Rosneft’s financial breakthrough

Severe macroeconomic challenges did not prevent Rosneft from achieving impressive financial results in January-March. So, its net profit amounted to 149 billion rubles, which is more than for the entire last year (147 billion).

According to the chief executive officer of the company Igor Sechin, such a significant increase in the key indicator is associated with an increase in operating profit, a reduction in costs and a decrease in the negative effect of non-monetary factors.

Rosneft’s net profit turned out to be almost 3% higher than the experts’ expectations: according to the consensus forecast prepared on the basis of data from 12 investment companies and banks, this figure should have amounted to 145 billion rubles. In dollars ($ 2 billion) for the first quarter, it is higher than that of such industry majors as Chevron ($ 1.4 billion) and Equinor ($ 1.9 billion). “This is the highest indicator of Rosneft’s net profit since the acquisition of TNK-BP,” Sova Capital said in a report.

Other parameters included in the financial statements for the first quarter match these figures.

Thus, the EDITDA indicator increased by 44% in annual terms – to 445 billion rubles, the highest level since the beginning of the pandemic. And compared to the fourth quarter of 2020, the growth was 22.3%. The positive dynamics of EBITDA was supported by the rise in oil prices, lower operating, operating and administrative expenses. As for the total revenue of Rosneft, in January-March it grew by 14.2% in rubles (to 1.737 trillion rubles) and by 16% in dollars ($ 23.9 billion) compared to the fourth quarter.

Despite all the challenges that the industry faced during the crisis, Rosneft continues to generate positive free cash flow. At the end of March, it amounted to 190 billion rubles ($ 2.5 billion), which is twice as much as in October-December. The profitability of the Russian company’s PSA (6.5%) is higher than that of ExxonMobil (1.7%), Chevron (1.2%) and Equinor (3.7%). It has been in positive territory for nine years in a row.

Commenting on the latest financial achievements of Rosneft, analysts point to such an important indicator as capital expenditure (CAPEX). These are the costs of the enterprise for the acquisition of non-current (valid for more than 1 year) assets, as well as for their modernization. In the first quarter, they amounted to 225 billion rubles ($ 3 billion), which is at the level of the fourth quarter and 21.6% higher than in the first quarter of 2020. The growth is mainly due to the start of implementation of Rosneft’s flagship project, Vostok Oil, which was launched in 2020 as part of a comprehensive program for the development of a new oil and gas province in the north of the Krasnoyarsk Territory. According to the rating agency Moody’s, such strategically important undertakings will provide Rosneft with a competitive advantage in the future,

Another strong point of Rosneft is its vigilant attitude towards costs. Thanks to good control, the company’s unit operating costs remain among the lowest in the world. Moreover, in any, sometimes force majeure, macroeconomic conditions. At the end of the first quarter, Rosneft’s specific production costs amounted to $ 2.6 per barrel of oil equivalent. For comparison: the British BP has a similar indicator (excluding Rosneft production) – $ 7.4 per boe.

It is also important that in January-March the amount of the company’s financial debt and trade obligations decreased by $ 4.6 billion (including the amount of financial debt – by $ 2.9 billion). The net debt / EBITDA ratio in dollar terms was 2.2x. At the same time, Rosneft continued to improve its debt structure: at the end of the reporting period, the volume of liquid assets exceeded its short-term part by 2.3 times. Simply put, everything is in order with financial stability.

Investors unconditionally believe in the prospects of Rosneft: at the beginning of the year, its shares became the leaders of the stock market in terms of the dynamics of quotations growth not only among domestic oil and gas companies, but in general for all blue chips. During January-March, Rosneft shares on the Moscow Exchange rose by more than a third. At the same time, at the end of March, the cost of securities reached a historic high of 585.15 rubles per share. The dynamics of the company’s capitalization growth (in dollars – 86% at the end of the first quarter in annual terms) exceeds the same indicators for all majors.

As for obligations to shareholders, Rosneft traditionally pays more than 50% of its net profit under IFRS. This ratio is one of the highest in the industry. At the end of April, the board of directors recommended paying dividends for 2020 in the total amount of 73.55 billion rubles.

The activities and financial condition of the company are adequately reflected in international ratings. Thus, in January, S&P Global confirmed its long-term credit rating at investment grade BBB-, with a stable outlook. S&P motivates its decision by the fact that Rosneft’s cash flows are less volatile than those of many of its competitors. Plus, the Russian company has extremely low specific operating costs for hydrocarbon production ($ 2.6 / boe), and its provision with hydrocarbon reserves does not raise any concerns.

In April, Moody’s also affirmed the company’s investment grade rating at Baa3 with a stable outlook. Analysts highlighted Rosneft’s strong business profile, noting that low production costs support its profitability and is a competitive advantage in various scenarios related to oil price dynamics. According to Moody’s estimates, Rosneft will demonstrate significant improvement in credit metrics in 2021.

Even with lower oil prices ($ 50 at the current $ 66), Rosneft’s liquidity sources are sufficient to further reduce debt, finance capital investments and dividend payments. According to Moody’s, by the end of the year the level of the company’s debt burden may decrease by more than 40%.

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