Gazprom Neft (MCX: SIBN) — a large vertically integrated holding, carrying out reconnaissance, development and production of oil and gas in Russia, Iraq and Serbia. Company on 95,68% owned by Gazprom, that is, in free circulation is less than 5% issuer's shares.
18 November financial statements were released on the basis of the first 9 months of 2021. Amid the rapid recovery of the oil and gas market after the 2020 crisis and high oil prices, the company increased its revenue by 49%, and the net profit actually increased by 10 times from last year's low base.
I propose to evaluate the results of the business for this period, to understand, How did the favorable market situation affect operational and financial results and what it might mean for shareholders?.
Disclaimer: if we write, that something has risen or fallen by X% or X times, then by default we mean a comparison with the report data for the same period last year, unless otherwise stated.
Market position
Revenues from the sale of oil, gas and oil products based on the results 9 months were about 97% proceeds, therefore the company depends on the situation on the hydrocarbon market.
Let me remind you, what with 1 May last year, there are severe restrictions on oil production in the framework of OPEC +, which helped to stabilize the situation on the market. As a result, already in the second half of 2020, demand and prices for hydrocarbons began to recover.. Market conditions remain generally favorable in 2021, allowing OPEC+ to gradually ease restrictions and keep prices high. In September, the cost of Brent crude for the first time in two years exceeded 75 $, and in the moment it rose higher 86 $ per barrel.
Market restrictions do not allow Gazprom Neft to increase the level of oil production, but high oil prices, gas and oil products enable the company to earn more money on the same sales volumes.
In the coming years, the market may face a shortage of oil and rising prices for hydrocarbons. The fact, that oil and gas companies reduced their investments in exploration and development of new fields against the backdrop of the crisis, therefore, now many of them have almost no free capacity to increase production. In particular, the largest oil producing companies in Russia, such as Rosneft, Lukoil and Gazprom Neft, announced in November this year, that they have almost completely exhausted their free capacities, therefore, they are unlikely to be able to significantly increase production volumes, even if OPEC + lifts restrictions.
Operational results
Mining. Taking into account the share in joint ventures, Gazprom Neft increased hydrocarbon production by 3% and reached a record 547.03 million boe, and daily production amounted to 2 million boe. Gas production increased by 6% against the background of a favorable market situation and commissioning of new capacities. At the same time, oil and condensate production increased by less than 1% up to 340.82 million barrels.
Processing. The volume of oil refining at its own and joint refineries increased by 7,5% up to 32.43 million tons. The best dynamics was demonstrated by the Moscow Oil Refinery, where processing has grown by 18% up to 8.9 million tons against the background of the launch of a new production complex "EURO +".
The structure of oil products production by volume is as follows:
- diesel fuel — 9.9 million tons (+4%);
- gasoline - 6.8 million tons (+8%);
- fuel oil — 4.2 million tons (+18%);
- bitumen — 2.7 million tons (+8%);
- aviation fuel — 2.6 million tons (+33%).
Operating indicators of Gazprom Neft for 9 Months
| Extraction of hydrocarbons, million boe | Oil and condensate production, million barrels | Processing volumes, million tons | |
|---|---|---|---|
| 2017 | 497,10 | 350,33 | 29,85 |
| 2018 | 510,96 | 350,96 | 31,81 |
| 2019 | 531,14 | 353,50 | 31,08 |
| 2020 | 532,58 | 338,62 | 30,17 |
| 2021 | 547,03 | 340,82 | 32,43 |
Financial results
Revenue. Production growth, refining and hydrocarbon prices led to an increase in revenues by 49% to a record 2,161.6 billion rubles. Such dynamics is partly due to the low base of last year., when the company's revenues declined amid the crisis in the oil and gas industry.
About 66% the company's revenues were generated by the sale of petroleum products, which are mainly sold in the domestic market. The sale of oil had 29,4% proceeds, and here the situation is reversed: the main volume of supplies is exported. The share of gas in total revenues is still insignificant and occupies about 1,5% proceeds.
