Novatek (MCX: NVTK) — one of the largest producers of natural gas in Russia. The main volume of natural gas the company sells on the domestic market, transporting through the pipeline of the unified gas supply system of Gazprom. Besides, in December 2017, the company launched the Yamal LNG plant for liquefied natural gas and entered the international LNG market.
11 October Novatek published its operating results for the first 9 months of 2021. Compared to the same period last year, natural gas production volumes increased slightly, but sales in foreign markets collapsed by 16%. I propose to consider the key operating data of the company and understand, how it responds to new challenges for the oil and gas industry.
Disclaimer: if we write, that something went up or down by X%, then by default we mean a comparison with the report data for the same period last year, unless otherwise stated.
Position in the industry
Since the middle of this year, the gas industry has been in the spotlight. Gas prices at major gas hubs in Europe began to grow rapidly and at some point exceeded 1900 $ per 1,000 cubic meters amid reports of insufficient filling of European gas storage facilities ahead of the heating season.
But since October, there has been a correction in the quotations of gas contracts on major European exchanges.. So, on 2 November 2021, prices during the auction fell to 750 $ per 1000 cubic meters. Even after correction, prices remain historically high amid risk, that Europe may face an energy shortage, if the coming winter turns out to be no less severe, than was the past.
main reason, through which Europe did not have time to pump gas in sufficient volumes, the cold and long winter season 2020-2021 has become, which led to the consumption of natural gas above normal. Besides, for a while the weather was practically calm, which led to a drop in the volume of wind generation. As a result, European storage facilities were filled by about 74% before the start of the heating season at a historical rate of 85-90%.
Imbalance between supply and demand in the gas market, as well as fears, that European countries will not be able to overcome the heating season, took advantage of speculators, who dispersed prices at gas hubs.
In the domestic market, natural gas consumption has also grown markedly this year from the low level of 2020., when a pandemic came after a warm winter and the authorities introduced restrictive measures. Gas prices within Russia are regulated by the state, therefore, such strong volatility has not been observed in our country, and prices for Russian consumers turned out to be much lower, than for European.
Mining
For 9 months of 2021, the volume of hydrocarbon production by Novatek increased by 4% - up to 464.3 million barrels of oil equivalent - against the backdrop of an increase in production capacity, as well as recovery of demand in the oil and gas market.
Average daily production over this period amounted to 1.7 million barrels of oil equivalent per day, which was a record result for business.
Production volume natural gas increased by 4% - up to a record 59.11 billion cubic meters.
Production of liquid hydrocarbons increased by 3% and reached 9.3 million tons.
Volume of gas condensate processing at the Purovsky plant grew by 10% - up to 9.4 million tons. At the Ust-Luga complex, processing volumes decreased by less than 1% - up to 5.2 million tons of stable gas condensate.
Dynamics of hydrocarbon production for 9 months of 2021, million boe
| 2017 | 383,3 |
| 2018 | 402,2 |
| 2019 | 441,3 |
| 2020 | 445,9 |
| 2021 | 464,3 |
383,3
Dynamics of the average daily production for 9 months of 2021, million boe per day
| 2017 | 1,40 |
| 2018 | 1,47 |
| 2019 | 1,62 |
| 2020 | 1,63 |
| 2021 | 1,70 |
1,40
Natural gas production dynamics for 9 months of 2021, billion m³
| 2017 | 47,34 |
| 2018 | 50,31 |
| 2019 | 55,88 |
| 2020 | 56,71 |
| 2021 | 59,11 |
47,34
Dynamics of production of liquid hydrocarbons for 9 months of 2021, million tons
| 2017 | 8,8 |
| 2018 | 8,8 |
| 2019 | 9,1 |
| 2020 | 9,0 |
| 2021 | 9,3 |
8,8
Sales
49.73 billion cubic meters of natural gas sold in Russia, What's on 6% more results from the previous year. As a result, total sales increased by 3% - up to 55.7 billion cubic meters.
Sales in foreign markets collapsed by 16% - up to 5.97 billion cubic meters. The main reason is, that the company began to sell less LNG directly at exchange prices on an immediate delivery basis and more through the Yamal LNG joint venture under long-term contracts. The transition to long-term contracts is associated with, that it is easier for the company to predict the volumes of supplies in the future and it is less dependent on fluctuations in exchange prices.
It is worth noting, that in May of this year Novatek launched the fourth stage of Yamal LNG, which made it possible to increase the total design capacity from 16.5 to 17.4 million tons of LNG per year.
Natural gas sales dynamics for 9 months of 2021 by markets, billion m³
| Russia | International | General | |
|---|---|---|---|
| 2017 | 47,02 | — | 47,02 |
| 2018 | 47,57 | 3,43 | 51,00 |
| 2019 | 47,55 | 10,11 | 57,66 |
| 2020 | 47,03 | 7,12 | 54,15 |
| 2021 | 49,73 | 5,97 | 55,70 |
Dividends
In December 2020, Novatek's Board of Directors approved a new version of the dividend policy. The document provides for the direction of dividends at least 50% from adjusted profit under IFRS.
1 October 2021, an extraordinary general meeting of shareholders of the holding approved interim dividends based on the results 1 half of 2021 in the amount of 27,67 P per share under the current dividend policy.
Amount of dividends per share based on the results of the reporting period
| 2015 | 13,5 R |
| 2016 | 13,9 R |
| 2017 | 14,95 R |
| 2018 | 26,06 R |
| 2019 | 32,33 R |
| 2020 | 35,56 R |
| 1п2021 | 27,67 R |
13,5 R
What's the bottom line?
Novatek demonstrated strong operating performance following the first 9 months of 2021 amid favorable market conditions in the oil and gas market. The volume of hydrocarbon production for this period exceeded the pre-crisis results and reached a record level.
Natural gas sales in Russia also peaked, but export sales fell to the lowest in recent years. The drop in export sales was caused by the transition to long-term direct contracts for the Yamal LNG project, which in the long term will allow the company to reduce risks, associated with the volatility of demand and prices in the international LNG market.
On the eve of the new winter season, energy prices on world markets have increased. High prices for natural gas and liquid hydrocarbons, combined with record production results of Novatek, portend strong financial results of the business - not only in the first 3 quarters, but by the end of the whole 2021.
