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UFS Investment Company - Gazprom neft - Q3 2012 financial results, Nov 12, 2012.

Gazprom neft released IFRS results for 9 months and Q3 2012.

The third quarter was surprisingly favourable on rising oil price and decreased duties. The company posted strong results, especially in terms of EBITDA and net profit.

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At the same time, increased CAPEX exerted pressure on free cash flow.

We assess the statements as moderately positive, yet in Q4 2012 the company is going to show a marginally worse performance q/q. The quotes have neared our targets for 2012; in comparison to its closest counterparts the company does not look cheap. We retain our HOLD recommendation.

Investment factors

The company not only managed to restore EBITDA and operating profit but also posted upbeat growth as compared to quite strong Q1. The results proved slightly better than we estimated.

Due to one-off items net profit also beat our expectations.

Production of oil and oil products demonstrated positive q/q dynamics.

Refinement continued to expand; sales through premium channels also grew at a good pace supporting revenue and profit margins.

Debt load remained at a low level.

Risk factors

Increased investments and working capital brought about a twofold fall in free cash flow in Q3 2012.

Seasonal factors and planned maintenance reduced oil production q/q.

In Q4 2012 aKudrin's scissorsa will again disadvantage the company.

In Q3 2012 oil companies reported strong results as oil prices were rising, ruble was strengthening, while duties were on the slide. Gazprom neft was no exception. However, after other companies like Rosneft had announced their results, this result can't be deemed surprising. Now, when the general trend has been confirmed, it may provide support for the companies that have not reported financial results yet (LUKOIL), yet we do not expect strong positive dynamics in Gazprom neft.

Q3 operational results look quite upbeat. Production of oil and oil products increased 2.4% and 0.5% respectively. Gas production appeared disappointing dropping 10.4% during the quarter. Yet it is hard to consider it a negative factor a this is a seasonal decline due to planned preventive maintenance. After 9[ETH]12 production rose 25%, which is a quite positive result.

Positive trends remained the same: increasing share of refinement in sales; focus on domestic market, which is neutralizing oil quotes' and exchange rates' dynamics; development of own retail. Quarter sales through premium channels added 7.2% (+19% since the year's start). This bolstered financial highlights, and we expect the trend to remain in place.

In effect, revenue almost met our forecasts, whereas EBITDA and net profit blew past our expectations. EBITDA per barrel exceeded $27, which is even better than last year a this is a positive result amid toughened tax regime.

Meanwhile, CAPEX showed disappointing growth increasing by almost a third. The key growth items are geological exploration (+37%) and marketing (+143%). Investments in refinery added 15%, according to our expectations.

Besides CAPEX, Gazprom neft also extended its working capital, which is partly due to brisk retail development. As a result, despite upbeat operational results, free cash flow contracted more than twice, which is the main negative in the report.

Net debt did not change much and remained at a comfortable level.

By and large, quarter results are very good. However, as soon as Q4 2012 market situation will again worsen for oil companies. Decreased free cash flow is also disappointing news. We assess the report as moderately upbeat for the quotes, though amid lack of market ideas it can be a strong driver for local growth.

At current levels Gazprom neft stocks do not appear very attractive. They are cheaper than Rosneft that accelerated on corporate news, but more expensive than LUKOIL that has not yet released Q3 statements. In our opinion, in current environment LUKOIL is more interesting.

The company's equities have approached our target price for 2012 a 160 rubles per stock ($26.14 per GDR). So far we consider this level relevant. We retain a moderately positive view of the stock and HOLD recommendation.

Gazprom neft 9[ETH]2012 results(table)


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Publication:Russian Banks and Brokers Reports
Date:Nov 12, 2012
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