UNPRF - Fortum Oyj: A Clear No Go

Summary

• A potential gas price cap could be the short-term solution.
• Looking at Uniper transaction and the latest development.
• Too many risks to consider and no guidance provided by the company. A current no go.

Here at the Lab, we extensively cover the European gas situation providing follow-up notes on the main companies involved such as E.ON ( OTCPK:EONGY ) and Engie ( OTCPK:ENGIY ). Even if it is the first time that we provide a specific update on Fortum Oyj ( FOJCF ), we already commented on the Finnish company in our recent publication on Uniper ( OTCPK:UNPRF ). To get acquainted with the story up to now, here is our previous analysis:

• (20th of July) Uniper: A Very Complicated Situation ;
• (25th of July) Uniper: Transaction Details Versus Market Expectations .

Fortum is a leading European utility company that engages its activities thanks to four main divisions: Generation, Russia, City and Consumer Solutions. The company is headquartered in Finland and was founded in 1998. Fortum's equity stake in Uniper was almost 80%. However, after the German government's capital increased, the Finnish public company drop to 56% of Uniper's equity stake.

Source: TIKR

As already mentioned, " Berlin will acquire 30% of Uniper with a bailout package of around €15 billion ". In our previous publication, we report that Uniper's liquidity drain was almost €50 million a day. However, with the current gas spot price, the numbers more than double. For this reason just yesterday, Uniper decide to withdraw €2 billion in credit facility with the support of the German state-owned bank called KfW, reaching the 9 billion supportive aid package. In addition, the German gas company has announced a new stabilization package of another €4 billion. As already anticipated, Fortum will not support any further financing to Uniper.

Source: Fortum half-year results

In the meantime, less gas is coming to Europe. Russian energy giant Gazprom informed Engie of a reduction in gas deliveries starting from Tuesday 30th of August. Gazprom's gas supplies to Europe had already substantially fallen since the start of the war in Ukraine with a recent monthly supply of around 1.5 terawatt hours. Moreover, Gazprom's plan is to interrupt supplies on the Nord Stream 1 gas pipeline to Germany from 31 August for three days of scheduled maintenance. Meanwhile, the proposal for a gas price ceiling supported by Italy seems to be losing momentum. From the EU Commission, Ursula Von der Leyen announced that on there, a new and efficient market model for energy will be implemented. . EU's intention is to untie the price of electricity from gas. There will be an extraordinary meeting of energy ministers in Prague on 9 September to discuss the emergency measures and the gas ceiling price. Belgium already positively announced that it is ready to collaborate with Italy and from our assessment even the German government seems to agree with the fact that the gas price cap could be the only solution to the current condition.

Source: Fortum half-year results

What's next for Fortum?

It's very hard to predict what the situation will be in the future. Our internal team has deeply analyzed Fortum's P&L and balance sheet even taking into consideration the latest company's hedging and the recent Uniper estimates. Financially speaking, we have decided to assign a neutral rating to Fortum cutting EPS estimated by almost 10% in our 2023/2024 numbers. We should note that Russia still accounts for almost 20% of the company's total EBITDA. Aside from the gas supply contracts, Fortum's assets in Russia include renewables power plants, fossil fuel generation plants, and equity investments (direct and indirect). In our estimates, we impaired all the Russian assets providing zero value. The Finnish State made a very clear announcement on the fact that companies should leave Russia as soon as possible and Fortum is owned by the Finnish government which has an equity stake of 50.76%.

On the positive side, there might be possible upside from a higher energy price given Fortum hedging levels (75% hedged for 2022 and 50% for 2023). However, risks are equally important and Fortum is facing:

• Gas interruption;
• Government intervention;
• FX development;
• Power and gas trading activities;
• Geopolitical uncertainties.

For further details see: