END OF SEMESTER: THE CEE OIL AND GAS INDUSTRY, ON THE STOCK MARKETS
- Written by Laurentiu Rosoiu
Experiencing the effects of the crisis in Ukraine, the oil and gas industry in Central and Eastern Europe, represented by the Stoxx 300 Oil & Gas index had, during the first half of 2014, a negative evolution. It’s not only the index has plummeted, but it has registered weaker performances against the oil and gas indices at regional or global level, and also against the indexes reflecting the entire economic evolution of these areas. In spite of the weak evolution on the whole, there are companies in the field that registered divergent trends.
Being influenced by the evolution of the companies in Turkey and, in reverse trend, of the companies in Russia, the CEE oil and gas industry had a negative evolution in the first half of 2014; at least this is the trend expressed by the Stoxx 300 Oil & Gas index which has fallen during the first six months of the year by 1.2 percent: it has plummeted from 163.88 points (on December 31, 2013) to 161.85 points (on June 30, 2014).
NEGATIVE TREND OR STABILIZATION?
The decrease is not by itself spectacular, nor is it a clear mirroring of a possible interval with problems for this industry in the region; after all, it’s just a one percent variation, be it positive of negative and it could rather give the impression of stabilizing or stability, in no way a message of negative evolution.
The trend of Stoxx 300 Oil & Gas index (this index reflecting the evolution of the most important 25 companies from the oil and gas field listed on the stock markets in Central and Eastern Europe), although modest, is becoming relevant if analysed in comparison with the relevant index for this industry in Western Europe or with the one revealing the trend of the global oil and gas industry. As such, by this comparison, the image of a regional field that seems to really face problems becomes obvious.
At least this could be the conclusion drawn if we look at the fact that, while the CEE oil and gas industry index has ended the semester on the negative side, the one reflecting the Western Europe industry (Stoxx 600 Oil & Gas – which is reflecting the evolution as a whole for the biggest 32 oil and gas companies from Western Europe) was on the raise by 11 percent during the same interval; as compared with the relevant index for the global oil and gas industry (Stoxx 1800 Oil & Gas – the one reflecting the evolution as a whole of 107 most important companies in the field from the world) this one has climbed by 13 percent during the first six months (see the chart “The evolution of indexes in the oil and gas field”).
As a consequence, the comparing analysis of the evolution of oil and gas industry indexes for several areas/regions shows the companies in CEE, as a whole, have had a rather weak evolution in the first half of the year, even though the negative variation of the Stoxx 300 Oil & Gas index is not a really conclusive one.
Hence, this view is supported also by the evolution of another stock exchange index regarding the same field of activity: i.e. CECE Oil & Gas (index calculated and disseminated by the Vienna Stock Exchange, reflecting the entire evolution of the most important 11 oil & gas companies from Romania, Hungary, Poland, Czech Republic and Serbia). It is an index that, although it has a regional niche component as against Stoxx 300 Oil & Gas index (this one including 27 companies on a significant larger geographic area – including companies from Russia, Turkey, Cyprus and Greece besides the CECE Oil & Gas states) it underscores the image of an unfavourable evolution of the oil and gas industry in Eastern Europe.
Even more, as it describes a wider decrease (registering by the half of 2014 a 3 percent drop against the value registered by the end of 2013) CECE Oil & Gas index clearly reveals that this region (Central Europe – made up by five states to which the companies included within the index belong) has a significant contribution to the entire negative evolution of the Stoxx 300 Oil & Gas index.
It seems Romania is placed in a conflicting position against this negative trend in the region, having in view that the BET-NG index, the one reflecting the evolution of the companies of the entire energy sector on the Bucharest market (being thus representative for one of the bourses included in the regional CECE Oil & Gas index) has had, during the same interval, a growth of 4 percent and not a decrease.
At first sight, a parallel drawn between BET-NG and the Vienna index could seem mismatched; the BET-NG index includes companies in the electric energy production and distribution and companies offering auxiliary services for the oil and gas industry, not only companies in the oil and gas field. In reality, BET-NG is extremely relevant for this industry because it includes a range of companies (such as Transgaz, Romgaz, OMV Petrom, Rompetrol and Conpet) which contribute to the index in a more than 80 percent share; this makes it comparable to the other regional indexes in the field.
Last, but not least, an analysis of the US Oil & Gas industry is needed to get a complete at global level (given by the Stoxx 1800 Oil & Gas index). In this context one should point to the evolution of the Dow Jones U.S. Oil & Gas Index (calculated and disseminated by Dow Jones under the DJUSEN symbol, reflecting the whole evolution of the most important 85 American companies in the field) which raised by 12 percent (see the chart “The evolution of relevant indexes in Romania, Central Europe and the US”).
BEHIND REAL ECONOMY
The oil and gas industry’s performance in CEE is weak not only by comparison with the aggregate evolution of the companies in the field on European and global level; this field of activity in Eastern Europe has had, during the same interval, a weaker evolution that the aggregate evolution of the real economy (seen through the stock exchange general indexes following the evolution of a great number of companies in all fields of activity, playing the role of guide marks and/or bench-marks for the economic situation in a certain region or area).
