Low oil prices continue to burden NIS in H1 2015

In the first half of 2015 NIS realized profit of RSD 5 billion, a drop of 71% compared to the same period of 2014. However, this result was due to a significant loss in the first quarter, as in the second was achieved net income of 9.6 billion, an increase of 15%. EBITDA (Earnings before interest, taxes, depreciation and amortization), declined by 32% to 21 billion dinars in 1H 2015 vs. 1H 2014, but in 2Q almost doubled compared to 1Q 7,2 bn RSD, thanks to savings and operating efficiency. Decline in total revenues (-16%) to 103.4 billion dinars for 6M 2015 and for 2Q to 57bn from 66bn dinars in 2Q 2014 are worry. The reasons for this lie in the same factors as for the 1Q 2015 fall - lower oil prices, which offset the increase in turnover, as well as foreign exchange losses. Although dinar / dollar situation in the second quarter of the year improved and was seen a stabilization, a huge loss in the first quarter was not compensated, thus this position remain negative in 6M 2015.

The production of oil and gas in observing period fell 5%, but was higher than the plan by 1%. According to the same plan, NIS expects investments to be about 38 billion, while the first estimate was around 44 billion dinars. In the first 6M 2015, CAPEX amounted to just over 12 billion dinars, which shows that in the second half of the year NIS will give significantly more attention to this factor. Therefore, there is a significant risk for this plan to become a reality, as management said itself. The decline in production, as the most profitable segment of the company is a concern, especially taking into account that it is very realistic that this situation will continue in the future, because of the old wells and sites, and still low crude oil prices making investments irrational. However, NIS is turning to processing, which is currently at about 60% of full capacity (maximum volume processing is around 4-4.5 million tons per year), which will mostly contribute to efficiency, cost savings and growth in profit margins.

Another problem is the debt of public enterprises, which also leads to a slowdown of investments, and therefore the disposal of profits and greater profitability of NIS. Here it should be noted that EBITDA margin still remains very good, at over 20%, above the industry average in the Balkan region of about 19%. The debts of JAT were collected, which caused a huge increase in operating cash flow in 6M 2015 (which was done and seen in 3M 2015), while the most important problem and the risk of investing in this company remains receivables from Srbijagas and Petrohemija. Together, the total debt is around 39-40 billion dinars. The Srbijagas owes 26 while Petrohemija owes 13 billion dinars. NIS expects to charge its debts on the basis of dividend it gives to the state. It made a deal with the government, so at the end of 2015, the company should obtain 2.1 billion dinars on the basis of dividends attributable to the state of Serbia (as a shareholder with 30% stake), as well as the rest of up to 5 billion on the basis of the debt, so that the claims can be collected as soon as possible. This is certainly a positive step, but still takes a lot of time for repayment of the entire debt if it goes at this rate.

As for dividends, it was announced that the payment could be at the end of August. To recall, maintaining dividend ratio of 25%, NIS will pay gross dividend for 2014 of 46.8 dinars per share. The cut-off date was Jun 13 2015.

NIS a.d. Novi Sad

JP Srbijagas Novi Sad

HIP-Petrohemija a.d. Pančevo

NIS