Despite pressure: Rosneft confirmed the inviolability of its business model

Despite frankly unfavorable external circumstances, Rosneft has maintained economic stability and high efficiency of its business model. This is clearly seen from the company’s report on production and financial results for the third quarter and nine months of the current year according to IFRS. Thus, in January-September, the volume of hydrocarbon production increased by almost 11% and reached 5.5 million boe. (barrel of oil equivalent) per day due to the development of existing projects and the launch of new ones.

At the same time, the work was seriously hampered and is being hampered by fiscal (and other) decisions of the financial authorities. When the industry tax system is subject to constant adjustments, it is extremely difficult to plan investments for the long term and implement projects that have already begun. “Already in October, the Russian Ministry of Finance initiated further changes to one of the basic parameters of taxation in the oil industry – the procedure for determining the price of oil for tax purposes,” noted the head of the company, Igor Sechin. He recalled that the Ministry of Finance’s unfinished decision to reduce the damper provoked a crisis in the domestic fuel market in August–September 2023.

In addition, an economically unjustified reduction in the forecast for the difference between the price of Russian oil and the Brent grade is envisaged. At the same time, for taxation of the industry, the Ministry of Finance still uses a price indicator that is completely irrelevant in modern conditions – the Brent quote. “The financial department is ignoring fundamental changes in the operating conditions of the country’s oil industry: the formation of new directions for Russian oil supplies and approaches to its pricing,” said Igor Sechin.

The head of Rosneft also mentioned a number of other initiatives of the Ministry of Finance, which, according to experts, look ill-conceived. In particular, for tax purposes it is proposed to use virtual freight costs for no longer existing routes for the supply of Russian oil to Europe. Moreover, without taking into account the cost of transport and other logistics costs, insurance costs, conversion costs, interest payments on borrowed loans.

“Another initiative implemented without a comprehensive analysis of its impact and without discussion with the industry is the differentiation of gas prices for different categories of industrial consumers against the backdrop of an increase in the tax burden on the industry. The adopted changes will lead to an imbalance in the market and the creation of a gas shortage for socially important industries,” warned Igor Sechin. In addition, an increase in the mineral extraction tax on gas (the volume of payments in the next three years will increase by 25%) will lead to the withdrawal of investment and working resources from the industry and will reduce the ability to maintain production levels in the future.

Obvious risks are created for the company by the Central Bank’s progressive increase in the key rate. This has a negative impact on the cost of financing – both for the company and for its contractors and suppliers. Projects are becoming more expensive, and the time frame for their implementation is increasing. Profit, which is the basis for determining the size of dividends, is also under attack. As Igor Sechin noted, in January-September interest expenses increased by 15% – and the delayed effect of the Central Bank’s decisions on the rate will increase it in the coming periods. In addition, sanctions pressure is constantly increasing against Rosneft – in almost every round of sanctions, restrictions are introduced that negatively affect the company’s activities. “Since the beginning of the strengthening of sanctions, the Bank of Russia has not created reliable routes for the execution of cross-border payments in various currencies, which makes it difficult to timely credit export proceeds,” said Igor Sechin.

Rosneft remains one of the largest companies on the planet in terms of hydrocarbon production volumes. At the end of the reporting period, this figure was higher than that of ExxonMobil, BP, Chevron, Equinor, Eni, Sinopec and other global majors. In January-September 2023, it grew by almost 11% and reached 5.5 million boe. per day. Production of liquid hydrocarbons for the nine months amounted to 4.0 million b/d, which is 3.9% higher year-on-year and is mainly due to the resumption of production at the Sakhalin-1 project.

As for gas, its production in January-September increased by 33% compared to the same period last year and amounted to 1.5 million boe. per day. The growth is due to two circumstances – an increase in production volumes at existing projects, as well as the launch of new gas projects in the Yamalo-Nenets Autonomous Okrug in 2022.

The active implementation of the flagship Vostok Oil project, which has no analogues in the world today, continues. In January-September, more than 2.2 thousand linear lines were completed. km of 2D seismic exploration and 1.6 thousand sq. km of 3D work. Construction of the main oil pipeline “Vankor – Payakha – Bay Sever” and the oil terminal “Port Bay Sever” is underway. Warehouse transshipment facilities are being built in the Yenisei basin. During the summer navigation period, more than 850 thousand tons of cargo were delivered to the project sites along the Northern Sea Route, Yenisei and Ob-Irtysh river basins.

In January-September, the company increased the volume of oil refining in Russia by 3.3% – to 65.8 million tons. Sales of petroleum products on the domestic market for the nine months of the year amounted to 31.2 million tons, and in the third quarter – 11.4 million t (growth by 13%). The company is an active participant in trading on the Commodity and Raw Materials Exchange (SPbMTSB).

Despite negative macroeconomic factors, the company’s financial performance remains stable. It continues to actively invest in new promising projects. Capital expenditures for the nine months increased by 10.6% year-on-year and amounted to 909 billion rubles, the figure for the third quarter reached 310 billion rubles. The growth is associated, among other things, with the active implementation of the Vostok Oil project. The company’s revenue for the third quarter increased by 33.3% (quarter on quarter), to 2,732 billion rubles, which is 2.4% higher than the consensus forecast from the Interfax agency. At the end of nine months, revenue amounted to 6,612 billion rubles. The indicator is affected by the macroeconomic environment, including the decline in oil prices.

As for EBITDA (earnings before interest, taxes, depreciation and amortization), in January-September it grew by 19.3%, to 2,403 billion rubles, and in the third quarter it reached 1,002 billion rubles (almost 15% higher analysts’ consensus forecast). The better dynamics of EBITDA compared to revenue is associated with cost control (including a reduction in general and administrative costs), an increase in sales volumes in the eastern direction and an increase in the efficiency of export deliveries. Specific costs for hydrocarbon production in the reporting quarter amounted to $2.5/boe. — this is one of the lowest rates in the world.

Net profit attributable to Rosneft shareholders for nine months reached 1,071 billion rubles (for the third quarter – 467 billion), which is 1.8 times higher than the level of the same period last year and is mainly explained by the growth of EBITDA.

In the face of unprecedented external pressure, the company continues to strictly fulfill its obligations to shareholders. At a meeting in November, the Board of Directors recommended paying interim dividends in the amount of 30.77 rubles per share. In total, it is proposed to allocate 326 billion rubles, or 50% of net profit for the first half of 2023, to pay dividends, in full compliance with the dividend policy. By the way, over the past two years the number of shareholders of the oil company has grown almost 4.5 times – at the end of the first half of the year their total number reached almost 900 thousand people.

The company’s securities have become one of the fastest growing on the Russian stock market, and capitalization in October exceeded 6.4 trillion rubles. In September, BKS and Sinara experts raised their forecasts for the target price of Rosneft shares by 25% and 11%, respectively. The key factors in the investment attractiveness of both BCS and Sinary analysts include the implementation of the company’s flagship project, Vostok Oil.

In January-September, the company continued to implement measures to achieve sustainable development goals within the framework of the Rosneft-2030 strategy: reliable energy and global energy transition. The company aims to achieve zero accidents by 2030 or earlier. Over the nine months of 2023, the frequency of incidents associated with depressurization of equipment with serious consequences decreased by 38% compared to the same period in 2022,

Over the past nine months, not a single case of gas, oil and water intrusion (the release of oil, gas or water to the surface) during well drilling has been recorded at the company’s facilities. As part of the Program for the elimination of environmental “historical heritage” for 9 months. 2023 More than 60 hectares of contaminated “historical heritage” lands were reclaimed.