Thus, either we compare it with the aggregate economic evolution in CEE, or with the Western European economy, or even with the global economic evolution... the oil and gas industry in CEE has registered weaker results – even though the discrepancies are not as high. More exactly, if Stoxx 300 Oil & Gas index was falling by half year with 1.2 percent, the economy in the area (CEE region) is facing a much better situation: the Stoxx Eastern Europe 300 (index revealing the aggregate evolution of the most representative 300 companies in the region from all fields of activity, being a bench-mark for the regional economy) was registering a growth of 0.6 percent (see the chart “Evolution of general indexes”). One should note though, in order to underscore the negative evolution of the oil and gas industry in CEE, that in this region only can be seen a divergence between the field index (Stoxx 300 Oil & Gas) and the one of general index (Stoxx 300).
Unlike it, the indexes for oil and gas field in Western Europe and global indexes have registered better results than general indexes. As a matter of fact, in the first half of the year Stoxx 600 Oil & Gas index (reflecting the evolution in the field in Western Europe) has grown by 11 percent, while Stoxx 600 (general index, reflecting the aggregate economic trend) has grown only by 4.5 percent; as well, Stoxx 1800 Oil & Gas index (relevant for the field on global scale) has grown by 13 per cent, while Stoxx 1800 index (general, reflecting the global economy’s trend) has grown by only 5.5 percent.
Drawing the conclusion, one could say that, in an international context where the oil and gas industry (including in Western Europe as well as on global scale) has registered better results against the rest of economy... for the Central and Eastern Europe region the evolution registered an opposite trend: the industry in the field has had a weaker evolution than the entire economy. The situation is obvious in Central Europe, where unlike the US (and, paradoxically, unlike Romania) the CECE Oil & Gas index (calculated by the Vienna Bourse and reflecting the evolution of the field in Eastern Europe) had a poorer evolution than CECE extended index (index comprising 49 companies in various fields of activity in Poland, Hungary, Romania, Croatia, Serbia and Czech Republic, reflecting the aggregate economic trend of this area). Hence, while CECE Oil & Gas index went down by more than 3 percent, CECE Extended went up by a little bit more than 1 percent (see the chart “The evolution of general indexes in Romania, Central Europe and in the US”).
CRIMEA, THE OIL AND THE GAS PRICE
A first in explaining the negative trend of the CEE oil and gas companies shares’ prices on the market is obviously given by the impact of political and economic evolutions in Ukraine. The conflict that burst out at the beginning of the year got amplified later and has laid a high pressure on the regional capital markets. Such a conclusion can be drawn on the basis of an analysis on the weaker evolution of the general regional index (Stoxx 300, which raised only 0.6 percent during the first half of the year) as compared to the representative general indexes for Western Europe (such as Stoxx 600 – which grew by 4.5 percent during the same interval) or the ones for global economy (Stoxx 1800 – up by 5.5 percent during the same interval) (see the chart “Evolution of general indexes”).
The pressure resulting from the Ukrainian conflict on CEE capital markets was felt more profoundly in the oil and gas field, firstly because this region is a transit one for energy imports in Europe from Russia; as the main holders of the infrastructure enabling the process (transporting the gas and/or oil from Russia to Europe) are generally the great national companies in the field (companies listed on the regional bourses)... these are also the entities most affected by the escalating conflict and by the emergence of unforeseen events in the relations between the two economic areas. By this they become the most sensitive marks of the tensions in the area – the tensions on the shares’ prices for these companies being passed over to the stock exchange indexes the companies are included into.
The results at indexes level are amplified by the fact that the regional conflicting situation is overlapped to an obvious tendency notices lately, i.e. of cutting the energy consumption, both at world scale and at regional level. The tendency has twofold effects by the decrease in natural gas prices (see the chart “The price of natural gas on downward trend”). The elements enumerated above are the main issues laying more pressure on the companies, by the risks induced to their basic activities (as all noticed issues could rapidly lead to sales decrease, of incomes decrease, of the profit margins, profitability, etc., laying more pressure on the decrease of the shares’ prices).
Paradoxically, one could say, among the companies that have registered a good evolution on the market during this first half of 2014, there are ones that the Ukraine tensions should have pushed to lower prices, by no means higher. Such an example is the Ukrainian national company for oil and gas – Ukrnafta, whose shares were registering, during the first half of the year, an increase of more than 50 percent (from EUR 61 to EUR 93) on the Frankfurt Stock Exchange.
The very good evolution for Ukrnafta during this interval is contradictory on the surface. This growth, no matter how spectacular it may be, is just a tiny reverse of the decrease trend that started sometime in the first part of 2011 and was amplified starting January 2013; the interval coincides with the beginning of political problems generated by Kiev’s intention to sign the association agreements with the European Union and thus the growth in tensions with Russia. Hence, in spite of a wide movement in the first part of 2014 on the Frankfurt Bourse, the Ukrnafta shares are still far away from the level of EUR 400/share registered in March 2011 and also far away from the EUR 200/share in March 2012.
