Risk And Reward In Russian Energy Resurgence By Q2 2015

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Includes: OGZPY, RNFTF
by: Albert Goldson

Summary

Russian oil sector recovery to be sharper than most oil-producing when Western sanctions are eased or lifted.

Bottom already reached for oil prices with gradual 1Q2015 recovery as surplus oil supplies are drawn down.

An oil price recovery to about $100/bbl by 2Q2015 on tighter oil supplies and growing world energy demand.

The brutal oil price meltdown and anticipated continued low prices for the upcoming months have forced the temporary mothballing of multi-billion dollar energy projects and an overall industry wide retrenchment.

According to the Financial Times article entitled "Blow for Kiev as Chevron (NYSE:CVX) quits shale gas project" dated December 16, Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) and Chevron, pulled out of their shale gas exploration deals in Ukraine which both signed only last year. This means that Ukraine will continue to be totally dependent on Russia for its energy needs. As its sole source supplier, Ukraine is essentially Russia's cash cow with respect to oil revenues.

This places Russian energy firms, specifically OAO Rosneft (OTCPK:RNFTF) and OAO Gazprom (OTCPK:OGZPY), in a favorable position once world surplus oil inventories are drawn down and accelerated by an improved world economy by 2Q2015. Additionally, many major Western energy firms have collaborative arrangements with Russia's state-owned energy firms. According to the WSJ article dated December 17, "Ruble's Skid Looms Over European Firms", some Western energy firms with substantial investments in Russia are as follows:

  • BP PLC (NYSE:BP) which owns about 20% of Russia's state firm OAO Rosfnet and,
  • Royal Dutch Shell PLC, which owns 27% of a natural gas project on Sakhalin Island and 50% of Salym development that produces oil.

These and other Western energy firms are also "feeling the pain" of depressed oil prices and the deleterious impact of sanctions on the ruble.

What does this mean for investors? As stated in my earlier SA article "Buying Opportunities During the Russian Recession" on December 9, 2014, current depressed prices represent an excellent buying opportunity. The Russian recovery will be sharper than for most other oil-producing countries and will occur in three stages.

  1. The first is the eventual lifting or easing of sanctions that will stabilize the ruble and provide Russia with access to capital markets to service their debts.
  2. The second will be lower oil inventories that will raise oil prices even with flat demand.
  3. The third will be increased demand, even albeit modest, that will raise oil prices further.

As a cautionary note with respect to risk, Russia's economy is certainly not looking in the abyss, however it's near enough to see the edge. President Putin can still resort to two politically unpalatable options to avoid such a disaster. The first is to continue drawing down on his substantial foreign reserves. The second is to seek relief from the IMF. The former reduces Russia's financial cushion and the latter is political suicide because Putin insists on a strong, independent Russia that does not require Western economic assistance.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has 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.

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