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Transneft

Transneft

Transneft’s dividend payout ratio grew from 5% in 2014 to 43% in 2017. We believe a 50% payout ratio will become a permanent feature of the company’s future dividend policy, which would imply a 2018 dividend of RUB14,177/common share, on our estimates, reflecting a current yield of 8.3%. Higher dividend payments are just one of the signs of the recent improvements in the company’s corporate governance, with future changes possibly including a conversion of prefs into commons and a formal change in the dividend policy to reflect the higher actual payout ratio (vs the 25% currently stated). Additional upside may be presented by the potential to realise the value of its quasitreasury shareholding and line-fill in the longer term. Maintain BUY with a 4% higher TP of RUB224,000.

Significant improvement in dividend policy drives equity outlook

We estimate that Transneft’s 2018 dividend could amount to RUB14,177/pref share, based on a 50% dividend payout ratio, which implies a dividend yield of 8.3%. Higher dividend payments are just one of the signs of the recent improvements in the company’s corporate governance, with future changes possibly including a conversion of prefs into commons and a formal change in the dividend policy to reflect the higher actual payout ratio (vs the 25% currently stated).

Fair regulation and capex slowdown drive sustainable positive FCF

We believe the oil transportation tariff – unlike that for gas – is fairly regulated, with Transneft achieving an RoIC of between 9% and 10%, significantly higher than the same metrics for Gazprom’s gas pipelines (2-3%). As the East Siberia Pacific Ocean pipeline (ESPO) expansion project comes to an end in 2020, we estimate the company’s capex will decline from $5.5bn in 2018 to under $4bn in 2021, with improved FCF gradually leaving more room for a higher dividend payout ratio in future years.

Valuation and risks

We value Transneft based on an EVA/DCF approach with an estimated WACC of 12%. Our TP includes the value of its quasi-treasury shares and a 57.4% stake in Novorossiysk Commercial Sea Port, but excludes the value of the line-fill. The main risks to our investment case include slower tariff growth or higher-than-expected capex, a further tightening of anti-Russian sanctions, and lower-than-expected dividend payouts.

Company update

BUY (maintained) TP: RUB224,000

(previously RUB215,000)

Oil & Gas Russia

Summary valuation and financials, RUBbn (unless otherwise stated)

Source: Bloomberg

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MOL Group

We believe 2019 could be an exceptionally strong and eventful year for MOL as the years of strategic focus and investments come to fruition. In the downstream, we upside potential to our estimates of refining margins in the run-up to IMO2020 regulations and on the back of high diesel crack spreads in Europe. In the upstream, we see exploration potential from three new drills in Norway, with results expected by the end of 2019. Elsewhere, the final outcome of arbitration by the International Centre for Settlement of Investment Disputes (ICSID) could pave the way for a resolution of the INA dispute during 2019, we think. Poor dividend policy remains the weakest link in MOL’s investment case, in our view, but a strong FCF outlook and IMO upside could make special dividends a more permanent feature. Maintain BUY with a 5% higher TP of HUF4,400.

Attractive core franchise; positive exposure to IMO2020

MOL’s two flagship refineries (Danube and Bratislava) are among the largest and most complex in Europe, with NCIs of 10.2 and 11.0, respectively. With a 45% share of output in the form of diesel, we believe MOL is attractively positioned to benefit from strong growth in middle distillate consumption in the near term, as well as the higher diesel crack spreads that are likely in the run-up to the introduction of IMO2020 regulations from 1 January 2020.

Exploration upside

MOL plans to drill three exploration wells in its core exploration portfolio around the Mandal High area offshore Norway, with the results expected by the end of 2019. Net risked resource potential associated with these three wells is sufficient to double

MOL Group’s current 2P reserve base of 356mn boe. The company’s efforts in

Norway are supported by world-class partners (Lundin Petroleum, Aker BP and Petoro), with exploration expectations further shaped by alleged similarities between Mandal High and the highly prospective Utsira High areas, according to Lundin. If successful, Norway’s discoveries could go a long way towards fulfilling MOL’s target of adding 350mn boe of new 2P reserves by 2023, substantially reducing future M&A risk, in our view.

INA case close to resolution?

We believe the ongoing corporate dispute over MOL’s 49% stake in INA weighs on the company’s investment case and is delaying an investment decision on the Rijeka refinery upgrade. The final ruling in the ICSID arbitration case (expected in 1Q19) could accelerated resolution of the dispute, particularly in light of the recently stated intention of the Croatian government to repurchase INA shares. With MOL reportedly looking to at least recoup its original $1.8bn investment, a possible resolution of this dispute could support MOL’s share price, in our view.

Company update

BUY (maintained)

TP: HUF4,400 (previously HUF4,200)

Oil & Gas

Hungary

Summary valuation and financials, HUFmn (unless otherwise stated)

Source: Bloomberg