PGNiG has reached an agreement with Gazprom on gas prices, daily Rzeczpospolita said citing its own findings. Details of the deal to cut the price of imported natural gas from Russia under a long-term contract signed in 1996 will be announced later today, the newspaper reports, citing people close to Poland’s Treasury Ministry and PGNiG-Gazprom talks (no individuals named). According to Rzeczpospolita, the new gas price will be set close to the level paid by German customers (roughly US$ 80- 100/mcm, below that paid by PGNiG) while the pricing formula, now based on crude oil prices, will also be altered to include gas prices. In exchange, PGNiG will withdraw the arbitration case filed in Stockholm in February 2012.
This would clearly be a very positive development for the investment case. If PGNiG does indeed start to pay a price similar to that of German customers going forward (and domestic tariffs remain unchanged) we calculate this would translate into windfall gains of roughly PLN 2.2bn for 2013 (some 26% of 2013F EBITDA) and PLN 1.4bn (some 15% of 2014F EBITDA) for 2014. As we assume full liberalization in 2015, earnings in 2015 and beyond will be unaffected. We estimate the windfall gains in 2013 and 2014 would correspond to a PLN 0.4 per share or 10% increase in our fair value estimate. Moreover, if the price cut was applied retrospectively (as in the case of E.ON), the upside would be even higher.
If, for example, the price cut was also applied for 2012, PGNiG could benefit by a further PLN 2.9bn (or PLN 0.36 per share). Even if the agreement is confirmed either by the companies or government officials today, one key question remains unanswered: in what way and how fast could the regulator act? In our view, the regulator would be unlikely to rest on its laurels and we have little doubt it would cut domestic tariffs significantly, if not cutting them back to a level which essentially leaves no profits for PGNiG. Hence, fertilizers may be a better play on this latest news than PGNiG itself. Nevertheless, on balance, the market reaction is likely to be positive for PGNiG in today’s trading.