TNK-BP Holding: Creating Shareholder Value

Transcription

1 Company Report Oil & Gas TNK-BP Holding: Creating Shareholder Value Investment Summary TNBP TNBPP BUY $3.5 35% BUY $3.2 38% TNK-BP Holding is one of the most efficient Russian oil companies. A combination of high dividend payments, an increasing efficiency on brownfields and a huge greenfields portfolio suggests a promising outlook for shareholders. We estimate company target prices of $3.5 per common share and $3.2 per preferred share, both justifying BUY recommendations. TNK-BP Holding (TNK-BP) is the third largest oil producer in Russia (output in January-November 2011 was 66.4m tonnes). Increasing well stock optimization and the concept of the SMART field have helped minimize the production decline effect in West Siberia and Orenburg, the main exploration regions for the company. A huge greenfields portfolio will enable production growth in the future. The company is one of the most efficient by capex per bbl of production among large VICs ($5.5/bbl against Rosneft s $7.5/bbl and Lukoil s $7.2/bbl). We count TNK-BP as the main winner in the introduction of the export duties system (the gain to the company is about $600m, or 4.3% of EBITDA 12E). Benefits come from a 52% share of crude oil exports in revenue (export duties for crude oil were reduced under 60-66) and small volumes of purchased oil (domestic prices rose). Company R&M strategy is focused on asset modernization and further penetration of domestic and FSU markets. This will contribute to an increasing share of high-margin refining in the structure of sales. EBITDA per bbl in 6M 2011 was $22 vs. leaders, Rosneft with $28/bbl and Lukoil s $27/bbl. TNK-BP shares are currently traded at 3.1x EV/EBITDA 11, which is a 40% discount to long-term pre-crisis levels of some 5x. We see an opportunity of coming closer to historic levels in future. The company demonstrates high FCF (about $6b annually), and it expects to keep positive cash flows despite capex growth. We also do not see any risks in leveraging, if it comes: net debt to EBITDA ratio of 0.2x is one of the lowest among oil VICs. TNK-BP is one of a few Russian oil VICs generous in paying dividends. Dividend yields were 15% per common and 17% per preferred share in We do not expect any substantial reduction of payout ratio in the future due to the cash needs of majority shareholders (AAR and BP), and forecast $0.40 per share for 2011, implying 13% and 18% current yields for commons and prefs. We see as major risks for the company its very low liquidity (free float 5% for total capital, and only 3% for commons alone) and continuing shareholders conflict. On the other hand TNK-BP Holding is attractive due to its high dividends, the increasing efficiency of brownfields and its large greenfields portfolio, so we recommend the stocks as BUY with a 30-40% upside potential. Current market cap, $m EV, $m Estimated free-float, % 5% Common shares - ticker (MICEX) TNBP - number, m market price, $ fair price, $ up/down, % 35% - previous fair price, $ 2.4 Preferred shares - ticker (MICEX) TNBPP - number, m market price, $ fair price, $ up/down, % 38% - previous fair price, $ 2.2 Other stock exchanges LSE N/L NYSE N/L IFRS, $m E 12E Revenues EBITDA margin, % 26% 24% 25% 23% Op. income Net income margin, % 17% 16% 16% 14% EPS, $ E 12E EV/S EV/EBITDA P/E RMG Research, December 23, 2011

2 Brief sector outlook New reality of oil prices Oil (Brent) has been traded at over $100/bbl for the last 3 quarters, backed by political turmoil in oil-pumping countries in North Africa (in particular Libya), the effect of monetary easing in the USA (QE1, QE2), and high costs of oil extraction at new fields (shelf production in the Gulf of Mexico, West Africa and the Arctic shelf in Russia, and heavy oil production in Venezuela), supporting stable demand. We expect oil prices to exceed $100/bbl in the next few years (see our forecast in macroeconomics table below). QE1-2 influence on oil prices and S&P500 Source: Bloomberg, RMG estimates World oil market balance Source: BP, RMG estimates 2

3 Oil production benefits Efficient brownfields TNK-BP is the third largest oil producer in Russia after Rosneft and Lukoil (oil production from January to November 2011 totalled 64.4m tonnes). The main brownfield assets are located in West Siberia with its depleting stocks, so the company is working under well stock optimization. Efficiency initiatives enabled an increase in output at Orenburgneft (TNK-BP subsidiary, with a 28% share in company s production) by 8% in Another project of this kind is the launch of SMART field technology, for the first time ever in Russia, in the Samotlor fields (also with a 28% share in production). TNK-BP maintains a rational investment strategy. It has shown one of the lowest levels of capex per barrel of production among largest Russian VICs ($5.5/bbl against $7.5 for Rosneft and $7.2 for Lukoil in 2010). Oil production dynamics Source: companies data, RMG estimates Huge greenfields portfolio The greenfields of TNK-BP are represented by a large portfolio of fields on the Yamal peninsula. The Suzunskoye oilfield with reserves of about 0.2b bbl (peak production of 4.5-5m tonnes per year) and the Russkoye field with reserves of some 2.2b bbl (peak production 7.5m tonnes per year) are scheduled to start output in The Tagul field (reserves of 1.3b bbl, peak production of 5m tonnes) is to begin production in Among the largest projects is the development of the Messoyakha field jointly held with Gazprom Neft (50:50). Its peak production is estimated at 20m tonnes per year, which is just a little less than at the Russian major greenfield, Vankor, belonging to Rosneft (25.5m tonnes per year). All these projects require major investment: total capex attributed to TNK-BP is forecasted at $17b, which we reflect in our valuation. The Yamal projects have a privileged MET (mineral extraction tax) rate from 2011: a zero tax rate will be applied till cumulative oil production reaches 25m tonnes. Moreover the Russian government ratified a decision that the Zapolyarie-Purpe pipeline, which will connect the Yamal oilfields with the WSPO pipeline, will be financed solely by Transneft (costs are estimated at $4b). Previously it was suggested that this pipeline would be a JV with TNK-BP, Gazprom Neft and Lukoil. This decision will also contribute to higher profitability of the Yamal projects. 3

4 Already commissioned greenfields, now compensating for falling production at brownfields, are represented by the Kamennoye, Verkhnevhenskoye and Uvat fields. They are already charged with a zero MET rate and Verkhnevhenskoye also had reduced export duties till last May, which gave an extra gain of $1.2b for TNK-BP in Aggressive gas production plans TNK-BP is making attempts to become a fully integrated global oil&gas company, in so doing developing gas projects. Increase in gas output is supposed to follow the development of Rospan fields, along with utilization of associated petroleum gas (APG). In 2010 the company produced 13.1bcm of APG (utilization level stood at 85%), which it delivered to its gas refining plants in Nignevartovsk, Belozersk and Krasnoleninsk. Rospan gas production totalled 2.7bcm last year, and we forecast a further rise in output there. The fields have access to the Gazprom gas-transport system (a delivery contract is signed until 2016) winner TNK-BP looks the main winner from the introduction of the new export duties system. We estimate the positive gain for the company to stand at about $600m, or 4.3% of EBITDA 12E. Benefits come from a 52% share of crude oil exports in revenue, as export duties for crude oil have been reduced under the new system, and from only marginal volumes of purchased oil, as domestic prices have grown. Moreover TNK-BP has a high share of light oil in its production mix, which means the equalization of duties for light and heavy oil products is not critical for the company. Oil refining structure Source: CDD FEC, RMG estimates 4

5 Refining and marketing Assets modernization Further market penetration The TNK-BP refining segment is represented by four refining plants: the Nizhnevartovsk, Ryazan, Saratov and Krasnoleninsk refineries, with total capacity of 24m tonnes per year (output in 2010 was a full 24m tonnes). Company strategy in the segment is focused on modernization to raise light product yields and processing depth, which we take into account in our forecasts. The TNK-BP retail network comprises TNK and BP petrol stations (110 BP and 664 TNK ones). Company strategy is directed on further penetration of the Russian and FCR markets via purchase of new assets. Management announced that the company will increase capex for the filling stations network. We see this strategy as rational (as margins rise) and take account of growing capex on retail sales expansion in our valuation. Dividends Company is a cashcow for main shareholders via dividends TNK-BP Holding is one of a few Russian oil companies whose dividends impress. The company paid 90% of net profit for 2010 as dividends, offering yields of 15-17% for common/preferred shares. We expect high dividend payments to continue due to the policy of the major shareholders, BP and AAR. For BP the company is one of the largest generators of cash to compensate for its huge losses after the disaster in the Gulf of Mexico (reserves for losses are about $40b). AAR also supports payment of dividends as preferable to cash-out. We estimate dividends for 2011 to be $0.40 for shares of both types, thanks to record financial results this year, and based on the stable payout ratio. Dividend yield dynamics Source: Company data, RMG estimates 5

6 Macroeconomic forecasts Valuation E 2012E 2013E 2014E 2015E 2016E Brent Urals Oil product exports, $/tonne: Gasoline Fuel oil Heating oil Domestic sales of oil products, $/tonne: Gasoline Fuel oil Heating oil Gas prices, $ per thousand c.m.: domestic Export duties, $/tonne: Crude oil Light products Heavy products Taxes: Oil MET $/bbl Gas MET $/1000m R/$ exchange rate CPI, % 12% 13% 9% 9% 7% 8% 7% 6% 6% 6% PPI, % 25% -7% 14% 17% 11% 10% 9% 8% 8% 8% Source: RMG estimates Operational review, m tonnes E 2012E 2013E 2014E 2015E 2016E Oil production Gas production: APG Rospan Refinery throughput Purchases of crude oil Crude oil exports: Non CIS CIS Oil products exports Domestic sales of oil products: wholesale retail CIS sale of oil products Source: Company data, RMG estimates 6

7 Financial review, $m E 2012E 2013E 2014E 2015E 2016E Revenue Crude oil sales: domestic exports Oil products sales: exports domestic: wholesale retail CIS Gas sales Other revenue Total revenue Costs and expenses Production & operating expenses Transport expenses SG&A DDA Purchased oil & oil products Taxes Export duties Exploration expenses Other expenses Total C&E Operating income EBITDA EBITDA, margin 25% 21% 26% 24% 25% 23% 23% 23% 24% 26% Income tax expenses Minority interest Net income Source: Company data, RMG estimates FCF valuation, $m E 2012E 2013E 2014E 2015E 2016E Revenues Growth rate (%) 30% 34% -4% 5% 4% 2% 2% EBITDA Margin (%) 24% 25% 23% 23% 23% 24% 26% EBIT Margin (%) 20% 21% 18% 17% 17% 17% 18% Income tax expenses NOPAT DDA Capex Changes in working capital Free cash flow Source: Company data, RMG estimates 7

8 WACC calculation Risk free rate 7.0% Equity risk premium 5.0% Company's specific risks 3% Beta 1.16 Leveraged beta 1.60 Cost of equity 18% Cost of debt 8.0% After tax cost of debt 6.4% WACC 14.3% Source: RMG estimates Fair value calculation Terminal growth rate, % 2% Discounted cash flows , $m Terminal value, $m Discounted terminal value, $m Enterprise value, $m Net debt, $m Minority interest, $m 894 Equity value, $m Number of common shares, m Number of preferred shares, m 450 Target per common share, $ 3.5 Target per preferred share, $ 3.2 Source: RMG estimates Sensitivity analysis (common share fair price, $) WACC 12.8% 13.3% 13.8% 14.3% 14.8% 15.3% 15.8% 3.5% % % % % % % Source: RMG estimates Terminal growth rate (%) 8

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