OP to Recover in 2021 as Oil Prices Rebound
The author is an analyst of KB Securities. She can be reached at hyejung.jung@kbfg.com. -- Ed
4Q20 preliminary OP of KRW260.3bn (-38.1% YoY) falls short of consensus
— KOGAS reported 4Q20 preliminary consolidated revenue of KRW5.4tn (-21.8% YoY, +58.8% QoQ), OP of KRW260.3bn (-38.1% YoY, TTB QoQ), and NP (attributable to controlling interests) of KRW77bn (TTB YoY, TTB QoQ). OP fell short of our estimate by 32.6%, and consensus by 23.1%.
Sluggish results at overseas consolidated subsidiaries and impairment losses erode NP
— Standalone OP for 4Q20 contracted 32.6% YoY to KRW264.1bn. Standalone revenue fell 22.5% YoY to KRW5.2bn. Although LNG sales volume improved by 4.8% YoY (power generation +3.7% YoY, city gas +5.6% YoY), unit sales price declined (average LNG wholesale price -25.3% YoY) as lower oil prices were reflected. Meanwhile, full-year 2020 standalone OP contracted KRW236.2bn YoY to KRW950.5bn—reflecting a KRW117.2bn decline in guaranteed returns. Actual annual LNG sales volume amounted to 32.36mn tonnes, missing the target used to calculate supply costs (33.61mn tonnes) by 3.7%, which appears to have also weighed on OP.
— Consolidated subsidiaries posted 4Q20 OP of KRW388.9bn (-KRW92.6bn, -19.2% YoY). OP from the GLNG and Prelude projects in Australia declined by KRW44.5bn and KRW15.2bn, respectively. Despite increased output, lower unit sales prices upon weaker LNG prices depressed OP at the GLNG project. The Prelude project is believed to have resumed production in December after operations were suspended due to equipment malfunctions in February 2020. However, it should take time for utilization to normalize and the project to contribute meaningfully to earnings. Meanwhile, OP from the Badra project in Iraq improved by KRW38.4bn, but this was mostly offset by a KRW28.9bn decline in OP from the Zubair project.
— KOGAS reported non-operating losses of KRW190.4bn for 4Q20 and KRW1.2tn for 2020. The company booked substantial non-operating losses in 2020, as it had in the previous year, due to the recognition of impairment losses on overseas projects amid a decline in oil prices. Impairment losses of KRW461.7bn for the full year is KRW26bn higher than what it had been at end-2Q20, when GLNG and Prelude losses were booked, due to losses from the Horn River project in Canada.
OP to recover in 2021 as oil prices rebound
— Historically, OP and share price performance have been tightly correlated to oil prices. As such, the recent uptick in crude oil prices should bolster earnings and share performance.
— Higher oil prices should also bolster results at overseas consolidated subsidiaries over the near term. Not only should profitability for the GLNG project recover as LNG unit sales prices rebound, the Prelude project should also be able to turn a profit as operations have resumed. Dubai crude has been trending up, with average price rising 9.2% YoY to USD59.8/bbl in February.
— KOGAS plans to announce its hydrogen business roadmap in March. Disclosure of detailed investment plans for the business should bolster EV.