Russian Oil Companies To Buy Right Now

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Includes: GZPFY, LUKOF, LUKOY, OCRNL, RNFTF, SGTPY
by: Aquarium Investments

Summary

Oil prices are still under pressure.

Many global energy companies are undervalued.

Russian energy companies are the best picks if you want to get exposure to energy stocks.

(Source: Wikicommons)

The collapse in oil prices along with sanctions has put the Russian economy under pressure. In the latest quarter, Russia's GDP fell 4.6%. Oil makes up around 15% of GDP and more than 50% of the budget revenues, and cheaper oil has led to increased budget deficit, which is expected to reach 3% next year.

Russian oil companies are also suffering from sanctions. All the technology transfers and cooperation between Russian and Western companies has stopped. In addition to that, they are effectively cut off from the western capital markets. Nevertheless, Russian energy companies look more attractive than their Western counterparts. As we have stated in the article on Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), big energy companies are in a much more favourable position to withstand the bear market in crude oil market, and boost their market share. The same is even more true for Russian energy companies as crude oil production in Russia is kept at the same level, while less effective market players quit the market.

Sanctions and the crash of oil prices have led to devaluation of the ruble. Since June 2014, when oil prices began its decline, the ruble has devalued by 45%. This is a major benefit to Russian oil companies as they earn dollars and their costs are in the local currency. The same logic applies to other commodity companies from emerging markets.

Oil production costs in Russian are among the lowest in the world. For example, Rosneft OJSC (OTCPK:RNFTF, OTC:OCRNL), which is the largest oil producer and exporter in Russia, has capital expenditure of $4.20 a barrel, a sixth of what Exxon Mobil spends. In 2014, Rosneft's capex was $14.1 billion, which was slightly lower than in previous years. Among Russian oil producers, only Lukoil spent more last year - $14.5 billion. Having low capital expenditures, Russian oil companies enjoy solid free cash flows. According to Goldman Sachs, Russian producers are generating free cash flows as if the price of crude was $100 a barrel.

As we have stated above, the Russian budget is highly dependent on oil revenues. Taxes are collected through production taxes and exports duties. The government planned to introduce the so-called "tax maneuver," under which production taxes would increase while export duties would be cut from 42% to 36% during the next three years. However, due to falling oil prices and sanctions, the budget is now under pressure and the government decided to postpone the cuts in export duties or cut it by 2-3pp. This measure could add up to 200 billion rubles ($3.2 billion) to the budget revenues.

On a fundamental basis, Russian companies are even more attractive than their US and European peers.

Name

Mkt Cap (mil, $)

P/E

P/B

ROE

Dvd Yld

Operating margin

YTD (%)

LUKOIL PJSC-ADR

$32,066

12.2

0.3

2.8

6.6

6.3

-6.4

ROSNEFT OAO

$43,955

9.8

0.9

9.0

3.2

14.3

32.9

GAZPROM NEFT-ADR

$11,427

4.8

0.6

13.5

5.4

19.6

6.9

NOVATEK OAO-GDR

$29,331

33.9

4.0

12.3

2.1

-5.2

21.9

SURGUTNEFTEG-ADR

$19,828

1.4

0.4

34.9

1.8

-4.2

30.6

BP PLC

$105,106

 

1.0

-5.3

6.9

-14.6

-8.2

ROYAL DUTCH SH-A

$171,546

12.6

1.0

7.4

7.0

4.7

-18.2

TOTAL SA

$121,772

34.1

1.2

3.4

5.5

10.3

4.3

EXXON MOBIL CORP

$330,637

14.1

1.9

13.4

3.6

6.6

-14.2

CHEVRON CORP

$166,985

12.9

1.1

7.9

4.8

-6.2

-20.9

Two biggest oil producers in Russia are Rosneft and Lukoil (OTCPK:LUKOY, OTC:LUKOF). Their free cash flow yield is more twice the rate of Royal Dutch Shell (RDS.A, RDS.B) and BP, according to research by Barclays.

Based on other metrics, Rosneft, Lukoil, Gazprom Neft (OTCQX:GZPFY) and Surgutneftegaz (OTCPK:SGTPY) beat their peers. What particularly stands out are low P/B ratios of the above-mentioned companies. With the exception of Novatek, the highest P/B ratio stands at 0.9 for Rosneft.

With regards to price performance, Russian companies have also shown better results year-to-date. For instance, Rosneft is up 32.9% YTD, Surgutneftegaz appreciated by 21.9%. Then goes Novatek; but this company has worse valuation metrics, and currently it is overvalued compared to its peers.

Conclusion

Based on the fact that Russian companies are in a better position due to weaker ruble and attractive valuation metrics, Rosneft, Lukoil and Surgutneftegaz are the best picks in the energy sector. It must be noted that their stock prices performance in the near term will also depend on crude prices, but in the medium term, when crude prices will recover, exposure on Russian energy sector will pay off.

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.

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