Naftogaz reports 25% decline in EBITDA, large losses in 2020

Naftogaz of Ukraine (NAFTO) increased total revenue 27%
yoy to UAH 193.0 bln in 2020, according to its annual accounts released on
April 27. Its revenue from sales of goods and services increased 6% yoy to UAH
159.2 bln, while most of its core segments showed a decline in sales. Key
contributors to its revenue were oil and gas E&P (UAH 55.9 bln revenue,
down 28% yoy), the commerce segment (UAH 75.5 bln, down 31% yoy), the Ukrnafta
segment (UAH 35.5 bln, up 26% yoy) and intermediation in the transit of Russian
gas (UAH 46.7 bln revenue, a new segment in 2020).

The company’s adjusted EBITDA decreased 25% yoy to UAH
23.4 bln in 2020 as its key segment, E&P, showed a 36% yoy EBITDA decline
to UAH 28.0 bln. Another big contributor to its consolidated EBITDA was
Ukrnafta, the EBITDA of which reached UAH 9.6 bln (up from losses in 2019). Its
negative EBITDA in the commerce segment increased 64% yoy to UAH 15.8 bln.

The company’s losses before tax reached UAH 14.0 bln
in 2020 (vs. UAH 4.9 bln profit in 2019) and net losses reached UAH 19.0 bln
(vs. net profit of UAH 2.6 bln a year before). According to the company’s press
release, its adjusted net profit reached UAH 3.2 bln in 2020. “If there were no
debt crisis inflicted by the inefficient state regulation of natural gas
prices, the group would have been profitable in this tough year,” the company’s
CEO Andriy Kobolev commented.

The company’s operating cash flow before working
capital changes reached UAH 61.0 bln in 2020, down 62% yoy. It generated UAH
19.5 bln cash from operations (down 82% yoy) and used UAH 22.8 bln cash for
investments (down 3% yoy) in 2020. Its financing cash outflow was UAH 50.5 bln
(up 3x yoy), which was a result of the net repayment of debt and payment of
heavy dividends (UAH 39.5 bln, up 91% yoy).

Its end-2020 cash position was UAH 37.1 bln, down 52%
yoy. Its total debt increased 9% yoy to UAH 66.3 bln and net debt reached UAH
29.2 bln as of end-2020 (vs. net cash a year ago). Its net debt to adjusted
EBITDA was 1.3x as of end-2020.

Alexander Paraschiy: The key
drivers of the company’s 2020 negative bottom line were receivables provisions
of UAH 42.6 bln (up 6.7x yoy) and impairment losses of UAH 8.0 bln (down 16%
yoy). Such cost items were partially compensated by UAH 32.2 bln in received
compensation from the government for its PSO losses. Net of the above items,
the company’s profit before tax would be UAH 4.3 bln in 2020, which is still
not encouraging as the comparable number for 2019 would be UAH 20.8 bln.

Some higher expected achieved price for natural gas
should improve the company’s margins in 2021. Its cost-cutting measures will be
also helpful for this year’s results, but are likely to undermine its growth,
especially in the E&P segment. That said, we see that in the 1-2 year horizon,
Naftogaz will maintain its strong balance sheet and slightly improve its
operating margins. We retain our neutral view on NAFTO bonds.