Naftogaz reports negative EBITDA in 1H20

Naftogaz of Ukraine (NAFTO) reported a 21% yoy decline
in total revenue to UAH 71.9 bln in 1H20, according to its interim report
published on Sept. 23. The biggest revenue decline happened in the company’s
Gas E&P segment (48% less yoy to UAH 23.1 bln) and a newly presented
segment called Commerce (UAH 34.1 bln, halving yoy). Its EBITDA segment turned
negative in 1H20 at UAH 1.8 bln (vs. positive UAH 28.8 bln a year before). The
company attributes its weak P&L to low gas and oil prices and declined
demand for these resources. Meanwhile, the key contributors to the company’s
negative EBITDA in 1H20 were increased provisions for doubtful receivables (UAH
9.1 bln) and the negative result of its subsidiary Ukrnafta (UAH 2.3 bln loss).
The company’s bottom line was negative UAH 11.5 bln in 1H20 (vs. positive UAH
24.7 bln a year ago).

Naftogaz generated UAH 11.8 bln of cash from
operations before working capital adjustments (less 62% yoy) and UAH 15.6 bln
of net operating cash flow (down 68% yoy). The company halved its CapEx yoy to
UAH 7.8 bln but boosted its dividend payout 10x yoy to UAH 39.6 bln in 1H20. As
a result, its cash balance decreased 31% YTD to UAH 53.4 bln as of end-June
2020.

Its net debt amounted to UAH 14.4 bln and the ratio of
net debt to LTM EBITDA was 0.42x as of end-June 2020.

Naftogaz also reported that it intends to demand from
the government compensation for the provision of PSO services for an estimated
amount of UAH 32.2 bln. The company expects to receive such compensation by the
end of this year, while it did not include respective receivables in its
balance sheet.

Alexander Paraschiy: The
company’s weak result is what was expected, taking into account weak natural
gas prices in 1H20 that were below the costs of purchase of natural gas in 2019
(when the company was forming excess stockpiles in preparation for a possible
gas war with Gazprom), as well as weak payment discipline in some segments of
the domestic gas market. Taking into account that natural gas prices are
recovering from their 1H20 lows, Naftogaz is likely to improve its P&L in
the second half of the year.

Meanwhile, the company remains cash-rich, while its
weak 1H20 profit provides a guarantee that Naftogaz will avoid heavy dividend
payments to the state in the near term (dividends were a key cash drain from
the company in 2H19-1H20 as it paid a total of UAH 56.3 bln during this
period). At the same time, there is almost no chance that Naftogaz will receive
any compensation for its PSO in the near term.