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one hand, it is a private company with a strong balance sheet (positive), but on the other it is a gas company, and we believe that the business models of Russian gas companies are under much greater threat than those of oil companies.
Growth drivers The existing business is relatively stable. As is the case with Russian oil companies, Novatek's core business (producing gas for the domestic market and LNG, oil and condensate for export markets) will experience some pressure due to sanctions, but should be able to adapt to changing conditions in the long term.
Dividends are good, but shares are overvalued. Novatek is likely to pay the official minimum dividend (50% of adjusted net income), generating solid yields on a good profit base. However, the stock is trading well above the average of the 5 years before the crisis in dollar terms, despite the deterioration of the key growth story. This looks overly optimistic to us, and we would argue it should no longer trade at high “growth multiples”.
Key risks Problematic growth model. Novatek's aggressive LNG plans have been hit hard by the inability to import key components for new liquefaction trains. We have excluded all new LNG projects from our model, with the exception of Arctic LNG-2, where we include the near-completed Train-1. The completion of Train-2 and Train-3, however, is in doubt for the foreseeable future.
Arctic Cascade may take some time to start working. In mid-June, Novatek's stock quotes rose sharply after the company’s CEO made comments on the possibility of adapting Russian technologies to Novatek's needs. We think that solving the problems encountered with the Arctic Cascade technology in Yamal LNG’s small Train-4, may prove to be a long process.
Limited exposure to current high gas prices. Novatek sells approximately 80% of its LNG under long-term contracts with prices pegged to oil prices. Thus, while the company can generate very good profit in the current environment of record-high international gas prices, profit nonetheless may be significantly less than investors expect.
● Lukoil
LUKOIL's trading structure is considering dividing into two companies, Swiss and Emirati, in order to allow European refining operations to continue after the European oil embargo begins on December 5th, reports Bloomberg. A logical step, does not affect our stock view. Lukoil will face a more significant challenge in marketing Urals crude after the embargo begins in a few weeks. So far, its exports of Russian crude have been relatively lightly touched by Western sanctions thanks to the company being able to load its Sicilian refinery completely with its own Urals crude, and thus largely fully realizing the
120 RUSSIA Country Report November 2022 www.intellinews.com