Page 6 - FSUOGM Week 21 2021

FSUOGM COMMENTARY FSUOGM

Gazprom share price benefits

from gas price surge

European spot prices have moved beyond the $350 per 1,000 cubic metre mark

EUROPE RUSSIA’S gas giant Gazprom has been a big win- per share, following pressure by the Ministry of
ner from the tightening gas market that has sent Finance to pay out more to shareholders. The
the price of gas soaring in recent months. company’s stock surged 30% in a matter of days
“The gas forward curve is recovering closer following the news.
to fundamentally justified levels of around $250/ In April the board of directors recommended
mcm ($7/mmBtu) much sooner than we had pre- a RUB12.55 per share dividend for 2020, mak-
viously expected, while Gazprom has substantial ing a RUB297bn ($4bn) total payout and cor-
spare production capacity,” Sberbank CIB said in responding to 50% of the adjusted IFRS net
a note. “We have upgraded our 2021-22 financial income for 2020. As reported by bne IntelliNews,
forecasts and reiterate Gazprom as our top pick in Gazprom could switch to a 50% payout one year
light of its expected high-double-digit free cash earlier than the dividend strategy implies, with
flow (FCF) and dividend yields, which are the the surprise dividend news positively being
most compelling in the Russian oil and gas sector.” received by the analysts.
The recovery in global spot gas prices that Analysts are buoyed by the good news sur-
started in August last year, along with pricing rounding the company and have upgraded
spikes caused by cold weather earlier this year, Gazprom’s financial forecasts. Sber increased its
has driven prices up from around $100/mcm DCF-based target price to $5.70/share ($11.40/
last year and sent forward prices up over $200 GDR or RUB415/share) from $5.30/share.
to around $250. “With gas market conditions improving
More recently, European spot prices for gas much sooner than we had anticipated, Gaz-
have risen to $350/mcm and the forward curve prom's FCF yield (we expect 21% in 2022) could
has been pushed up 30% higher for 2022 and be the highest in the Russian oil and gas sector
20% higher for 2023, the bank reports. next year, while we estimate Gazprom dividend
“We raise our average realised export gas yields at 14-16% in 2022-23, even assuming a
price assumption for Gazprom by 18% to $237/ 50% payout ratio,” Sber said. “Our EBITDA and
mcm for 2021 and by 13% to $250/mcm for 2022 FCF forecasts are a respective 30% and 100%
while highlighting that the 2024-25 forward above the Bloomberg consensus, implying sig-
curve is now in line with our long-term price nificant potential for upgrades.”
assumptions,” Sber believes.
Gazprom's non-CIS gas export volumes Capex to rise
jumped 27% year on year to 76 bcm in Janu- Gazprom will almost certainly increase its 2021
ary-early May, while EU and Ukraine gas storage capex budget in its mid-year review, as the com-
volumes remained close to record lows. pany tends to use any windfall to finance expan-
Even if Gazprom's gas exports were to sion of its infrastructure. What has changed
remain flat y/y (close to the seasonal average) recently is the company is now sharing more of
in the second half of 2021, which Sber says is a its income with investors.
conservative scenario given the low storage lev- Analysts expect investment increases to lag
els, Gazprom’s annual non-CIS export volumes the rise in European gas prices, such that Gaz-
appear set to recover this year towards the 2018 prom fully covers the dividend and generates
record level of 200 bcm. some free cash flow.
“We think the combination of robust prices Gazprom continues to work under its initial
and volumes will see Gazprom's EBITDA almost 2021 capex budget, but a review is only possible after
double this year to $38bn (also close to the 2018 the results of the first half of the year are received.
level), while capex should drop 20% (versus 2018),” “We fully expect Gazprom’s capex budget to
says Sber. “This should boost free cash flow after be revised upwards. We expect this to be done in
interest to above $10bn (15% yield), whereas it was the second half of the year, in line with established
negative in both 2019 and 2020. We forecast divi- company practice when revenues are running sig-
dend per share (DPS) almost tripling to RUB35 for nificantly ahead of the conservative initial annual
2021, implying a 14% dividend yield.” budget. This is especially true in 2021, as European
The company has surprised investors by gas prices have to date averaged $245/mcm, far
increasing its dividends dramatically in the outstripping the very conservative $170/mcm put
last two years. After paying RUB8 per share for into Gazprom’s initial 2021 budget set in late 2020
years the company shocked investors by hiking (indeed, current spot gas prices are around $350/
its dividends twice in a week in 2019 to RUB16 mcm),” BCS GM said in a note. ™

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