Article / 10 August 2017 at 9:30 GMT

Much oil and little cash in Rosneft quarterly results

Russia oil and gas expert
United Kingdom
  • Rosneft produced 4.56 million boe in Q2, boosted by Bashneft acquisition
  • Q2 EBITDA was up 1.4% y/y to $5.4 billion
  • Q2 EBITDA margin fell to 22% from 28% a year ago and could fall further
  • Creditors seem willing to extend loans to quasi-sovereign borrower
  • Equity investors left with little if any real cash on a quarterly basis

Sakhalin 1
 Sakhalin 1 in the Okhotsk Sea. Photo: www.rosneft.com/

By Nadia Kazakova

Rosneft's quarterly results are more than a historic snapshot of the company's financials. It is a glimpse into how the largest – and best resourced (with oil reserves and otherwise) – Russian oil company operates. It is also a glimpse into the economics of Russian crude oil production. 

And there is a story to tell.

Rosneft's oil output and key financials, USD billlion
x
Source: www.rosneft.ru, author's estimates

After buying Bashneft in the fourth quarter of 2016, Rosneft's share of Russia's total oil output rose to almost 42%. The company produced 4.56 million barrels of oil equivalent in the second quarter of 2017, but stripped of the extra Bashneft barrels, Rosneft's upstream output was only marginally up in Q2 from last year. 

With Urals oil prices averaging $49/barrel in Q2 (vs $44/b in Q2 last year), Rosneft's earnings before interest, tax, depreciation and amortisation was up 1.4% year-on-year to $5.4 billion. On the other hand, the EBITDA margin has been declining (22% in Q2-17 vs 28% in Q2-16), and might continue to decline if the oil price remains stable but costs keep rising.

A large non-cash FX gain might have lifted net income in Q2, but net earnings are likely to be back to $0.5 billion both in Q3 and Q4 on high financial and FX costs and various adjustments.

Rosneft keeps adding new debt, with many projects on the go. For now, Rosneft's creditors seem relatively relaxed and willing to extend loans to what they perceive to be a quasi-sovereign borrower. 

A more detailed look at the results (per barrel of oil output) show, however, that equity investors are left with little if any real cash on a quarterly basis.

For all its size and ambition, Rosneft is essentially an upstream company with relatively little value added by its downstream and marketing operations. The gross revenues per barrel of output are only marginally higher than the price of Urals oil. 

Rosneft's revenues and EBITDA per barrel of oil output, USD per boe 

x Source: www.rosneft.ru, author's estimates

A distinct feature of the mainly upstream operations is their low costs. 

Rosneft spends around $7/barrel of output on lifting costs and refining, some $7/barrel more to get the oil transported, which means $14/barrel in operating costs plus some $8/barrel on oil re-sale operations. The total taxes (MET and export duties) were $25/barrel or roughly half of gross Q2 revenues. 

That leaves Rosneft with $13-$14/barrel in EBITDA, which – due to taxation – should remain relatively stable if the oil price fluctuates in a $45-$65/barrel range.

Rosneft's cash flow per barrel of output, USD per boe

x
 Source: www.rosneft.ru, author's estimates

The problem, however, is that after paying cash income tax ($1/boe) and making working capital commitments – another $1-2/boe as business continues to expand, Rosneft's has only just enough to cover cash capex ($8-$9/boe) and pay cash interest on its debt ($2/boe).

Such a business model might roll on for a while, but capex is likely to become more expensive as Rosneft's fields mature, and Rosneft's expansionist ambitions are unlikely to moderate even though oil prices might stay stuck in the current range for a while.

While Rosneft's creditors have the oil output and the government's implicit guarantees to fall back on, shareholders might be less happy if Rosneft finds it difficult to come up with cash to pay the decent dividends it has promised. 


— Edited by John Acher


Nadia Kazakova is a Russian oil and gas specialist

1y
Blange Blange
Very well written, thank you
1y
fxtime fxtime
Hmmm free cashflow declining and cash capex accelerating ! Great article as usual Nadia. :-)
1y
Nadia Kazakova Nadia Kazakova
Thank you. I would also add that along with cash flow risks, there are significant political risks, something to watch out for over the next six months or so.

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