Ukrnafta 1Q07 Net Sales Down 31%, Net Income Dropped by 82%

Ukrnafta (UNAF: SELL) just released part of its 1Q07 results. According to the announcement, the company’s 1Q net sales decreased by 31.0% yoy, to USD 277.9 mln, while net income was down by 82.5%, to USD 32.8 mln. The company also said it tax burden has grown substantially: taxes paid to the central and local budgets were up by 52.4%. Vladimir Nesterenko: The company’s bad 1Q07 performance is due to the fact that its stored almost all its extracted gas with the hope that it would win its fight with the government for higher gas prices (currently the company is obliged to subsidize public consumers). Our target (USD 56/share) from September 2006 assumes lower margins in 2007 and a 20% decrease in net income to about USD 344 mln. Although these disappointing 1Q07 results threaten even our conservative projections, we believe that the 1Q drop is temporary in nature and the company will find a way to sell its gas closer to the market later this year. In our valuation we assumed average realized gas price in 2007 at about USD120/tcm.