Oil and gas

On December 23, 197.4 thsd mt of crude oil were sold at Resources Auction 124, which took place on the floor of the Ukrainian Interbank Currency Exchange. According to our source at the UICE, the average price of oil was UAH 1,450 per mt, or USD 20.8 per bbl (excluding VAT, at USD/UAH 7.94).

The total volume offered at Auction 124 was 438.9 thsd mt, 45% of which was sold.

The average price of gas condensate amounted to UAH 2,349 per mt (USD 247 per mt, excluding VAT). The total volume of condensate sold was 18.25 thsd mt, or 98.2% of the total volume offered (18.6 thsd mt).

About 96% of the oil and 46% of the condensate was offered by Ukrnafta [UNAF UZ, BUY], a major Ukrainian oil and gas producer, as well as fuel retailer, which is controlled by two strategic shareholders: the Ukrainian state (50%+1 stake) and the Privat Group (42%, controls management).

Our view: NEGATIVE, because the price of oil was too low, 53% less than the average December price of the BRENT blend, according to our calculations. The discount for Ukrainian oil to the Urals blend amounted to 49%.

At the previous regular Auction 123, the discounts for Ukrainian oil amounted to 47% (BRENT) and 44% (Urals).

According to our estimates, Ukrnafta sold 2.36 mln mt of oil in 2008, 11% below our expectations, which we explain by 200-300 thsd mt of oil having been carried over to the next auction since October. Hopefully, Ukrnafta will sell the accumulated inventories in 2009.

We estimate that the average price of oil sold by Ukrnafta in 2008 amounts to USD 688 per mt (with VAT), or USD 78.2 per bbl (without VAT), 5.3% above our latest projections of USD 74.3 per bbl. The difference is due to Ukrnafta decreasing sales volumes in the fourth quarter, in which the price was sharply lower than in the first three quarters.

To summarize what has been a wild year for oil prices, we note that the current deflationary stage of the world economic and financial crisis has every chance to be followed by a highly inflationary period, during which we may see a flight from what currently seems the safest monetary instruments to real assets. Oil has every chance to appreciate during such a time, both in real and especially in nominal terms. In fact, a hydrocarbon-influential political crisis (the West vs. Iran, Russia vs. Georgia/Ukraine) may actually be the trigger for a debasement of many currencies.

Ukrnafta is sitting on about 300 thsd mt of oil inventories and is well prepared to benefit from an increase in oil prices. The company has about 690 mln boe of hydrocarbon reserves, which are priced (EV/Reserves) at USD 1.2 per boe (for comparison: the Russian average is USD 1.6 per boe; developed markets average is USD 14.1 per boe; emerging markets is USD 18.0 per boe). We are optimistic about the company’s future. And if the main hurdle – the perpetual conflict between the two shareholders, Ukrnafta and the Ukrainian state (Naftohaz of Ukraine) – is somehow resolved, the company’s shares may experience dramatic growth.

For our November 12, 2008 report on Ukrnafta “Ukrnafta: after a halt, refueling begins”, please contact the Head of International Sales, Constantine Lisnychyy, +38 050 310 0819, lisnychyy@sokrat.kiev.ua

An EGM of Ukrnafta [UNAF UZ, BUY], which was scheduled for today, did not take place because of the absence of the shareholders’ registry. The agenda for the EGM included profits’ distribution for 2006 and 2007, as well as recalling and electing the Supervisory Board, the Revision Board, and the Management Board of the company.

Since the beginning of 2008, five attempts to convene a general meeting have failed at Ukrnafta. The last time the shareholders convened was in 2007, but, at that time, voting on profit distribution for 2006 was postponed.

Ukrnafta, a major Ukrainian oil and gas producer, as well as fuel retailer, is controlled by two strategic shareholders: the Ukrainian state (50%+1 stake) and the Privat Group (42%, controls management).

