Naftogaz improves P&L in 9M21, burns cash in 3Q

Ukraine’s leading natural gas producer and trader
Naftogaz (NAFTO) increased net revenue 31% yoy to UAH 136.7 bln in 9M21,
according to its financial report of Dec. 10. Key growth segments were
hydrocarbon production (up 84% yoy) and gas trading & retail (up 83% yoy),
where growth was mostly due to increased natural gas prices.

The company’s EBITDA improved to UAH 12.4 bln in 9M21,
from negative UAH 1.2 bln a year ago. Key contributors to the result were the
exploration & production segment (EBITDA more than doubled yoy and reached
UAH 34.8 bln) and Ukrnafta (EBITDA reached UAH 5.9 bln in 9M21, from negative
UAH 2.2 bln a year ago). Excluding expenses related to the impairment of
financial assets, Naftogaz’ EBITDA increased 3.4x yoy to UAH 33.9 bln. The company’s
net loss decreased 74% yoy to UAH 4.4 bln.

Naftogaz’s operating cash flow before working capital
changes improved 2.5x yoy to UAH 37.7 bln in 9M21, but net cash flow from
operations was negative at UAH 19.4 bln (vs. positive UAH 16.1 bln a year ago).
This was mostly a result of inventories built up for UAH 50.9 bln in 9M21 (vs.
 cash inflow from inventories releases of UAH 13.0 bln a year ago).

Cash outflow from operations and investments into
PP&E for UAH 11.0 bln (-7% yoy) resulted in an overall cash outflow from
Naftogaz accounts of UAH 28.8 bln in 9M21. As a result, the company’s cash and
equivalents decreased 84% YTD to UAH 5.9 bln and its net debt increased 93% YTD
to UAH 56.4 bln as of end-September 2021. Its ratio of net debt to LTM EBITDA
reached 1.52x as of end-September, up from 1.25x as of end-December 2020.

The results imply that in 3Q21 alone, the company’s
revenue decreased 5% yoy to UAH 30.5 bln, EBITDA turned to negative UAH 0.5 bln
(from positive UAH 0.5 bln in 3Q20) and net loss halved yoy to UAH 2.7 bln. Its
quarterly cash outflow from operations was UAH 37.2 bln (vs. UAH 1.1 bln inflow
in 3Q20) and the increase of net debt was UAH 48.5 bln (up 9.2x yoy).

Alexander Paraschiy: Naftogaz’ liquidity position looks shaky due to the large outflow for
the inventories build up and prepayments in 3Q21. At the same time, we do not
expect any problems with Naftogaz’ ability to pay its bills, even though the
company still has social obligations on the natural gas market. The company can
always count on support from state banks, should it need some. At the same
time, we do not rule out a downgrade of Naftogaz’ credit ratings or their
outlooks, based on the company’s worsened balance sheet.