Description:
OAO NOVATEK (Novatek) was established in 1994; its headquarters are based in Tarko-Sale, Yamalo-Nenets Autonomous Okrug, Russia. The company’s stock has been listed on the London Stock Exchange since 2005.
Novatek is Russia’s largest independent gas producer (the 2nd largest after the state-controlled Gazprom) with total proved reserves of 9,393 MBOE and a reserve replacement ratio (RRR) of 444%. The company’s upstream activities are in the Yamalo-Nenets Autonomous region. The field is located to the north-east of the Ural Mountains in a region with the world’s largest natural gas reserves. The present production is currently absorbed by both Russian consumers (gas from the Yamal region meets 84% of Russian demand) and international clients (17% of the world’s demand is met with Yamal gas), and this ratio is expected to constantly increase over time.
Novatek is set to benefit more from higher gas demand than any other gas producer; however, depressed gas prices are likely to delay any immediate full-scale development of the field, and hence there is limited transition into the share price at present.
In the long-term, Novatek will benefit substantially from the Yamal LNG project, which it has invested an estimated USD 20 billion in to date. From this hub, the company expects to serve the Asian market, which lies outside Gazprom’s gas pipeline network. Development of the field contains some important execution risks, including Arctic conditions; however, the company’s efforts should be rewarded with annual production of about 1 MTPA of gas condensate and 15 MTPA of LNG projected by 2019. Novatek is the lowest cost gas producer globally, and its field benefits from a good geographical intersection between east and west.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- Novatek benefits from a good geographic location, hence it can serve both the European markets through Gazprom’s network as well as the Asian market with LNG,
- Novatek has decided to develop the high value added gas market segment,
- France’s Total took a 12% stake in Novatek in 2011. Total also controls a 20% stake in the construction of the gas liquefaction plant in the Yamal region,
- Novatek enjoy’s a ROC in excess of 30%,•11 Novatek’s production costs are amongst the lowest globally.
Weaknesses:
- Novatek’s fields are difficult to exploit (e.g. Arctic conditions),
- The relatively young company, created in 1994, runs a “one-field” strategy i.e. the principal asset of the company is the E&P license for the Yamal field,
- Although there is no direct ownership in Novatek by the Russian government, it’s feasible that political decisions could have negative longer-term ramifications for the well-being of the company,
- The tax stimulus offered by the government to start development of the difficult fields is of a temporary nature only,
- Although Novatek’s production costs are among the lowest globally, international competition for the Asian market will be harsh. This will impact longer-term gas prices and hence the company’s profitability.