Sales revenue structure for 3 Quarter 2021
| Petroleum products | 66% |
| Oil | 29,4% |
| Other | 3,1% |
| Gas | 1,5% |
66%
Operating expenses. Gazprom Neft increased operating expenses by 29% up to 1,772.7 billion rubles. This is due to the increase in the cost of acquiring oil., gas and oil products for 62% up to 583.4 billion rubles, which they purchase from joint ventures for their own refineries. Besides, increased transportation costs, export duties, as well as tax value added and mining.
As a result, the company's operating profit increased by 5 times due to the effect of a low base and reached a historic high of 388.85 billion rubles.
Thanks to the improved situation on the global market, Gazprom Neft managed to increase profits in joint ventures in 2,6 times up to 74.19 billion rubles. Due to the effect of exchange rate differences, the company recorded a profit of 7.98 billion rubles, compared to a loss of 41.21 billion rubles for 9 months of 2020, which is mainly due to the revaluation of the foreign exchange component of the loan portfolio.
The total net profit increased by almost 10 times and reached 367.94 billion rubles, exceeding the results of pre-crisis 2019.
Financial indicators of Gazprom Neft at the end of the period, billion rubles
| Revenue | Operating profit | Net profit | |
|---|---|---|---|
| 2017 | 1407,86 | 221,82 | 200,5 |
| 2018 | 1827,29 | 360,27 | 317,4 |
| 2019 | 1871,44 | 356,56 | 336,75 |
| 2020 | 1449,57 | 79,17 | 37,04 |
| 9м2021 | 2161,55 | 388,85 | 367,94 |
Debts
Since the beginning of the year, the total debt of Gazprom Neft has decreased by 11% up to 700.36 billion rubles. The Company increased its financial cushion in the form of cash and cash equivalents from RUB 237.01 billion to RUB 450.06 billion, which made it possible to reduce net debt for 9 months more than 2 times up to 250.3 billion rubles.
The level of the holding's debt load according to the ratio "Net debt / EBITDA "at the end of the third quarter reached its 12-year minimum and amounted to only 0.32 ×, what indicates good financial stability.
Dynamics of the debt burden at the end of the period, billion rubles
| net debt | net debt / 12mEBITDA | |
|---|---|---|
| 2017 | 584,03 | 1,19× |
| 2018 | 527,87 | 0,73× |
| 2019 | 497,75 | 0,70× |
| 2020 | 547,08 | 1,32× |
| 9м2021 | 250,3 | 0,32× |
Dividends
In December 2020, the company fixed in the new dividend policy the target level of dividend payments in the amount of at least 50% from IFRS net profit.
Management leaves a wide margin for profit adjustments when calculating the dividend base. If necessary, the indicator can be adjusted:
- on the effect of exchange rate fluctuations and revaluation of assets;
- non-monetary revaluation from financial investments and participation in joint ventures;
- financial result from agreements on compensation for losses and compensation for expenses for the liquidation of property;
- financial results from connection to heating networks;
- the sum, required for the implementation of the current investment program;
- other adjustments as decided by the board of directors.
Against the backdrop of strong financial results and historically low leverage, the Gazprom Neft Board of Directors has recommended record interim dividends for 9 months of 2021, which will make up 40 P per share. Shareholders will be able to approve dividends at an extraordinary meeting, to be held 17 December.
History of dividend payments
| 2015 | 6,47 R |
| 2016 | 13,9 R |
| 2017 | 10,7 R |
| 2018 | 30 R |
| 2019 | 37,96 R |
| 2020 | 15 R |
| 9м2021 | 40 R |
6,47 R
What's the bottom line?
Gazprom Neft managed to recover from the consequences of the 2020 crisis, demonstrate multiple growth of key financial indicators and update all-time highs in revenue and profit.
OPEC + is still holding back production figures, but despite this, the company updated the maximums in total hydrocarbon production and produced record volumes of petroleum products at its own and joint refineries. And the favorable market situation in the oil and gas market keeps prices for the main products of Gazprom Neft at a high level.
Strong financial results and reduction of the debt burden to the minimum for the last 12 years pushed the board of directors to pay record interim dividends for the entire history of the company. At one of the next meetings, management plans to consider a new strategy until 2035, where the priority goals and objectives of the business for the coming years will be identified.
