Нефть и газ

Ukrnafta [UNAF UZ, BUY] will not sell oil at the auxiliary Ukrainian Auction 122-D, announced for November 18.

At the last regular Auction 122, which took place on October 21, Ukrnafta did not sell any oil. The next regular Auction 123 is scheduled to take place on November 25.

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 announcement of the auxiliary Ukrainian Auction 122-D, and Ukrnafta’s not selling at it, is NEUTRAL. Auxiliary auctions are announced a few times a year to sell extra volumes, and frequently Ukrnafta does not participate. The next event that will shed some light on the company’s tactics regarding oil sales will be the next regular Auction 123 on November 25.

On November 10, Concern Galnaftogaz [GLNG UZ, Speculative BUY] disclosed its selected consolidated UAS 1H08 results.

The 9M08 P&L data (USD/UAH 5.05): net sales, USD 1,009.8 mln (+76% YoY); OIBDA, USD 56.7 mln (+168%); net income, USD 32.7 mln (+768%). The margins: OIBDA, 5.6% (up 1.9 pp YoY); net, 3.2% (up 2.6 pp). Selected items from the September 30, 2008 balance sheet: total assets, USD 543.0 mln; net PP&E, USD 256.1 (+44.4% YtD); shareholders’ equity, USD 214.2 mln.

During 9M08, Galnaftogaz sold about 490 thsd mt of fuel.

According to our calculations, the 3Q08 P&L details are: net sales, USD 400.4 mln (+80% YoY); OIBDA, USD 20.8 mln (+183%); net income, USD 5.1 mln (+545%). During 3Q08, shareholders’ equity increased by 2.5%, or by USD 5.3 mln. The fuel sales reached 176 thsd mt in 3Q08, or about 7.5-8.0 mt per OKKO station per day.

In a separate development, on November 12, Galnaftogaz reported an increase in the number of OKKO-branded filling stations by 7 to 259. The total number of units in the retail network has exceeded 290.

Galnaftogaz is an independent fuel retailer, one of the largest in Ukraine, and a member of the diversified Universal Group. Its filling stations network is present in 18 of 24 oblasts (regions) of Ukraine, as well as in Kyiv. As of November 2008, the company’s filling stations network consists of at least 290 units, including 259 high-turnover units of the OKKO brand. Galnaftogaz operates 15 fuel storage depots throughout Ukraine. By 2011, the company plans to operate 505 filling stations. At the end of 2007, Galnaftogaz secured USD 250 mln in credit from the European Bank for Reconstruction and Development, the International Finance Corporation, and the Black Sea Trade and Development Bank. A share capital increase fetched an additional USD 48.3 mln at the end of 2007. Galnaftogaz is planning an IPO, likely on the London Stock Exchange, in 2H09.

Our view: We value Galnaftogaz on the basis of consolidated IFRS results, but also compare our estimates to the UAS results, both consolidated and non-consolidated. For 2008, we expect net sales of USD 1.251 bln (-7% vs. annualized 9M08 UAS consolidated data), OIBDA of USD 75 mln (-1%), and net income of USD 21 mln (-52%). Both sales and OIBDA will experience downward pressure in 4Q08 from the Ukrainian fuel prices, which followed oil in dropping substantially during the last few months. However, the growth (both quantitative and qualitative) of Galnaftogaz’s network may allow it to meet our FY08 expectations.

The annualized 9M08 fuel sales amount to 653 thsd mt, which is 24% below our expectations of 899 thsd mt and 14% below the April 2008 management target of 760 thsd mt. The daily fuel sales volumes of 7.5-8.0 mt per station also fall short of the management’s 10 mt per station target. Again, network expansion and, more importantly, the company’s rebranding efforts (increasing the number of OKKO stations) may allow it to increase fuel sales and possibly reach 190-200 thsd mt in 4Q08. However, Galnaftogaz still has to demonstrate it can sell close to 9-10 mt per day per station.

The management’s target of having at least 300 filling stations (including at least 270 OKKO-branded units) by the end of 2008 looks realistic, but will require a year’s end boost in expansion.

Overall, Galnaftogaz performed well during 9M08, which is POSITIVE.

On Saturday, October 25, the National Electricity Regulatory Commission (NERC) – Ukraine's main energy regulatory body – approved a price hike for Ukrainian gas consumers, which is an average rate of 35%. As announced by NERC Head Valeriy Kalchenko, the new tariffs take effect as of December 1, 2008.

This sizeable jump in fees comes as Ukraine faces another increase in imported gas prices, which will take effect on January 1. Naftogaz Ukrainy, a state-owned oil and gas holding, is hoping to finalize a new deal for long-term gas supply with Russia's Gazprom by the end of the week. Re-establishing a direct trading relationship between the two companies would effectively end a three-year stint, during which the contentious RosUkrEnergo served as the monopolistic importer of Russian and Central Asian gas to Ukraine.

