CEE OIL & GAS COMPANIES EVOLUTION: The best, the worst and the losers of the Stoxx 300 CEE Oil & Gas index
- Written by Laurentiu Rosoiu
A first part of the year in slight decline on the stock exchanges, amid financial reports showing rising profits and generalized decrease of revenues in 2016! This is the characteristic of the oil and gas industry in Central and Eastern Europe (CEE) revealed by the Stoxx 300 Oil & Gas index at the beginning of 2017. In this context, of the results’ dynamic, companies such as Hellenic Petroleum, MOL and OMV Petrom stood out whereas sector leaders Gazprom, Lukoil and Rosneft consolidate their position. On the stock markets however, after the price increases in the first quarter, the leading places are taken by less visible and less important players in the sectoral index representative for the region.
The 2016 year-end and early 2017 seem to have been not so auspicious for the oil and gas industry in Central and Eastern Europe. If we look at the development of the representative sectoral stock index in the region, which seems to hesitate in incorporating the sustained upward trend in oil prices that started in the first half of last year, this is the conclusion. Thus, the Stoxx 300 Oil & Gas index (with ID EE050P), reflecting the overall evolution of specialized companies in this region, was at the end of Q1 2017 at around 160 points; the value is close to the threshold at which it closed 2016 (i.e. 170 points), see the chart “The oil and gas industry in CEE, decline on the stocks early this year.” It is therefore an evolution not so auspicious of the index, which seems not to have accumulated any positive results reported by the companies included in that index for 2016, or the rising oil prices.
In other words, the rise in oil prices late last year is found in a large share in the increase of the aggregate value of revenue for companies in the regional index profile; the amount of their revenues increased from the equivalent of EUR 373 billion in 2015 to about EUR 417.1 billion in 2016. Also, the oil price increase is reflected in the profit increase at index level; the aggregate profits reported by companies in the index increased from EUR 28.1 billion in 2015 to EUR 37.1 billion last year.
However, the positive development in oil prices is not so keen to transfer to the level at which Stoxx 300 Oil & Gas index is actually quoted.
The end of Q1 2017 was a period full of financial reports. During this period, no less than 20 of the 25 companies included in the Stoxx 300 Oil & Gas index published the financial results for 2016. All 20 companies reported profits for 2016, unlike in 2015 when only 15 reported profit and the remaining five - losses. This development in profits gives a first positive note to the sector in early 2017.The industry’s positive image at the end of 2016 - beginning of 2017 is in fact completed by the figures of the other five companies in the index, which although had not published the results for all 12 months of last year, support the positive development of the sector by the figures reported for the first three quarters. Thus, three of the five companies had in the first nine months of 2016 profits significantly higher than those reported in the same period in the previous year.
In parallel, the dynamic of figures has to be highlighted, namely the fact that 20 of the 25 companies in the index representative for the oil and gas industry in Central and Eastern Europe reported increasing profits in 2016 against the previous year.
From this perspective, Russian companies Novatek and Gazprom Neft stand out, whereas good developments were reported also by the Greeks with Hellenic Petroleum, the Poles with Grupa Lotos, the Romanian company OMV Petrom or Hungarian company MOL, see the table “Growing profits in 2016”.
Thus, Novatek’s profit increased from the equivalent of EUR 929 million in 2015 to nearly EUR 4 billion in 2016 (thus showing an increase of 330%) and Gazprom Neft’s profit in 2016 reached EUR 3.1 billion, by 126% higher than in 2015 (which was of only EUR 1.3 billion).
It should be noted that the Russian companies’ results received support from the significant appreciation of the Ruble against the EUR. At the end of 2015, the exchange rate was about 80 rubles for EUR 1, at the end of 2016 the EUR had fallen to about 65 rubles - which means a depreciation of the EUR and an appreciation of the Russian currency (more EUR for the same amount in rubles) and, accordingly, a substantial financial bonus in the exchange of the results in rubles to EUR to get uniformity and comparability of figures.
The best development was recorded by the Greeks with Hellenic Petroleum; the company’s profit increased from less than EUR 47 million in 2015 to EUR 330 million in 2016, an increase of about 600% which also marks a historic high, according its representatives. A significant contribution to this result had, according to the public reports, the refining sector, whose net income increased from EUR 116 million in 2015 to EUR 500 million in 2016.
OMV Petrom, MOL and Grupa Lotos also stand out by switching from substantial losses to significant profits. MOL reported for 2016 a profit of EUR 852 million after the loss of EUR 827 million reported in 2015; OMV Petrom moves from a minus of EUR 149 million in 2015 to a profit of EUR 229 million last year; Grupa Lotos moved from a minus of EUR 62 million to a profit of EUR 230 million.
