Incentives, incentives, incentives. For long-time readers of our daily articles, we have consistently emphasized how important it is to look at the incentives of all the oil producers. As Charlie Munger famously put it:
Russian President Vladimir Putin came out yesterday and said, "Russia is ready to freeze production at current levels." This statement solidifies where Russia stands on the current OPEC deal. Although it's not a cut, we think Saudi Arabia wanted to see Russia stand firm on a production freeze. What's interesting about Putin's statement is what Russia is planning to do with its Rosneft (OTC:RNFTF) stake.
For those who don't know, Rosneft is a Russian state majority-owned integrated oil company that produces 4.151 million b/d of oil and liquids and 5.217 million boe/d of hydrocarbon. It is by far one of the largest oil companies in the world, and over 69.50% of the company is owned by the Russian government.
On November 7, Russia published a government decree announcing the sale of a 19.5% stake in Rosneft. The government is currently seeking 748 billion rubles, and the proceeds are expected to be used to plug the budget gap of 1 trillion rubles. Proceeds so far this year from the disposition of other assets have totaled 382 billion rubles, so the Rosneft sale would fill the gap. The buyer of the shares will be Rosneft itself, and the company is expected to resell the shares back to the public in early 2017.
This deal comes at a time when Russia's own budgetary needs have come under pressure. The disposition of stakes in state-controlled companies and other tactful strategies that stopped the bleeding from its foreign reserve at the end of 2014 have allowed Russia to survive the severe oil downturn. With the imminent Rosneft stake sale at hand, the Russians are in line with the Saudis for higher oil prices. Watching the incentives of these countries is particularly important, as they signal the events that will unfold.
Similar to the Russians, the Saudis are also preparing their own IPO of the state-controlled oil company, Saudi Aramco. In the case of Aramco, the valuation difference is quite significant. Aramco is estimated to be $2 trillion (or that's what Saudi needs it to be for the 2030 vision to work), and the IPO is slated for the first half of 2018. Similar to how the Russians wants to see a recovery in oil prices, the success of the Aramco IPO will also be hinged on investor sentiment. Why else do you think the Russian government didn't just turn directly to investors to sell the 19.5% stake? Why did it sell to Rosneft first and then have Rosneft sell it back to investors later?
Investors remain skeptical of a prolonged oil price recovery, and sell-side research updated today illustrated the current skeptical sentiment. Other than Goldman Sachs, which raised its oil price outlook, every large sell-side bank report we read today remained skeptical. This is certainly positive for investors who are contrarians, as it presents a good opportunity to take advantage of the skepticism.
With Putin's support of the OPEC deal and its incentives aligned (e.g., selling the Rosneft stake), we see higher oil prices in both the near term and over the next 18 months. Following an approved OPEC deal, we should see oil prices quickly move over $50 and into $60 by year end. A sentiment shift will start to take place, and 2017 could prove to be a golden period to be an energy investor.
We updated our long oil thesis yesterday in our weekly oil markets outlook to premium subscribers. If you are interested in reading it, please sign up here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.