Naftogaz’s price increase as of January 1 is inevitable, even with Gazprom’s agreement to delay enforcing ‘market’ prices on Ukraine until 2011. Ukraine currently pays US 179.5 per 1,000 cbm for its gas imports.

According to the October 20 decision by the National Security and Defense Council aimed at decreasing the impact of the global financial crisis on Ukraine’s economy, which was enacted through a Presidential decree issued on October 24, gas prices for the public will be adjusted to an economically-justifiable level. As NERC Head Valeriy Kalchenko explained, "In this case, the gas price for the population would grow by 3.8 times. We believe that such an increase would be very significant for the main category of consumers. Thus, the decision was taken to increase prices gradually, firstly by 35%.”

Our view: We find this news definitely NEGATIVELY for retail consumers. The Ukrainian government cannot continue subsidizing a process that impacts on its budget. We expect that gas tariffs will increase once again for the population when the final price for Ukraine will be announced. We forecast the possibility of three different scenarios, each of which is specifically related to the price that Ukraine will eventually pay for gas at the border. In an optimistic scenario, the price will be set at USD 250 per 1,000 cbm, while it would be USD 300-320 per 1,000 cbm given a moderate scenario. In the critical scenario, Ukraine may pay as much as USD 400 per 1,000 cbm on the board. The actual tariffs are to be determined by Russia following the final confirmation of prices it will pay for Central Asian gas. It is still unclear what kind of gas formula will be used to identify the final price for Ukraine in 2009. Traditionally Gazprom used a coefficient with a multiple of the price for oil. Today we see crude oil price significantly decreasing globally; therefore, the question about the final gas price for Ukraine is still open.

The increase of gas prices for the population will cause price inflation for other utilities, such as hot water and central heating and will be one of the major driving forces of CPI growth in 2009, accounting for up to 5% of the growth in consumer prices.

On October 21, 5.7 thsd mt of crude oil were sold at Resources Auction 122, which took place on the floor of the Ukrainian Interbank Currency Exchange. According to the official information of the UICE, the average price of oil was UAH 2,618 per mt, or USD 58.9 per bbl (excluding VAT, at USD/UAH 5.05). In comparison with the previous Auction 121, held on September 23, oil jumped 22.6% in hryvnya terms.

The total volume offered at Auction 122 was 216.5 thsd mt, only 2.4% of which was sold.

The average price of gas condensate amounted to UAH 2,885 per mt (USD 476 per mt excluding VAT), down 25.5% in hryvnya terms since Auction 121. The total volume of condensate sold was 0.65 thsd mt, only 3.5% of the volume offered (18.6 thsd mt).

About 92% of oil and 67% of condensate was offered by Ukrnafta [UNAF UZ, Strong 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: Ukrnafta obviously sold nothing. The price movements are irrelevant and NEUTRAL, because they are not indicative of the market situation at such small volumes. Nevertheless, we note that we expected USD 66-74 per bbl on the basis of the world price situation, and the achieved levels of USD 58.9 per bbl are somewhat lower.

Most importantly, if Ukrnafta wanted to sell oil cheap to Privat Group affiliates, it most likely could have. Therefore, we conclude that Ukrnafta held its oil until better times, which means that it is in the interests of the Privat Group to maximize Ukrnafta’s revenues and profits. This is POSITIVE – if true.

Ukrnafta [UNAF UZ, Strong BUY] plans to sell 216.5 thsd mt of oil and 12.6 thsd mt of gas condensate at the Ukrainian Energy resources Auction 122 on October 21. In comparison with the previous auction, the initial UAH price for Ukrnafta’s oil is the same, at UAH 2,600 per mt (USD 58.5 per bbl net of VAT using USD/UAH 5.05). The initial UAH price for condensate is down a significant 24.5% from a month ago, at UAH 4000 per mt (USD 654 per mt net of VAT).

The previous auction, which took place on September 23, yielded shockingly low prices: UAH 2,136 per mt (USD 48.1 per bbl net of VAT at USD/UAH 5.05) for oil, and USD 639 per mt for condensate net of VAT. The discount of Ukrainian oil to Brent reached 54.4%, the normal level being 15-20%. The discount of Ukrainian oil to Urals amounted to 50.8%, the normal levels being 12-18%. Notably, at the previous auction Ukrnafta did not sell its condensate, thus the volume offered on October 21 will be about twice the normal volume.

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: Under normal circumstances, and judging from the world oil prices dynamics, we would expect Ukrainian oil prices to be USD 66-74 per bbl on October 21, 40-55% above the anomalously low September 23 prices.

We are not sure what caused the significant drop in Ukrainian oil prices on September 23. It could have been that given the declining dynamics of the world oil prices, which was obvious already in September, the buyers, which are stocked up with expensive oil and oil products, were reluctant to buy at then-normal levels.

Nevertheless, if the Privat Group, which controls most of both the supply and demand at the Ukrainian oil auctions, has decided to keep the Ukrainian oil prices significantly below what is justified from world oil price levels, the price may see further decline, or weak growth, on October 21. This will be very NEGATIVE for Ukrnafta.