Our view: Because we did not expect the meeting to take place, we view this news as NEUTRAL. In our opinion, the shareholders’ conflict at Ukrnafta is unlikely to be resolved until substantial changes, such as privatization, take place at its parent company, Naftohaz of Ukraine.

The European Commission has acknowledged the compliance of Ukraine’s sunflower oil to European standards. The Commission inspected Ukraine’s oil producers in September. The results of the inspection were officially released yesterday by the Government of Ukraine. The Eurocomission admitted that Ukrainian state systems of prevention of oil contamination meets all European standards, which are defined in the Eurocommission decision # 2008/433.

However, the Eurocommision is now asking the Ukrainian Government to present them with information on the control system of the quality standards at oil processing plants.

Our view:Issues due to contaminated oil emerged in April 2008, when crude oil by-products were revealed in Ukrainian exported sunflower oil. The problems were successfully resolved with Ukraine implementing a quality control procedure, ensuring such contamination will not happen in the future. Moreover, domestic oil producers have implemented their own systems of control, which will help them to independently control the quality of their own oil exports.

On November 25, 215.3 thsd mt of crude oil were sold at Resources Auction 123, which took place on the floor of the Ukrainian Interbank Currency Exchange. According to our source at the UICE, the average price of oil was UAH 1,719 per mt, or USD 28.9 per bbl (excluding VAT, at USD/UAH 6.75).

The total volume offered at Auction 123 was 422.4 thsd mt, 48.9% of which was sold.

The average price of gas condensate amounted to UAH 2,061 per mt (USD 254 per mt, excluding VAT). The total volume of condensate sold was 17.5 thsd mt, or 67.2% of the total volume offered (26.0 thsd mt).

About 96% of oil and 75% of condensate was offered by Ukrnafta [UNAF UZ, BUY], a major Ukrainian oil and gas producer, as well as fuel retailer, which is controlled by two strategic shareholders: the Ukrainian state (50%+1 stake) and the Privat Group (42%, controls management).

Our view: NEGATIVE, because the price of oil was too low in comparison with what could be expected from world oil prices and the previously established discount levels.

Indeed, the Ukrainian oil price at Auction 123 is 47% below the average November price of BRENT (USD 55.0 per bbl) and 45% below the average November price of Urals (USD 52.2 per bbl). From 2006 to September 2008, the discount to BRENT was 15-20%, whereas the discount to Urals was 12-18%. However, at Auction 121, which took place in September 2008, the discounts at which Ukrainian oil was sold amounted to 54% (BRENT) and 51% (Urals).

Ukrnafta did not sell any oil at Auction 122 (the regular auction for October) and Auction 122-D (an auxiliary auction that took place on November 18, 2008); thus Ukrainian oil has not been traded in significant volumes for two months. Even though only about half of the offered oil was sold at the latest Auction 123, the volume at that auction was large enough to conclude that discounts to world oil prices of 40-50%, substantially above the previously observed 10-20% discounts, seem to be a recently established NEGATIVE tendency.

Ukrnafta [UNAF UZ, BUY] plans to sell 422.4 thsd mt of oil and 19.5 thsd mt of gas condensate at the Ukrainian Energy resources Auction 123 on November 25. In comparison with the previous auction, the initial UAH price for Ukrnafta’s oil fell 23% in local currency to UAH 2,000 per mt (down 40% to USD 35.0 per bbl net of VAT using USD/UAH 6.5). The initial UAH price for condensate is down 38% in local currency from a month ago, at UAH 2,500 per mt (down 51% to USD 321 per mt net of VAT).

At the previous auction on October 21, Ukrnafta sold neither oil nor condensate.

Ukrnafta, a major Ukrainian oil and gas producer, as well as fuel retailer, is controlled by two strategic shareholders: the Ukrainian state (50%+1 stake) and the Privat Group (42%, controls management).

Our view: The prices are very uncertain, and will be indicative of Ukrnafta’s tactics. We expect oil prices of about 40 per bbl if (a) BRENT costs USD 50 per bbl and (b) the formerly common discount for Ukrainian oil of about 20% still applies.