Page 184 - RusRPTApr23

Adjusting for prices, taxes. Our 2022e forecasts rise on higher oil realizations, but declines in 2023e and 2024e on a realignment of taxation vs oil prices and the recent drop in international oil prices. We are above Street estimates for 2022e, in-line for 2023e, but far above for 2024e, which we assume is due to significantly different macro assumptions.
Valuation and recommendation Higher L-T dividend assumption drives an upgrade. We increase our TP on oil producer Gazprom Neft (SIBN) 36% to Rb640/sh and upgrade it to BUY, with the key driver being the higher long-term dividend payout assumption. Our 2023e DPS forecast is Rb46/sh, or a 10% DY.
● Surgutneftegaz
BCS TPs on oil producer SurgutNG’s ord/pref shares rise by 16%/25% to Rb22/40/sh. BCS upgrade the pref to BUY, but maintain the ord at SELL. The company is well managed, and output should eventually rebound to pre-crisis levels, but L-T growth potential is very limited due to constrained greenfield portfolio.
Cautiously optimistic on S-T outlook for Russian oil business. EU and G7 embargoes and price caps have not been as negative as we feared, and tax changes, a production cut, and growing shadow flee” may compress Urals discounts noticeably. We still expect output and the Urals discount to recover to November 2022 levels by end-2023, and regain near pre-crisis levels in the L-T.
Relatively low profile may lower risks. A mid-sized Russian blue-chip oil company, SurgutNG keeps a low profile and is rarely even mentioned in the press. Therefore, at least compared to high-profile state-owned companies such as Rosneft and Gazprom, its sanctions risk may be relatively limited.
Pref dividend provides ruble hedge. SurgutNG’s charter requires 40% of EPS payouts for the pref. Meanwhile, net income is very exposed to ruble volatility due to having c$50bn of net cash on the balance sheet, 90% of it is usually held in foreign currencies. Due to this, pref dividends can spike in years of strong ruble devaluations (chart to left). Thus, further devaluation of the ruble in 2023 would see dividend expectations for SNGSp rise.
General oil price and ruble risks. All Russian oil companies benefit from higher oil price levels and a weaker ruble. To the extent the former falls and the latter rises, our SurgutNG earnings and dividend expectations would fall.
Ord dividend unlikely to rise in foreseeable future. Unlike the pref, SurgutNG’s charter requires no minimum payout for the ord share, and traditionally it has been paid a low and only very slowly growing stable DPS.
184 RUSSIA Country Report Russia April 2023 www.intellinews.com