The good development of the Polish company in terms of financial results has also been recognized as such by investors! At least this can be said about the fact that at the end of Q1 2017 the Lotos shares registered growth on the stock market by about 50% against the end of 2016, up to the level of PLN 56.
Returning to the figures in the financial results, we see that 2016 was a very good year for the regional and index leader - Gazprom PAO, a company that had the most spectacular growth in fundamental terms, see the table “Growing profits in 2016”: Gazprom PAO reported for 2016 a profit of EUR 12.7 billion, the positive development was supported in particular by decreasing costs in exploration and development, according to the company’s reports. It is noteworthy that, dynamically viewed, the Gazprom revenues are by only 29% higher than in 2015. Seen but in absolute figures, Gazprom’s gross profit in 2016 represents more than one third of the overall reported profits of all the other companies in the index (of about EUR 37 billion). However, the advance in profit for Gazprom in 2016 against 2015 (equivalent to about EUR 3 billion) is approximately equal to the aggregate increases recorded at the same time by all the other components of the Stoxx 300 Oil & Gas index.
On the other hand, the positive outlook of the industry, revealed by the fact that all companies in the index reported profits (unlike 2015) and that the vast majority of companies had in 2016 higher profits than in 2015... is offset by the negative trend in terms of revenues. Only about half of the companies in the Stoxx 300 Oil & Gas index reported in 2016 higher revenues than 2015; the other half reported lower revenues than in the previous year.
In terms of revenues, as in the case of profits, the Russian companies are drivers in the sector: no less than eight out of the ten companies which registered higher revenues in 2016 against the previous year are Russian companies, Novatek and Gazprom Neft being leaders in this respect too, with increases of 40% and 31% respectively of the reported revenues in 2016 against the previous year (from EUR 5.9 billion to EUR 8.3 billion, and from EUR18.3 billion to EUR 23.9 billion respectively). Gazprom PAO, Lukoil and Rosneft are next by revenues, recording higher revenues of up to 10-20% against the previous year, see the table “Decreasing revenues in 2016”.
THE WEAKEST DEVELOPMENT
At the other end, from a fundamental perspective, the weakest development in a general context characterized by a relatively favourable oil price recovery and by upward changes in estimates was registered by Turkish company Tupras; the company registered a revenue decline of about 20% and a profit fall of about 40% in 2016 against 2015, from EUR 804 million to EUR 483 million.
According to official reports, the declining revenues reflect lower exports by 18% and falling domestic sales by about 1% due to significant increase of discounts.
At the same time, the significant increase of expenditures for interest (by about 33%) was another element that significantly led to lower profits. Interestingly, although significantly affected in turnover and profit, Tupras is one of the companies that have performed well in terms of market price; the Tupras shares recorded at the end of Q1 2017 an increase of 25% as compared to the end of 2016.
Despite financial results with very positive development year on year, the Russian companies are the most affected in terms of market price trends.
At the end of Q1 2017, the stock prices of all Russian companies included in the Stoxx 300 Oil & Gas index recorded negative variations between 5% and 20%, see the table “Who loses and who wins on the stocks”. Gazprom and Rosneft - the largest companies by revenues in 2016 of the companies included in the index, two of the companies with the best returns in value and dynamic - are companies which recorded the largest losses on the stocks: minus 17% for Gazprom and minus 22% for Rosneft.
DEVELOPMENTS IN TUNE WITH THE REST OF THE WORLD
The development of the Stoxx 300 Oil & Gas index seems to contrast with the overall evolution of the financial results of companies included in the index. The index reflects the major dependence on Russian companies and thus includes the negative trend recorded by them on the stocks.
Due to the relatively low weigh in the index, the other companies in Central and Eastern Europe therefore do not offset the negative impact of the falling prices of shares of major Russian companies.
On the other hand, the regional index is moving along with similar indices (for oil and gas), representative for Western Europe and globally – both having in the first part of 2017 developments as disappointing, see the graph “The oil and gas industry decreasing worldwide in Q1”.The Stoxx Eastern Europe 300 Oil & Gas index (EE050P – representative for Central and Eastern Europe) registered at the end of Q1 2017 a decrease of about 3%, the Stoxx Europe 600 NC Oil & Gas index (SXEBP – representative for the industry in Western Europe) fell by about 7%, whereas the Stoxx Global 1800 Oil & Gas index (SXW1ENEE – representative for the global oil and gas industry) lost more than 9% in the first three months.
Overall, the oil and gas industry in Central and Eastern Europe had a disappointing development, similar to the one registered worldwide by the industry (by indices!).Seen in detail, and ignoring the major negative impact from the falling quotations of all Russian companies’ shares, one could notice that not few companies have stood out as pleasant surprise. The result is seen both from the outlook of financial results and from the development of shares’ prices... which sets up the premises for potential pleasant surprises for the rest of the year.