Ukraine’s Energy Ministry posted on its website on Dec. 26 a preliminary schedule to reduce gradually natural gas prices for industrial consumers. The 1Q14 decrease is scheduled for 10% qoq, reduced from the current benchmark level of UAH 3,459/tcm (about USD 422/tcm) to UAH 3,113/tcm (the price without VAT and transportation/distribution/supply charges). The 2Q14 price has been preliminarily set at UAH 2,752/tcm, 3Q14 price at UAH 2,602/tcm and 4Q14 price at UAH 2,502/tcm.
The gas price cut became possible after Naftogaz and Gazprom agreed to a USD 268.5/tcm gas pricefor Ukraine, which will possibly take effect in January 2014 and will have to be confirmed each quarter until 2019. The average price at which Ukraine imported gas in 11M13 was about USD 409/tcm.
Concord Capital comments on the news: As we wrote before, the main victims of the benchmark gas price decline for industrial consumers will be producers of Ukraine-sourced gas: the subsidiaries of JKX Oil & Gas (JKX PW) and Serinus Energy (SEN PW), as well as Regal Petroleum (RPT LN) and Cadogan Petroleum (CAD LN). Their first quarter gas netback will be only marginally affected, as the decline of gas price by UAH 346/tcm will be partially offset by an expected decrease in the production tax (which is linked to import gas prices) by about UAH 281/tcm (and about UAH 157/tcm for Regal). Therefore, the decline in their average netback from gas production will be only UAH 65/tcm (USD 8/tcm) in the first quarter of 2014 (and it will be USD 23/tcm for Regal). Though, with the subsequent decline in retail gas prices, producers’ average netback from gas produced in Ukraine will decline by USD 83/tcm yoy in 4Q13 (and by USD 98/tcm yoy for Regal).
The key winners of lower gas prices within our coverage universe will be metallurgical and iron ore companies, as well as sugar producers. The subsidiaries of Metinvest (METINV) consume about 1.5 bcm of gas annually and the 2014 discounts will enable Ukraine’s largest steel producer to save about USD 130 mln in costs (1.0% of its revenue), compared to 2013. Sugar maker Astarta (AST PW) consumed about 0.09 bcm of gas in 2012 and the gas discount will allow it to save about USD 9 mln in costs in 2014, or about 1.5% of its revenue. Iron ore miner Ferrexpo would gain about USD 19 mln in 2014 (1.2% of its revenue), thus enabling the company to report 4.3% higher EBITDA in the next year, compared to what we earlier projected.
We stress again that the discounts for Russian gas may turn out to be short-lived as they fully depend on the good will of Gazprom. Recall, Gazprom and Naftogaz will have to confirm the USD 268.5/tcm gas price each quarter, and failure to confirm the price by the 10th day of each quarter for whatever reason automatically cancels the discount. Therefore, we can be only be sure about gas prices for the first quarter of 2014. We will monitor how the discounted price for the second quarter will be confirmed to understand its sustainability.