Strong dynamics in all financial parameters. Net profit growth of 49% yoy and strengthening EBITDA by 45% yoy in 2018 was the result of high oil prices (+ 32% yoy). The company also increased its physical sales of petroleum products (+ 6% yoy). Revenues reached 2489bn rub (+ 29% yoy). Despite the increase in tax expenses and expenses on the purchase of finished products, correlated with the rise in oil prices, operating income increased by 51% yoy to 457bn rubles. Free cash flow (FCF) increased 2.5 times to 162bn rubles. Adjusted EBITDA margin increased from 28.5% to 32.1%. The company's cash position strengthened significantly from 91bn rub to 248bn rubles. Net debt declined by 10% and the ratio of net debt to EBITDA narrowed from 1.2x to 0.7x.
The resource potential and the mitigation of OPEC + measures will be conducive to plans to increase oil production to 100mn tons. This year, Gazprom Neft, taking into account agreements with OPEC +, expects growth in oil production by 2%. Even in the case of a prolongation of the reduction, the company boldly declares its intention to achieve a production level of 100mn tons by 2020 at the current 69mn tons. In turn, we expect more slowed production growth. At the same time, we are optimistic about the resource potential of the company and exclude the possibility of a decrease in production, which was the main risk in the previous assessment. Taking into account the company's readiness to increase production, we raise our forecast to 86mn tons by 2025 or + 6.3% CAGR.
The oil price at 60/bbl is comfortable for the company. The company focuses on the level of $60/bbl, which, according to our estimates, implies the stability of financial performance with increased volatility in oil prices. Bloomberg consensus on oil for the next five years exceeds $60/bbl, and we do not expect a strong price drop in the forecast horizon. We expect revenue to be strengthened both due to optimal oil prices (> $60 bbl) and due to the increase in sales.
Gazprom Neft "promises" a substantial increase in dividends. Based on the statements of the management, we expect payment of about 38% of the profits attributable to shareholders (377bn rub), which will amount to 30.34rub/share and will exceed the dividend for 2017 by 102%. In the future, we also observe that if 35% of payments are maintained due to the progressive dynamics of earnings, the dividend per share will be higher.
Increasing 12M TP to 416rub/share, Buy recommendation. Our new target price is 416rub/share. The 24% growth potential is justified by a strong resource base and aggressive company policy regarding the growth of oil production, which against the backdrop of comfortable oil prices will contribute to an increase in free cash flow and together with the expectation of higher dividends in the short-term horizon justify our recommendation to Buy.
