Sergey Vakhrameev, IFC Metropol
Release Date: 2011-06-17
Which companies would you rate as “BUY” for this year and which are the common factors which link these companies together?Many of the major producers will do well in 2011 including: Gazprom, Lukoil, TNK-BP, Gazprom Neft, Bashneft and Surgutneftegaz. However, it should be noted that Gazprom has been downgraded by 10% to $8.5/share because there is a projected increase in the mineral extraction tax (MET) from 2012 effectively doubling the tax burden. Consequently, the EBITDA for Gazprom will decrease by 10% in that year. However, this development will not concern Novatek.
In May, gas exports grew year-on-year around 50% which, of course, is very good news for Gazprom. Total growth of exports to Europe in 2011 should be around 10%. However, in the second half of the year there will be a slight decrease in overall gas consumption.
What are the factors leading to this growth?
Japan had a very significant influence on European countries and their decisions concerning nuclear power. There are plans to terminate commissioning of 7 nuclear reactors and this will significantly increase the demand for gas in Europe. This trend of increasing gas consumption should continue for at least 5 years. Germany in particular plans to increase consumption by between 10 and 15 bcm/year and half of these volumes will be provided by Gazprom.
According to Troika Dialog’s figures from 2010 70% of Gazprom’s gas-related capex was value destructive. What are their investment plans for 2011?
Gazprom is planning to substantially increase its investments in the coming years. On 1st June there was a conference held by Gazprom where they announced a significant increase in capex from 816 billion roubles to 1,180 billion roubles or around 45%. In 3 years the capex of Gazprom the capex should come to around 1,250 billion roubles annually.
Gazprom much investment will go into thegas transportation system. Indeed this system is the main asset of the company representing 80% of Gazprom’s value. Among other investments, some projects appear value destructive such as South Stream because there is no current contract for acquiring the gas. North stream on the other hand has a contract. Around 80% of north stream volume is already contracted.
Mr. Kokin of UralSib said that EU support for the South Stream project could appear if Novatek are allowed to export. What is your assessment?
This is not a realistic possibility because Novatek simply does not have the right to export gas. However, Gazprom have announced a plan to buy gas from Novatek and sell to European customers for commission. Principally, this would be LNG gas from the Yamal Peninsular.
Gazprom announced that the gas from Shtokman will go via pipeline rather than by sea transportation. The gas will travel from Murmansk and then to North Stream. In 2016 Novatek plans to produce gas in Yamal supported by Total after their 20% acquisition. When this project is completed, Novatek plans to export LNG in volumes of around 16 million tonnes per year. The government decided to cancel MET from Yamal for LNG and export duty will be zero. Consequently, this is a very good project with a total value of around $10 billion. Novatek have sold around 20% to Total and now own 50% without options so the company owns $5 billion dollars of this project.
Novatek’s production is very large now. In May it increased 50% year on year. This is because it acquired Sibneftegaz accounting for a 25% expansion and simply because of organic growth of production of around 25%.
Tax breaks should help in promoting greenfield production however notable recent losses of tax breaks could impact on companies trust in these exemptions. What is your assessment?
It is true that the industry has been hit by the loss of tax breaks. Three tax breaks including the exemption for the Vankor field under Rosneft, the Tanakan field under Surgutneftegaz and the Verkhnechonsk field under TNK-BP have been cancelled from 1st May this year. This is very bad news for these companies.
In total, production in Russia should be flat at around 500 million tonnes per year which is good news for the Russian government given that this guarantees the stability of tax flows. The government will therefore not significantly change the tax regime.
However, ultimately companies are still dependent on tax exemptions. Rosneft clearly has plans to develop new fields and are waiting on the the government to propose new tax exemptions. If the government does not offer such tax breaks then the company simply will not invest and the total production from Rosneft will fall.
The readjustment of the tax burden should fall more heavily on the downstream and yet the government is trying to increase the value of production. How are these conflicting ideas reconciled?
The fact is that downstream production has been subsidised by the Russian government for a number of years. Over the last five years the government have subsidized refineries with no impact on the modernization of the Russian refining industry. The government previously subsidised this industry because of the social importance of this sector. However, without results the government is no longer willing to subsidize the industry.
Currently the export duty of an oil product is less than the duty for oil exports. This year the proposal will therefore increase export duties for fuel oil and dark oil products from 40% to 66%. Oil export duties on the other hand will fall from 65% to 60%. This is known as the 60%/66% model.
Consequently, companies with a high share of refined production such as Bashneft and Alliance Oil Company are exposed to an increase in duties on downstream production.
Which companies would highlight as good investments?
Although they will be hit but this increase in tax Bashneft should outperform the market because there are rumours about a possible IPO in 2012 and the oil price is set to grow. There is some positive news for Bashneft and their corporate management. They have already consolidated the Ufa refinery and other divisions meaning that their financial performance will do better than the market.
| Company: | IFC Metropol |
| Position: | Senior Analyst Oil and Gas |
| Country: | Russian Federation |