Serbia is currently facing a critical decision regarding the future of NIS, the country’s largest oil and gas company, which is jointly owned by the Serbian government and the Russian energy giant Gazpromneft. Following the imposition of new U.S. sanctions targeting Russian entities in the oil sector, NIS’s position has become increasingly precarious. While there are two main options on the table—either buying out the Russian share or proceeding with nationalization (i.e., confiscation of the Russian property)—it appears that nationalization has gained significant traction. This is largely due to the recent statement by Serbia’s president that the “ownership transformation model must be approved by Washington,” which many interpret as a signal that the U.S. expects Serbia to appropriate the Russian share without compensation.
The context of the sanctions
The new U.S. sanctions primarily target companies and individuals connected to financing Russia’s war in Ukraine, and NIS, being linked to Gazpromneft, is included in this broader list. While the sanctions are not directly aimed at NIS, they expose the company to the risk of “secondary sanctions” due to its ties to Gazpromneft, especially if NIS continues to pay dividends to its Russian parent company. This creates a dilemma for Serbia, which now faces potential economic repercussions if NIS is implicated in financing the war. Thus, Serbia must resolve the issue of Russia’s stake in NIS quickly to avoid the risk of halting operations at the refinery, with all the associated consequences.
The two options: Buyout vs. nationalization
Serbia’s decision hinges on two possible outcomes:
- Buyout of the Russian share: This option involves purchasing the 56% stake held by Russia in NIS. The current market capitalization of NIS is approximately €1.1 billion, which may represent its actual value. The valuation of the company is complex, as it involves several segments: oil and gas production (upstream), the refinery, retail, petrochemicals, and the stake in the TE-TO Pancevo thermal power plant.
- Nationalization: The alternative option is nationalization, where Serbia could seize the Russian share without compensating Russia. This scenario is gaining momentum, especially considering the political and economic dynamics at play. Given the geopolitical context and Serbia’s relationship with the West, nationalization could align with the U.S. push to prevent Russia from benefiting from NIS and its role in financing the war.
Valuing NIS
To assess the viability of these options, a detailed valuation of NIS is essential. There are several approaches to valuing an oil company, such as the Sum of The Parts (SOTP) method, Discounted Cash Flow (DCF), and Dividend Discount Model (DDM). These methods involve estimating future earnings, cash flows, and dividends, and discounting them to their present value.
Key factors influencing NIS’s valuation include:
- Declining oil and gas production: NIS faces challenges with declining production in its upstream segment, which is critical for the company’s profitability. Although there are indications that production could stabilize or even slightly increase in 2025, the long-term outlook is uncertain. A stagnating or declining production could hurt the company’s profitability, particularly if global oil prices remain subdued.
- Refinery margins: The refinery business is less profitable than it has been in the past, especially after the boom of 2022. Refining margins have returned to more historical levels, which may reduce the profitability of the refinery segment.
- Petrochemicals and retail: The petrochemicals division is facing challenges due to unfavorable global margins, while the retail business is profitable but insufficient to offset the refinery’s weak margins.
Taking all of these factors into account, it is unlikely that NIS will deliver significant profits or free cash flows in the coming years. Projections suggest that annual net profits may not exceed RSD 20-22 billion, with possible fluctuations due to changes in oil prices and refinery margins.
Dividend yield and future projections
NIS operates with a rigid dividend policy, paying out 25% of its accounting profit. For the next five years, estimated dividends could range between RSD 4 billion and RSD 5.4 billion annually, translating to a gross dividend yield of around 3-4%. When discounted using an appropriate cost of capital (WACC), the present value of future dividends is much lower—around RSD 238 per share.
When combining the DCF and DDM models, the final valuation of NIS suggests a per-share value of approximately RSD 598, or €829 million for the entire company. Given that the Russian share represents 56% of the company, its value is roughly €464 million. However, the market price currently stands at €1.1 billion, which implies that the Serbian government would need to raise additional funds to purchase the Russian share if it chooses the buyout route.
Comparative valuation
Comparing NIS to similar integrated oil companies like OMV, MOL, Shell, and Exxon, NIS is trading at similar valuation multiples. In terms of the price-to-earnings (PE) ratio for 2025, NIS is at 7.8x, which is on par with the industry average. However, its EV/EBITDA multiple (3.3x) is slightly below the industry average of 3.6x. This suggests that NIS is priced similarly to its peers, but it offers a lower dividend yield compared to the group, which could be a concern for minority shareholders.
Nationalization: A likely outcome
Given the current geopolitical situation and Serbia’s diplomatic ties, nationalization is becoming an increasingly likely scenario. Purchasing the Russian share at a reasonable price could be seen as indirectly aiding Russia in financing the war, which would not be acceptable to the U.S. or the broader international community. Moreover, the complexity of transferring funds to Russia, a country heavily sanctioned, further complicates the buyout option.
If nationalization occurs, Serbia would likely take control of NIS, either temporarily or permanently. There is the possibility that Serbia could later sell part of the company to a Western strategic partner, which could lead to a more transparent and efficient operation. However, if the government retains full control, NIS could face operational challenges, as state management has struggled in the past with other state-owned enterprises.
Conclusion
The future of NIS is uncertain, with nationalization emerging as the most probable outcome in the context of international pressure and economic challenges. While the company’s valuation remains relatively stable, its future profitability and dividend potential are questionable. The Serbian government will need to navigate these challenges carefully, balancing its relationship with Russia and the West while ensuring the long-term viability of NIS and the country’s energy sector.