DTEK Oil & Gas might have to sell 140 mcm of gas at cost

Private natural gas producers in Ukraine, including
the country’s largest DTEK Oil & Gas (DTEKOG), might be forced to sell up
to 20% of their production during January-April at regulated prices, according
to two Cabinet of Ministers’ resolutions published on Dec. 30.

 

The regulated prices will amount to the producers’
cost plus a 24% markup to costs other than extraction royalty, according to
Concorde Capital analysis of the resolutions.

 

The purpose of the market regulation is to stabilize
the prices of socially important goods and to fight the coronavirus, according
to the Cabinet.

 

The Association of Gas Producers of Ukraine (AGPU), an
industry association of which DTEK Oil & Gas is a member, said the
resolutions are illegal and called on the authorities to reconsider their
decision, according to an AGPU’s Dec. 31 press release. Ukrainian gas producers
might be forced to defend their interests in the manner prescribed by law, the
AGPU said.

 

Dmytro Khoroshun: DTEK Oil
& Gas’ pre-tax profit foregone because of the regulation might amount to
USD 100 mln, we estimate.

 

The company might have to sell up to 140 mcm of
natural gas at the regulated prices, assuming it produces 700 mcm in
January-April. We expect DTEK Oil & Gas to have produced about 2.05 bcm of natural gas
in 2021.

 

Assuming the European prices at EUR 75/MWh, or USD
900/tcm, DTEK Oil & Gas will earn about USD 700/tcm less if it is forced to
sell its gas at the regulated rather than at market price, we calculate.

 

The Cabinet’s decision is marginally negative for DTEK
Oil & Gas because it might result in a significant amount of profit
foregone. Importantly, the decision also casts a shadow on the prospects of
investments into natural gas production in Ukraine in general.

 

It is unclear whether Ukraine’s natural gas producers,
which DTEK Oil & Gas leads with a 40% production share, will be able to
successfully overturn the Cabinet’s resolutions in courts.

 

In any case, the Cabinet’s decision should not affect
DTEK Oil & Gas’ credit quality to any significant degree. The company
should remain financially sound, earning on its natural gas sales in 4M22 about
four times more than the profit foregone due to the regulation. Furthermore,
the natural gas pricing situation in Ukraine is also expected to remain
favorable for the remainder of 2022.