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Norvik Research 22.08.2016

22/08/2016 16:19

Global developments

A fresh signal from a senior Fed official about forthcoming policy tightening in the US has boosted the dollar. Stanley Fischer, Fed’s Vice Chairman, said yesterday that the US economy is “close to meeting the central bank’s targets”. Even though Fischer did not elaborate on interest rates outlook, the market has interpreted his comments, made less than a week before Chair Yellen’s speech in Jackson Hole on 26 August, as further evidence that Fed is laying ground for a rate hike later this year. The dollar index is up 0.3% on Friday’s close, near its weekly highs. 10-year US Treasury yields rose 1.5 bp to 1.60%, the highest level in 2 months. S&P futures are up 0.1% after the benchmark closed 0.1% down on Friday; the Euro Stoxx 600 is up 0.8%. Nikkei 225 is up 0.3% with the yen depreciating 0.5% after BoJ hinted at possible monetary easing. Chinese CSI 300 is down 0.8%. Bloomberg commodity index is falling 0.7%, reflecting the dollar’s strength.

Oil prices are declining amid projected supply increases by Iraq and increasing drilling activity in the US. Iraq, the second-largest OPEC producer, is reportedly planning a 5% boost (by 150,000 bbl/day) in oil exports from three oil fields in the North. Baker Hughes reported the number of active rotary rigs in US up by 10 to 406 in the previous week (eighth consecutive weekly increase). Brent prices are down 2.7% today to $49.5/bbl.

Russia and CIS area developments and market colour

Russia’s Finance Ministry is reluctant to offer an extension of subordinated loans to commercial banks. According to a report in today’s Vedomosti daily, MinFin aims to recover those deposits that had not been extended already (e.g. RUB 500bn loan to Sberbank) or converted into preferred shares (VTB, Rosselkhoz, Gazprombank). This decision would affect the Russian Standard bank (that got a RUB 5bn loan from VEB) most.

The rouble is down 0.6% against the dollar today at 64.4, in line with lower oil prices. OFZ yields dynamics is mixed today after Friday’s slow session. CIS area sovereign Eurobonds are broadly weaker today. Yields on Russia’s and Kazakhstan’s longer-term bonds are 1 and 2 bps wider. Ukraine’s longer-term sovereign bond yields are 3-5 bps wider while Ukraine 19 is 9 bps tighter after widening 39 bps on Friday. Azerbaijan 24 is 1 bps wider, while yields on both Belarus 18 and Armenia 25 are 2 bps lower.

Corporate news

TMK's financial results improved considerably in Q2, after exceptionally weak Q1. This was driven by a rebound in oil prices and stabilization of the rouble. Revenue was $853 mn, 27% lower YoY and 11% higher QoQ. EBITDA recovered strongly to $155 mn (-7% YoY and +68% QoQ) reaching the highest level since Q2 2015, while EBITDA margin was at a record level of 18.2% (Q2 2015: 14.4%). The America's segment remained a key area of weakness with negative EBITDA of $22 mn (Q1 2016: negative $31 mn), even though EBITDA margin improved to -30%, from -48% in Q1 2016. Further improvement is likely in H2 on higher drilling activity in the North America.

Adjusted cash from operations was supported by higher sales and release of working capital, increasing to $158 mn after negative $15 mn in Q1 2016. Free cash flow rose to $168 mn. We point out to deterioration of the situation with liquidity: TMK will have to repay $942 mn of debt in the next 12 months, while it only has $312 mn of cash and another $352 mn in unutilized credit facilities. Net debt/EBITDA slightly improved to 5.2x from 5.3x in Q1 2016, EBITDA/Interest expense ratio increased to 1.9x vs 1.8x in Q1 2016, although the leverage still remains worrisomely high.

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