Yesterday, we published Russian Oil and Gas - After four years of decline, dividends key. Excerpts from the front page are given below.
The sector’s profitability has been on a declining trend for the fourth consecutive year, and not just because of worsening macro. We think that in the current prevailing uncertainty, investors will lose interest in the companies’ fundamentals and focus exclusively on short-term dividend flows. On the back of this, we favour Gazprom Neft, Tatneft and Bashneft prefs and Lukoil (all Holds).
Profitability declining together with predictability. Although it would not come as a surprise to see a drop in Russian oils’ financials this year vs. 2014, we note that, in fact, the sector’s EBITDA has been in decline for the fourth year in a row since 2011. Even if profitability has been pushed down by different factors in different periods – global energy prices, macro factors (such as inflation), changes in regulation, tax manoeuvres, deterioration in the efficiency of industry players, etc. – the trend looks fairly well established.
From DCF based model to nearest dividend. We believe the EBITDA trend is important, as we think investors are likely to shift their focus away from the fundamentally justified forecast of long-term FCF to projections of the near-term net income, as a formal base for dividend payments. EBITDA would only be the starting point, with FX gains, interest payments and historical payout ratios being equally important factors.
Looking for dividends. In such an environment, fundamental factors no longer occupy an important role in the investment decision process, in our view. As a result, we consider the dividends that are to be paid out for 2015 as the most visible and quantifiable driving factor for Russian oil and gas stocks’ performance. Gazprom Neft is to deliver one of the highest FY15 DYs in our coverage universe of around 7%, on our numbers. This, coupled with the stock’s relative underperformance (24% vs. RTS O&G YTD) compels us to upgrade Gazprom Neft’s shares to a Hold (we leave our 12-month Target Price of USD 2.6 unchanged). Gazprom Neft, as well as Tatneft and Bashneft prefs and Lukoil (all Holds) – the stocks we estimate will provide fairly high FY15 DYs – are our preferred plays in the Russian oil sector.