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Veles Capital upgraded price target on Rosneft from $14.31 to $15.11, recommendation "buy" unchanged 18 September 2008 Source: www.veles-capital.ru
Rosneft reported for 2Q 2008. Throughout the reported term company’s income has been reduced -43.7% and formed 4.312 bn USD. However, if we exclude the single-time income of Rosneft in 2Q 2007 off YUKOS case in 7,920 bn USD, then the natural net income of the reported term would soar +153%. Do note though – net income has appeared above the general forecast +4% and +10%, exceeding our expectations. During 2Q 2008 Rosneft sales expanded +96% above past year, totaling 21.134 bn USD, whereas the market expected 20.72 bn USD, EBITDA has doubled, up to 7.021 bn USD, do remember though – the general forecast anticipated increase in 1.9 times to 6.762 bn USD. When evaluating the nature of company’s sales growth, we must point out the increase in total costs of extracted and refined raw material and oil products at average of +80.4%, during 2Q 2008, as well, as growth of oil extraction volume, which formed 15.5%, from 1.955 mn barrels per day to 2.116 mn barrels per day. At the end of 1H 2008 the free cash flow expanded to 5.1 bn USD, from 983 mn USD, last year this value upped more than 5 times. Now we correct our model of Rosneft, adding several changes into it. In particular – we have corrected our forecast of oil and oil products sales price upwards at average of +10%. In addition we have reviewed the volume of capital investments, expanded it at about +9% throughout the forecasted term. In our model of Rosneft, we have reflected the growth of general risks for Russian issuers, due to growth of political and geo-political risks, as well as worsening of world economy’s general environment. We have reflected the influence of Rosneft’s management’s actions regarding the counter-growth of operating costs, conducted during 1H 2008, which though expanded final fundamental estimation of the company. The resulting re-estimation of Rosneft model gave us a new fair price of company’s equity, which formed 15.11 USD per stock, instead of previously forecasted 14.31 USD, currently offering +75.09% of growth potential. Therefore we confirm “BUY” recommendation on stocks of Rosneft. Rosneft’s results of 1H 2008 Rosneft reported for 2Q 2008. Throughout the reported term company’s income has been reduced -43.7% and formed 4.312 bn USD. However, if we exclude the single-time income of Rosneft in 2Q 2007 off YUKOS case in 7,920 bn USD, then the natural net income of the reported term would soar +153%. Do note though – net income has appeared above the general forecast +4% and +10%, exceeding our expectations. Other financials of Rosneft have also proved to be quite good. During 2Q 2008 Rosneft’s sales upped +96% versus similar term of past year and formed 21.134 bn USD, whereas the market expected 20.72 bn USD, EBITDA doubled almost, to 7.021 bn USD, do remember that general forecast assumed this value to grow 1.9 times to 6.762 bn USD. When evaluating the nature of company’s sales growth, we must point out the increase in total costs of extracted and refined raw material and oil products at average of +80.4%, during 2Q 2008, as well, as growth of oil extraction volume, which formed 15.5%, from 1.955 mn barrels per day to 2.116 mn barrels per day. The sales also expanded through increased production of oil product over reported term +40.6%. There was some withholding factor upon the sales – reduction of gas extraction down -23.8%, which is related to a season drop in demand, and further reduction of extraction at Purneftegas’ deposits -1.952 bn cb m, in order to reduce gas popping via the torch. Now take a closer look upon Rosneft’s effectiveness in 2Q 2008. All of company’s financials have demonstrated decent effectiveness results, which are now above ones of company’s primary competitor – LUKOIL. Company’s EBITDA margin has formed 33.2%, beating last year’s result by -0.5 p.p. The natural net income margin has increased +4.6 p.p. to a 20.4%. A relatively high effectiveness grade of the company is supported by an optimal sales structure of Rosneft. Company sells a large share of its products at domestic market, which keeps expenses such as export duties at relatively low levels. Company also holds none surplus of retail goods, which helps in keeping costs for purchase of oil products low, unlike LUKOIL that has this value at 47.4% of total costs. The positive aspect, just like in the previous reports is the reduction of operating costs within sales of the oil company. Back in 2Q 2008 the share of costs within the sales formed 71.9%, whereas at the end of 2007 this value formed 78.22%. We must point out though that Rosneft entered the first place on the effectiveness of the operations. Rosneft has lowest costs within the extraction sector, which form below 3.31 USD per barrel and that is including Sakhalin’s costly projects. Financial report of 2Q had once more proved that company continues reducing its corporate debt, which is obviously a good factor. Net debt of Rosneft as of late 2Q 2008 has been educed by -2.14 bn USD, from 23.58 bn USD to 21.44 bn USD. Do remember, that to year 2010 company wants to have its debt to EBITDA ratio at zero. In our estimates Rosneft may achieve this value earlier this year or at early 2009. We would also like to underline the ongoing growth of free cash flow of the company. As of 1h 2008 the free cash flow has expanded to 5.1 bn SUD from 983 mn SUD, that is an increase in five times. In general, wee see the published dynamics as positive and as a proof to company’s effectiveness. We think that company looks rather strong at the back of its competitors, and now Rosneft could be comparable to foreign major companies. New forecasts and estimates Now we correct our model of Rosneft, adding several changes into it. In particular – we have corrected our forecast of oil and oil products sales price upwards at average of +10%. In our opinion – the long-term growth trend of oil will continue through the world market. And the fall we are seeing these days is a correcting to a rather sharp growth of last half of year. Ever since the start of 2008 towards the late June oil prices have added about +50%. And obviously that the current correction is a healthy technical correction, which would hit the market in any case and remove a range of speculative factors. Judging from the fundamental point of view, which we had reviewed in our previous reports of oil companies, we think that oil price would hit about 100-115 USD per barrel. In the short-term prospect we assume the prices to bounce off 104 USD per barrel of WTI and market should commence an upwards correction after a serious fall of last 2.5 months. The review of the oil price forecast had significantly boosted the fundamental price. Our model also includes the final results of macroeconomic values of Russia (GDP, inflation, energy tariffs and pipeline delivery costs) and their respective forecast for future years. The forecasted values have remained unchanged, unlike the results of 2008, which we have increased for the upcoming years in our forecasts. The forecasted values have remained intact, except for the results of 2008, which were upgraded using the expectations of Russian government on inflation and GDP growth rate. We have reviewed the extraction of gas downward -15%. Which is related to the fact that Purneftegas plans on equipping its deposits with equipment capable of collecting the accompanying gas, in order to reduce the volume of torch burnt gas. In addition to that, we review the volume of capital investments, expanding it average of +9% through the fact that company is currently engaged in a large-scale modernization of YUKOS assets purchased during YUKOS bankruptcy, using plans on development of shelf deposits and review of oil service inflation upwards. Another important topic to take notion in is the growing risk of investing into Russian stocks. Due to the latter events at Northern Caucasus (geo-political risks), political risks and general crisis values at financial markets of the world. The increase of given risks does not allow seeing Russian market as optimistic as before, which puts pressure on fundamental values. In our model we have tried and included all the newly re-appearing risks, which brought an increase of WACC rate going up +0.31 p.p. Within the operating activities, we have also corrected the costs growth rate, using the results off published report for 1H 2008, which demonstrated their moderate growth and company’s effectiveness. Given correction had positively supported the fundamental estimates of Rosneft. The resulting re-estimation of Rosneft model gave us a new fair price of company’s equity, which formed 15.11 USD per stock, instead of previously forecasted 14.31 USD, currently offering +75.09% of growth potential. Therefore we confirm “BUY” recommendation on stocks of Rosneft. |
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