It may take years for the oil market to right itself after the devastating selloff last year, but value investors with time on their hands might want to have a look at Russia’s oil assets.
The collapse in oil prices has devastated the country and caused a serious short squeeze on dollar borrowers that has sent the currency tumbling. Stocks in Russia are now dirt cheap and oil and gas producers are priced more cheaply than anywhere else in the world.
Share prices of three of the biggest energy producers in Russia – Gazprom (OTCPK:OGZPY), Rosneft (OTC:RNGZY) and Lukoil (OTCPK:LUKOY), all of which can be bought in New York as ADRs – are down by roughly three-quarters or more from their 52-week highs. Capital flight has put a serious damper on capital spending plans and reduces the outlook for production over the next few years. However, these companies look very cheap on a historical earnings basis.
State-controlled Gazprom is trading at 2 times 2008 earnings according to Thomson Reuters. Rosneft is trading at 3 times earnings and Lukoil is trading at just over 2 times earnings from last year. The market is dirt cheap and offers investors access to the world’s largest gas reserves in the world, not to mention a very large stream of global oil production.
Investors have sold out of Russia due to a one-way bet on ruble devaluation after the bank took the currency down stepwise in 20 mini-devaluations since last August. The currency is off by roughly 30% versus the dollar over the past six months but is stabilizing.
The decision by authorities to defend a slow depreciation of the ruble in the face of capital flight caused investors, even domestic ones, to sell out of Russia to avoid currency losses thus exacerbating the capital flight. This process also caused a slow bloodletting of the country’s foreign exchange reserves, which fell by roughly 35% or $200-billion.
The currency has stabilized in recent weeks and the central bank has successfully defended the lower value it has set for the ruble, although futures markets are still predicting an 18% decline this year.
Ultimately, the value of the currency hinges on oil prices staying aloft. It boils down to a gamble for investors trolling for the bottom, but one where the odds are increasingly improving.