The very good evolution of this company is yet irrelevant for the regional index for oil and gas (Stoxx 300 Oil & Gas) as Ukrnafta is not included in it; a similar situation is faced by the Bulgarian company Oil and Gas Exploration and Production AD-Sofia, which registered increases on the Sofia bourse of more than 66 percent in the first part of the year, from BGN (lev) 6.2/share to BGN 10.3/share. The next place in a hypothetical standing of price growth on the market is occupied by the Polish company Petrolinvest, whose shares have registered a 25 percent growth during the interval, from PLN (zloty) 0.16/share to PLN 0.2/share (see the chart “Winners outside the index”).
WINNERS WITHIN THE INDEX
Unlike the spectacular variations registered by the above mentioned companies, the companies included within the Stoxx 300 Oil & Gas index have had more balanced evolutions. Among the companies within the index, the best price evolution was registered by the shares of the Slovenian company Petrol DD, up by 28 percent in six months, from EUR 218/share to EUR 280/share. The next company placed in the Stoxx 300 Oil & Gas index standing by growth/decrease of price during the first semester is KOC Holding with an increase of 18.2 percent, while on the third place is another Turkish company – Turkiye Petrol, with a growth of 16 percent (from TRY-Turkish Lira 42.5/share to TRY 49.4/share). Worth mentioning is that on the fourth place for positive variations is placed Transgaz, Romanian company whose shares have increased value during the interval by some 11 percent, from RON 185/share to RON 206/share (see the chart “Winners outside the index”).
Making a comparison, at the other end of the standing there are companies such as Serinus Energy from Poland (during the first semester it lost some 35 percent), Hellenic Petroleum from Greece (its shares plummeted during the interval by more than 23 percent) and the Czech company Unipetrol – by the end of June 2014 its shares had fallen by 22 percent as compared to their value registered by the end of 2013.
RUSSIA’S NEGATIVE ROLE
It should be noted that no less than five of the eight Russian companies within the Stoxx 300 Oil & Gas index were registering decreases of the shares’ prices on the market, from 1.2 percent to a peak of 10.8 percent (see the chart “Winners within the index”). In fact, these are the companies which, due to their high weight within the index, have had a major negative influence on the index, pushing it downwards.
Thus, Gazprom Neft – a company with a capitalization of some USD 20 billion, has registered during the first six months of 2014 a modest negative trend of 1.2 percent, while Rosneft, with a market value by the end of June was of some USD 75 billion, was registering by the end of the first semester a decrease of 4 percent; Novatek, Surgutneftegas and Transneft (with capitalizations by the end of June 2014 amounting to USD 35 billion, USD 6.5 billion and USD 3.5 billion respectively) were registering during the same interval decreases varying from 9 percent to 12 percent (see the chart “Winners within the index”).
For comparison, two out of the three Turkish companies within the Stoxx 300 Oil & Gas index, stand on the second and third places in the standing of the index-included companies for growth registered during the first semester of the year. KOC Holding – company with a capitalization amounting to some USD 12 billion registered surged by 18 percent, while Turkiye Petrol – with a market value amounting to USD 6 billion, had registered a market price increase of 16 percent. One should notice that, in the same standing, the Romanian company Transgaz is placed fourth, with an increase of 11 percent; the best evolution registered by a Russian company is the one of Gazprom OAO, whose shares went up in six months by 7.4 percent. During the same interval OMV Petrom – the most important Romanian company in the field was registering a market price growth of only 2.6 percent (see the chart “Winners within the index”).
INSTEAD OF CONCLUSIONS
The numbers reveal that the first half of the year hasn’t been favourable for the oil and gas industry of the Central and Eastern European countries – as they have experienced the effects of the tensions in the region as well as the pressure on the companies’ balance-sheets (resulting in pressures on the profits and thus on the shares’ prices) coming from a possible decrease of the profitability margins, coming mainly from the decrease of the natural gas prices.
To these pressuring elements it is added the declining trend of consumption in the region – modest, however obvious and definite. The trend is influenced on one hand by the energy consuming economic activities, on the other hand by the trend of replacing by the final consumers (be them economic agents or household consumers) of classic energy resources with alternative energy resources. Within this context, the positive evolution of the oil and gas industry in CEE countries is under doubt, at least on long term.
On the other hand, the industry itself bears potential sources to revive: its capacity to make the activities more efficient, new technologies/work procedures; new discoveries/innovations in the field of exploiting alternative resources (as shale gas and shale oil)... the industry could compensate the current negative premises seen for long term. Such a rebalancing process of the companies in this field is a long term one, with slow moves and probably for extended intervals.
Hence, for an independent observer interested mainly in the stock exchange evolutions, most important are the elements having the ability to influence on short-term the market movements of the companies involved. Well, from this point of view, during the next six months, the oil and gas industry in the CEE countries will probably evolve with less influence coming from Ukraine and it could be influenced more by the financial results of the companies in the field.