Stock Market March 25, 2021


American markets ended the day in the red, with pressure on stocks picking up closer to the close. The S&P 500 retreated 0.55% and the Nasdaq fell 2.01%. Among the S&P sectors, the oil and gas, industrial sectors, and the production of raw materials and supplies went up, while telecommunications and IT showed the opposite result.

Brent crude futures rose 5.95% to $ 64 a barrel on news of a tanker running aground in the Suez Canal, blocking an important transport artery. The RTS index closed with growth for the first time after a sharp tightening of the US sanctions rhetoric last Wednesday, adding 0.2%. In the first half of the day, the ruble traded in a wide range of 75.70 – 76.80 per US dollar, and by the end of the day showed almost zero dynamics, closing at 76.4.

Key events of the day: Norilsk Nickel and RUSAL showed significantly worse performance than the market, dropping by 3.8% and 3.1%, respectively, amid news of a possible reduction in Norilsk Nickel’s dividend for 2020. In the afternoon, RUSAL announced that there was a “normal working dialogue” between the main shareholders, but this statement practically had no effect on the market.

  • The oil and gas sector returned to growth amid a rebound in oil prices: Gazprom + 0.6%, NOVATEK + 2.2%, LUKOIL + 4%, Tatneft + 2.6%, Rosneft + 0.1%.
  • Banks ended the day in the green zone: Sberbank + 1.3%, VTB + 0.3%, TCS Group + 0.1%.
  • Metallurgical companies were also in demand: Severstal + 1.7%, NLMK + 1.8%, MMK + 0.7%.
  • IT companies traded worse than the market: Yandex -0.8%, Mail.ru Group -0.7%, Ozon -1.7%.

LUKOIL TO RECEIVE SUBSIDY FOR MODERNIZATION OF THE NIZHNY NOVGOROD REFINERY (LKOD LI; OVER MARKET; GOAL – $ 83)

According to Kommersant, LUKOIL will receive government support in the form of an investment premium to the reverse excise tax on oil to modernize its Nizhny Novgorod refinery. The amount of the subsidy may amount to more than RUB 70 billion in 2022-2031 with a total project cost of about 80-90 billion rubles. The capacity of deep processing units at the Nizhny Novgorod Refinery is about 17 million tons per year. Under the agreement, it is planned to create a delayed coking unit with a capacity of 2.1 million tons per year and a diesel and gasoline hydrotreater with a capacity of 1.5 million tons per year and others. The launch of the complex will reduce the production of fuel oil at the refinery by 2.6 million tons per year and increase the production of Euro-5 diesel fuel by 0.7 million tons per year.

Our opinion. A state surcharge from the budget to the reverse excise tax was introduced in 2021 to stimulate investment in the creation of deep processing plants. At the same time, the subsidy is provided subject to investments in the project of more than 50 billion rubles and the signing of an agreement with the Ministry of Energy by October 2021. LUKOIL began construction of a delayed coking unit back in 2018 with the planned commissioning of the complex already in 4Q21 (at the beginning of 2021, construction was completed by 86% ).

NOVATEK RECEIVED NORTH GYDAN LICENSE AREA (NVTK LI; ABOVE MARKET)

NOVATEK announced yesterday that Arctic LNG-1 won an auction for the right to use the Severo-Gydansky subsoil block for geological exploration, exploration and production (license term – 30 years; one-time payment for subsoil use – 775.4 million rubles). The hydrocarbon resources of the area are estimated at 9.8 bn boe.

Our opinion. Rosnedra announced the auction in February 2021. According to the terms of the auction, only those companies that already had licenses on the Yamal or Gydan peninsula and had a mark in the license that they could send the gas to LNG production could apply for the site, which made NOVATEK the most likely winner of the auction. The acquisition of this license will expand the company’s resource base for the planned LNG project.

INTERROS OFFERS REVISION OF THE DIVIDEND FORMULA (MNOD LI; OVER MARKET; GOAL – $ 38.0)

Interros CEO Sergei Batekhin said that paying the final dividend for 2020 in the amount of $ 3.5 billion is unacceptable in the current environment. Interros proposed to revise the dividend formula with a target of annual dividend payments of 50-60% of free cash flow. Also, if RUSAL does not agree to revise dividends for 2020 and 2021, the overpayment amounts may be deducted from future dividends after the expiration of the current shareholder agreement at the end of 2022. RUSAL, which is also a major shareholder of Norilsk Nickel, responded that such “emotional statements” only harm the value of Norilsk Nickel shares.

Our opinion. This is not the first Interros initiative to cut dividends. However, this time the company’s statement indirectly points to Interros’ position on the issue of dividend policy after the expiration of the current shareholder agreement. Assuming the current shareholder agreement will remain unchanged, we do not see any significant risks to our dividend projections in the short term (2020 and 2021). We also believe that the current dividend policy makes it possible to effectively adjust dividend payments, taking into account both the decrease in income due to the accident (decrease in EBITDA = decrease in the dividend base) and the potential increase in the debt burden, which at some point should reduce the payout ratio. Norilsk Nickel trades at 2021F EV / EBITDA of 5.3x versus its own 5-year average of 6.8x.

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