Russia’s privately owned Novatek is on a tear after first quarter profits exploded, rising 666% year-on-year to $5.8bn under IFRS accounts, the company reported on April 26.

Profits were driven by its burgeoning LNG business and several big investment deals. Profits grew even faster q/q, up a staggering 725%. The company’s CEO and majority owner Leonid Mikhelson was also recently named Russia’s richest man by Forbes Russia with an estimated fortune of $24bn.

While the company is privately owned, the Kremlin is using Novatek to expand Russia’s LNG business to keep itself in the gas business, as countries around the world, but especially in Europe, seek to break their dependence on piped gas. Russia has been producing roughly 10mn tonnes of LNG a year, making it a minor player in the LNG game, but hopes to increase production to 80mn tonnes in the foreseeable future, which would make it a major player. Novatek is also exploiting huge untapped hydrocarbon deposits in Russia’s section of the Artic.

A lot of the profits in the last quarter came from a decision by Novatek to cashed in on its second LNG project, Arctic LNG-2, in the reporting quarter, selling stakes to its French strategic partner Total and Chinese energy majors.

"We expect Novatek to get $2.6bbn from 2 deals with Chinese companies and $0.7bn from deal with Total plus $2.4bn options on 3 deals, which diminishes risk of project’s realization," BCS Global Markets commented on April 26

The company's revenues remained flat q/q at $3.55bn, with Ebitda rising by 4% q/q to $997mn. Novatek showed gas sales including LNG of about 22.2bcm (billion cubic meters), rising 5% q/q, out of which exports rose by 31% q/q to 3.4bcm of LNG. 

The company maintained a positive cash flow of $328mn and cut net debt by 35% q/q to about $1.3bn. At the same time, BCS GM warns that, "Arctic LNG 2’s $13bn equity value [estimated from Chinese deals] may trigger a negative reaction from investors who considered $2.55bn deal with Total as the project’s valuation." 

As bne IntelliNews reported in “King of the castle” Novatek is increasingly becoming one of the most attractive stocks on the Russian market as its valuation has doubled in the last year and its close to overtaking the market capitalisation of its much larger peer, the state-owned oil giant Rosneft, despite having much smaller reserves and cashflow.

And investors are anticipating the company to generate a lot more good news. BCS analysts suggest investors focus on the outlook for dividend payout, accelerated ramp up of the company’s first LNG plant, Yamal LNG, comments on LNG market environment, as well as the progress on Arctic LNG-2.

Sberbank CIB on April 26 commented that it anticipates, "comments on the binding agreements signed with CNOOC and CNODC on the sale of stakes in Arctic LNG-2, updates on how the negotiations are progressing with regard to the sale of another 10% stake in Arctic LNG-2, as well as details on the tax treatment for the gain booked on the transaction with Total, i.e. the portion of income tax that will be deferred," will be anticipated.

Novatek launched its first major LNG project Yamal in 2017 despite Western sanctions against one of the company’s prominent shareholders and influential Kremlin insider and stoligarch Gennady Timchenko. To avoid trouble Timchenko subsequently reduced his share in the company, but remains a big minority shareholder. The company has adopted an ambitious strategy for LNG growth through 2030 and is now lining up a tanker transportation strategy to back it up. 

 

Novatek 4Q18 IFRS Review
	4Q17	1Q18	2Q18	3Q18	4Q18	1Q19	Y/Y chg	Q/Q chg
Revenue, Rb mn	169 046	181 150	195 201	218 736	236 671	234,106	29%	-1%
Adj EBITDA, Rb mn	55 435	58 210	68 250	70 344	64 211	65,724	13%	4%
Adj EBITDA margin	33%	32%	35%	32%	27%	28%	- 3 ppt	- 3 ppt
Net income, Rb mn	37 279	43 121	32 041	43 371	42 680	381,796	785%	745%
Net margin	22%	24%	16%	20%	18%	163%	- 8 ppt	5 ppt
Revenue, $ mn	3 121	3 154	3 163	3 347	3 558	3,550	13%	-1%
Adj EBITDA, $ mn	949	1 023	1 102	1 073	965	997	-3%	4%
Net income, $ mn	638	758	518	662	648	5,789	664%	752%
Source: Company data, BCS GM