oil equivalent.
The volume of processing at our own factories and joint ventures amounted to 42.91 million tons. This is 7.0% more than last year. The growth was due to the completion of scheduled repairs at the group’s plants in 2017.
The main owner of Gazprom Neft is Gazprom’s gas monopoly. She controls a 95.68% stake. The remaining 4.32% are in free float..
Summary of financial results
A favorable market position – high oil prices, a weakening ruble and rising prices for oil products in the second and third quarters of the year – determined good overall results. According to annual reporting, revenue increased over the year by 24.2% to 2,489 billion rubles..
Compared to other oil and gas companies, Gazprom Neft is less dependent on exports. Revenue of 43.2% is provided by sales in the domestic market. Crude oil exports bring it 22.2% of revenue, and oil exports – 13.3%.
The adjusted EBITDA (profit before interest, income tax and depreciation) increased by 45.1% and amounted to 799.5 billion rubles. Net profit attributable to shareholders for 2018 amounted to 376.7 billion rubles. She increased by 48.7%.
Last year, the company entered the zone of positive free cash flow (FCF), completing key infrastructure investments in new large production projects. In 2018, free cash flow amounted to 162.3 billion rubles, despite the fact that capital expenditures increased by 5.1% compared to 2017, to 375.2 billion rubles.
Net debt at the end of 2018 decreased by 9.6% over the year, to 527.9 billion rubles. Net debt to EBITDA ratio drops to 0.73x.
Below is a forecast of financial indicators for 2019.
Forecast of key financial indicators
The dividend policy fixed the minimum amount of annual dividends on shares. This size should not be less than the larger of the following indicators:
15% of the consolidated financial results of Gazprom Neft Group in accordance with IFRS.
Or 25% of the company’s net profit under RAS.
The company is not directly controlled by the state, but controlled through Gazprom. Therefore, it is not formally covered by the government’s requirement to give 50% of the profit in accordance with IFRS to dividends..
In 2017, the company returned to the practice of paying interim dividends. For 9 months of 2017, dividends were paid in the amount of 10 rubles per ordinary share, and the total amount of dividends for 2017 amounted to 15 rubles per share. Following the results of 9 months of 2018, shareholders received dividends at the rate of 22.05 rubles per share.
Dividends of Gazprom Neft
The size and date of the final dividend for the year has not yet been announced. The head of the company, Alexander Dyukov, announced that Gazprom Neft wants to channel 35% of its net profit under IFRS for dividends. Based on this information and the amount of net profit for 2018, the amount of annual dividends may amount to 27.8 rubles per share. But 22.05 rubles have already been paid for 9 months. Consequently, the total dividends may amount to 5.75 rubles per share..
Comparison with other industry companies
For comparison, analysts used indicators of industry companies comparable in terms of capitalization and production parameters.
The company has a comfortable net debt. Despite a significant increase in capitalization last year due to rising oil prices, Gazprom Neft seems to be underestimated for the main multiples. Probably, Gazprom’s ownership, which is fully state-controlled, as well as extremely low free float, play its role in this..
Analysts have calculated the target price for the predicted EV / EBITDA multiplier for 2019. Taking into account the country risk (risk of deterioration of the business and investment climate in the Russian Federation) and the risk associated with state control of the company, they applied a discount of 30%.
Target value for the predicted EV / EBITDA multiplier for 2019.
The final projected value was $ 29,777 million, $ 6.28 or 403 rubles per ordinary share at the rate on the valuation date.
Analysts of the Finam brokerage company recommend buying Gazprom Neft shares with upside potential of up to 25% (in the medium term).