Khartsyzsk Pipe sees minor orders looming on the domestic market

Khartsyzsk Pipe (HRTR UK) may gain from an extended modernization project of the Ukrainian natural gas pipeline. Ukrtransgas, the state operator of main pipelines, held a tender worth USD 29 mln to rebuild 27 km of the Urengoy-Pomary-Uzhgorod transnational pipeline by August 2014, according to media reports. The large diameter pipes produced by Khartsyzsk Pipe and the Interpipe Novomoskovsk Pipe Plant (NVTR UK) – which have traditionally been used for domestic pipeline modernization – will be used in the new project as well, as stated in the announcement of tender results.

Roman Topolyuk: We estimate that the project may bring a total order of 20 kt large diameter pipes, which represents only 30-50% of HRTR’s normal, monthly large-diameter pipe capacity. Spreading that over 18 months won’t substantially increase output. But in the present conditions of very low capacity load (10%, or 6 kt in December 2012), that would be a helpful input to the company’s sales anyway. Domestic demand is increasingly important now as the Russian market narrowed 53% yoy in 2012 to 1.6 mmt, (HRTR’s exports to Russia plunged 92% yoy to 29 kt) and several Central Asian projects have been either completed or postponed.

On Jan. 23, regional authorities in Ukraine optimistically announced that HRTR is fully loaded with orders through end-September 2013. We are considering this announcement cautiously with the expectation of lower 2013 production since the market is still at a weak point.

Recall that Khartsyzsk Pipe was paying high dividends in recent years. But this year will most likely demonstrate a significant decline. By our estimates, following a 39% yoy decrease in 2012 pipe output (to 381 kt), Khartsyzsk Pipe will post 4-5x smaller EPS yoy at UAH 0.06-0.08/share. Once fully distributed as dividends, they will offer a 9-12% dividend yield in 2013, which is a hefty decline vs. 23% last year.