Sber predicts a decrease in the profitability of the oil and gas sector in 2023

The profitability of Russian companies in the oil and gas sector in 2023 will decrease due to falling oil and gas prices, as well as due to a decrease in refining margins. This is stated in the review of analysts at Sber CIB Investment Research (Sberbank’s corporate investment block).

Analysts explain that after the record-breaking 2022, market conditions are normalizing: the ruble has weakened moderately, the discount for Russian Urals oil to Brent is narrowing, as are refining margins and crack spreads (the difference in prices per barrel of oil and oil products produced from it), and prices for gas returns to average cyclic levels. The review says that in late April – early May 2023, Brent quotes fell below $80/bbl. (according to the ICE exchange, July 26 Brent futures traded at 76.48/bbl). But Sberbank analysts have not changed their forecast and still expect Brent prices to recover to $90/bbl. in the second half of 2023

The discount for Urals to Brent in the first quarter of this year gradually decreased and reached $26/bbl. (the maximum discount set in the Tax Code was $34/bbl in April). This means, Sber CIB analysts explain, that the actual cost of Urals will be used to calculate taxes, and in combination with the weakening of the ruble, this will help replenish the budget and may reduce the need for higher taxes for the sector in the medium term.

Discount on Urals in the medium term, according to their forecasts, will decrease to $5-10/bbl. by reducing the margin of traders and normalizing the cost of freight. According to the calculations of the Russian Ministry of Finance, the average price of a barrel of Urals in January-April 2023 was $51.05, in April – $58.63.

Gas prices in 1Q 2023 returned to the level of 3Q 2021 on the back of a warm winter in Europe and reduced demand for fuel. Gas prices in Europe, which peaked at $3,900 per 1,000 cubic meters. m in March 2022, gradually decreased and in the autumn-winter period fell below $1,000 per 1,000 cubic meters. m. According to ICE, at the end of May they fell to a two-year low: on May 26, June gas futures on the TTF hub in the Netherlands were trading at $276 per 1,000 cubic meters. m.

“This normalization [газовых котировок] means that the financial results of oil and gas companies in 2023 will be noticeably more modest than in 2022,” the Sber CIB Investment Research report says. Analysts expect refining margins to shrink, but a reduction in Urals discount and a cheaper ruble will help smooth out the drop in profits from the mining sector.

According to Sberbank analysts, Rosneft will be the only company in the sector that will be able to make high profits by the end of 2023. They predict a 41.6% increase in the company’s net profit in 2023 to RUB 1.15 trillion, operating income – by 4.1% to RUB 1.77 trillion, and earnings per share should grow by 41.6% up to 121.16 rubles. It is noted that the company’s operating profit will be supported by the export of oil via the East Siberia-Pacific Ocean (ESPO) pipeline at a higher price. Rosneft supplies 30 million tons of oil per year via a branch from this pipeline to China under a long-term contract.

At the same time, the company’s EBITDA will slightly decrease – by 0.2% compared to 2022 to 2.55 trillion rubles, and revenue – by 8.9% to 8.1 trillion rubles. The target price of Rosneft shares has been increased from 350 to 520 rubles. for paper, the recommendation for operations with Rosneft shares also changed – from “hold” to “buy”. The return on the company’s shares in 2023 may exceed 12%, Sber CIB predicts.

Rosneft’s net profit in 2022 decreased due to the write-off of assets in Germany (the company’s structures owned shares in three refineries – PCK Schwedt, MiRo, Bayernoil), which the country’s authorities took under temporary management in September last year.

When analyzing the financial results of Gazprom Neft, analysts recalled that the company did not publish statements for 2022. According to their calculations, last year the company received a record net profit of 775 billion rubles, which is 53.8% more than in 2021. The main driver of profit growth, as noted in the review of Sber CIB, was the high margin of oil refining at the company’s Russian refineries – about $30/bbl. In 2023, the profit of Gazprom Neft may decrease by 27.7% to 560 billion rubles, but this is 11.1% higher than in 2021.

The review says that the net profit of Lukoil in 2023 may also fall by 25.2% to 812 billion rubles. At the same time, in 2022, the company’s indicator increased by 20.5% compared to 2021 to 1.09 trillion rubles. This happened against the backdrop of a decrease in the company’s free cash flow by about 270 billion rubles, which Lukoil spent on the purchase of assets.

The net profit of Tatneft, Sberbank analysts remind, in 2022 increased by 51% to 299 billion rubles, but by the end of 2023 it will also show a negative trend (-30.8% to 207 billion rubles). According to analysts, the company’s oil sales price may rise this year due to the narrowing of the discount on Urals and the cessation of oil supplies via the Druzhba pipeline to Germany and Poland, which frees up volumes of raw materials for shipment through ports. This will allow the company to minimize logistics costs and find buyers with a lower discount, the review notes. And also, analysts remind, Tatneft bought 568 gas stations in Turkey in April 2023, which “will help the company in selling export volumes of gasoline and diesel fuel.”

According to the results of 2023, the profit of the majority of Russian oil companies may decrease by an average of 12–20% compared to the high base of 2022, Sergey Kaufman, an analyst at FG Finam, predicts. This will be influenced by lower oil prices, a moderate increase in the tax burden and a slight reduction in oil production, he notes.

Earlier, Deputy Prime Minister Alexander Novak announced a voluntary reduction in Russian oil production by 500,000 barrels per day. Initially, such a measure was adopted for March of this year, and then was extended until the end of 2023. From May 1, eight more OPEC+ countries, including Saudi Arabia, joined the reduction. The total reduction in production will be 1.66 million barrels per day.

Rosneft looks advantageous compared to other companies in the sector against the backdrop of high volumes of oil supplies via the ESPO at prices exceeding Urals, said Sergey Suverov, investment strategist at Arikapital Management Company. The company also has a low dependence on damper adjustments (payments to oil companies from the budget in a situation where export netback for fuel is higher than domestic market prices. – Vedomosti), adds Kaufman.