Naftogaz increases revenue 46%, EBITDA 31% in 1H21

Ukraine’s leading natural gas producer and trader Naftogaz
(NAFTO) generated UAH 106.23 bln (USD 3.85 bln) net revenue, up 46% yoy, in
1H21, according to its interim report released on Oct. 28. The key growth
segment was gas trading and supply (up 105 % yoy), which was a result of the
significant increase of natural gas prices. The company’s EBITDA (before
impairment of financial assets/receivables) increased 31% yoy to UAH 33.10 bln
(USD 1.20 bln), with key contributors being gas E&P (UAH 26.64 bln, up 145%
yoy) and trading (UAH 4.55 bln, up from negative UAH 1.98 bln a year ago), as
well as Ukrnafta (UAH 2.48 bln, up from negative UAH 2.13 bln). Its EBITDA as
reported (after impairments) reached UAH 12.92 bln in 1H21, up from a negative
value in 1H20. The company’s net loss improved to UAH 1.65 bln in 1H21, from
UAH 11.54 bln a year ago.

Naftogaz’ operating cash flow before working capital
changes tripled yoy to UAH 33.72 bln, largely reflecting its EBITDA (before
impairment) level. It generated net cash from operations of UAH 17.78 bln, 19%
more yoy. Its investments in PP&E remained relatively flat yoy at UAH 7.42
bln.

The company’s total debt decreased 12% YTD to UAH
58.29 bln as of end-June 2021, while its net debt decreased 73% yoy to UAH 7.86
bln. In this way, its ratio of total debt to LTM EBITDA (after impairments)
reached 1.5x as of end-June, down from 2.8x as of end-December.

In its press release on interim results, Naftogaz
stressed that it was profit-generating in 2Q21, which is when Yuriy Vitrenko
was at the position of the company’s CEO. Namely, the company generated UAH
8.50 bln of profit in 2Q21, after UAH 10.15 bln losses in 1Q and UAH 19.00 bln
losses in 2020, when Vitrenko’s predecessor ran the company.

At a press briefing the same day, Vitrenko said that
Naftogaz is yet to decide on a possible issue of Eurobonds this year.

Alexander Paraschiy: Naftogaz’
1H21 results are very strong, but the worst times are ahead: in the coming
heating season, the company will face the need to sell a lot of natural gas at
discount to the market (to households, budget entities and heating utilities)
while importing more. All this will likely worsen the company’s liquidity, its
P&L in 4Q21 and possibly in 1Q22, as well as prevent it from reporting a
positive bottom line for the full year 2021. Taking into account the company’s
emphasis on a positive bottom line for 2Q21, net losses in the upcoming
quarters will not look desirable for political reasons. For these reasons,
Naftogaz will do all its best to show a net profit for the year – otherwise it
will be hard to explain to the government why it should have replaced the Naftogaz CEO this spring.

Another challenge for Naftogaz is that its longer
Eurobond (maturing in 2026) trades with a discount to par value, implying that
a possible new issue of mid-term bond would require a higher interest rate now
(which might not be politically acceptable). Therefore, the company is unlikely
to offer a new Eurobond in the next couple of weeks (unless the bonds will be
repriced positively), meaning its attempt to refinance the USD 335 mln bond
maturing next July is only possible in the next year.