"Transneft" (MCX: TRNFP) operates the world's largest oil trunk pipeline system with a length of over 50 thousand kilometers, acts as a monopolist in Russia in terms of oil transportation volumes and controls one of the largest port operators in terms of cargo turnover - NCSP.
30 March, the company released financial statements based on the results 2020 of the year. The year turned out to be one of the most difficult in the history of the holding, which affected the operating and financial results of the business.
Situation in the industry
The main income of the company comes from the transportation of oil to non-CIS countries.. Transportation volumes decreased in Q2-3 2020 years against the background of the crisis in the oil and gas industry and the new restrictive agreement between the OPEC + countries.
Despite the fact that the crisis in the hydrocarbon industry began in March last year, The largest drop in transportation volumes occurred in 3 neighborhood, because the new restrictive measures came into force only from 1 May 2020 of the year.
Dynamics of oil exports by Transneft to non-CIS countries, million tons
| 4 neighborhood 2019 | 55,3 |
| 1 neighborhood 2020 | 55,8 |
| 2 neighborhood 2020 | 49,8 |
| 3 neighborhood 2020 | 43,3 |
| 4 neighborhood 2020 | 45,3 |
| 1 neighborhood 2021 | 42,9 |
Volumes of oil transportation through "Transneft» remain at historically low levels, despite the easing of requirements for oil production.
Based on the results of 1 quarter 2021 year, oil exports to non-CIS countries through the company's transport system at the lowest levels in recent years, although prices and demand in the oil market are high against the backdrop of a cold winter.
In March 2021 Russia was allowed to increase production by 130 thousands of BOE per day. And at the April meeting, OPEC + decided to further increase production from May 2021 year for all countries, belonging to the cartel. Potential oil exports for Transneft should grow from 2 quarter, but they will still be below pre-crisis levels.
I propose to evaluate, how the drop in transportation volumes affected the financial performance of Transneft, and discuss possible business prospects for the current year.
Financial indicators
Revenue Transneft decreased by 10% year to year - before 962,4 billion rubles. The company's revenues were almost at the pre-crisis level. 2018 of the year, that is, the fall was not so strong, as might be expected given all external factors and the crisis in the oil industry.
The company's income is related to the hydrocarbon industry:
- Transportation of oil and oil products in Russia and abroad through our own pipeline system — 79,3% from proceeds.
- Self-sale of hydrocarbons, mainly in China. Oil and oil products for resale are purchased from the state company Rosneft — 15,2%.
- Port services through controlled operator NCSP — 4,7%.
Falling demand for hydrocarbons and OPEC+ restrictions led to a drop in revenues in all major business segments.
Operating expenses fell following revenue 10% year to year - before 519,2 billion rubles. Due to the crisis, oil quotes fell, which led to a drop in the cost of oil sold by 22%. At the same time, labor costs for employees increased from 133,5 billion to 144 billion rubles.
Operating profit fell on 19% year to year - before 225,7 billion rubles.
Transneft received a loss in 1,6 billion rubles — against profit in 16,1 billion rubles year-on-year — from participation in associates and jointly controlled companies. The company owns 57% in the mutual investment fund "Gazprombank - Financial", who has suffered a loss 11,9 billion rubles.
Net finance costs Transneft reduced from 34,5 billion to 18,4 billion rubles year-on-year due to the revaluation of exchange rate differences amid the devaluation of the ruble and a reduction in interest expenses on loans and borrowings.
Net profit companies decreased by 33% year to year - before 132,7 billion rubles. This is the lowest value in recent years..
Dynamics of financial indicators, billion rubles
| Revenue | Operating profit | Net profit | |
|---|---|---|---|
| 2016 | 848,1 | 279,7 | 232,9 |
| 2017 | 884,3 | 255,6 | 191,8 |
| 2018 | 980 | 255,3 | 225,4 |
| 2019 | 1 063,8 | 277,1 | 197,1 |
| 2020 | 962,4 | 225,7 | 132,7 |
Debts
Despite the drop in revenue and the crisis in the oil industry, the company reduced its total debt by 8% year to year - before 589,5 billion rubles, and net debt 5%, to 526,7 billion rubles. The main reason is the reduction in the volume of long-term loans and borrowings by 11%.
In recent years, the company has maintained a low level of debt. The value of the ratio "net debt / EBITDA" no 31 December 2020 year amounted to only 1,19, What does it say about the financial stability of a business?.
Dynamics of debt indicators, billion rubles
| Total debt | net debt | net debt / EBITDA | |
|---|---|---|---|
| 2016 | 701,6 | 627 | 1,53 |
| 2017 | 688,9 | 612,7 | 1,5 |
| 2018 | 673 | 571,1 | 1,32 |
| 2019 | 637,4 | 553,8 | 1,14 |
| 2020 | 589,5 | 526,7 | 1,19 |
Dividends
Only preference shares of Transneft are traded on the stock market, for which special conditions for dividend payments are prescribed in the company's charter. The total amount of dividends on preferred shares is 10% from net profit at the end of the reporting year, at the same time, the payment per preferred share must not be less than, than payments per ordinary. I will note, that all ordinary shares are owned by the state.
Dividend policy as a guideline for payments gives 25% from IFRS net profit, this includes adjustments for non-recurring and non-cash items.
The reality of recent years is, that management directs at least 50% from adjusted earnings to pay dividends.
In March of this year, during a conference call, the vice president of the company, Maxim Grishanin, said, that the holding can pay about 50% from net profit, or about 9250 R per preferred share.
Dividend per preferred share
| 2015 | 823 R |
| 2016 | 4296 R |
| 2017 | 11 454 R |
| 2018 | 10 706 R |
| 2019 | 11 612 R |
| 2020 | 9250 R |
What's the bottom line?
Financial indicators of Transneft fell relative to 2019 year against the backdrop of the oil crisis and the reduction in hydrocarbon exports. But the crash didn't happen., and the company's debt has been reduced.
Seems to be, the crisis period for the oil and gas industry is over, and from the second half 2020 the world has seen a recovery in demand and prices for hydrocarbons. The key question is, whether the company will be able to restore operating and financial performance to pre-crisis levels and how quickly this will happen.
Transneft revenue, among other things, depends on tariff policy, which is regulated by the state and depends on the expected rate of inflation. With 1 January 2021 year, tariffs for oil transportation through Transneft pipes increased by 3,6%, but this is below the current official inflation rate, which grew as a result 1 quarter 2021 year to 5,8%.
The company's management is very cautious in its forecasts and expects a decrease in the volume of transportation of oil and oil products by 1% - to 475 million tons 2021 year on the back of strong results 1 quarter 2020 of the year, when the new OPEC+ restrictive measures were not yet in effect. Probably, this year the company's revenue will be higher due to the growth of transportation tariffs, but will not be able to achieve record results 2019 of the year.
