Russian Oil and Gas. May 2020 - More Pain, Then More Gain
Even though Brent spot prices rebounded to $25/bbl recently, we have become more cautious on the near-term outlook for the oil sector, which finds itself in the middle of an unprecedented crisis and faces an extremely bumpy couple of months. Oil prices could test new lows given the significant oversupply and rapidly dwindling available storage. Although this situation is set to inflict short-term pain, we think it could be beneficial for low-cost producers (including Russian companies) in the medium term. We anticipate mixed developments in the sector that on balance do not considerably change our valuations for the companies, while the strong share performance (up 50% on average from mid-March lows) limits the upside. We downgrade Rosneft (to SELL), Gazprom Neft (SELL), Novatek (HOLD), and Lukoil (HOLD), while keeping only Gazprom and Tatneft at BUY. > The new OPEC+ deal kicked in on May 1. We expect strong compliance from Russia's oil producers, while the government recently confirmed a pro rata approach to the cuts. We expect Russian oil output to slide 8% this year and local producers to prudently manage this, mainly via brownfields. > We expect spot oil prices to remain under pressure in 2Q20, as the market remains oversupplied and storage is scarce. We believe this heralds accelerated output cuts in the sector, with further short-term pain for high-cost and leveraged producers. But with forced production and capex cuts, we think oil prices should recover faster in the medium term. We lower our average Brent assumption for 2020 by 13% to $30/bbl but keep our forecasts for 2021-22 unchanged.> Saudi Arabia's pricing approach, including the significant discounts announced for April-May, is mainly an attempt to stay competitive given the market contango. We now have a more positive view on Urals pricing, which has recently closed the gap with Brent spot.> We expect Russian refineries to benefit from a recovery in fuel oil cracks, while domestic pricing regulation should also support earnings. We think a significant margin shift from upstream to downstream in 2Q-3Q20 should encourage oil companies to maximize refining throughput in the near term.> We estimate that the domestic oil sector will cut capex by at least 25-30% this year. Upstream portfolios will require much less maintenance and greenfield capex given that the OPEC+ cuts will last for two years. Nevertheless, sector FCF and dividend yields will drop to single digits this year.
Gazprom Neft PJSC is vertically integrated oil company operating in the Russian Federation, CIS and internationally. Co.'s principal activities include exploration, production and development of crude oil and gas, production of refined petroleum products and distribution and market ing operations through its retail outlets. Co.'s Upstream segment includes the exploration, development and production of crude oil and natural gas (including joint ventures results), oil field services. Co.'s Downstream segment processes crude into refined products and purchases and sells and transports crude and refined petroleum products (refining and marketing).
PJSC Gazprom is a gas company based in Russia. Co.'s principal activity is the sale of gas. Co. is also involved in other types of activities which include leasing of assets, gas transportation and storage services, sale of gas condensate and refined products. Co. and its subsidiaries and associates operates gas pipelines systems in Russia. Co. is responsible for substantially all gas production and high pressure gas transportation in the Russian Federation. Co. is also a major exporter of gas to European countries. Co. is directly involved in exploration and drilling for hydrocarbons, production of gas and other hydrocarbons and domestic and export sale of gas and other hydrocarbons.
Novatek is an independent gas producer and natural gas producer in Russia. Co. is engaged in the exploration, production, and processing of natural gas and liquid hydrocarbons. Co.'s upstream activities are concentrated in the Yamal-Nenets region, which is a natural gas producing area and accounts for a significant part of Russia's natural gas production. Co.'s three core fields are located in the regions of Yurkharovskoye, East Tarkosalinskoye and Khancheyskoye. Co. maintains natural gas reserves of approximately 1,144 bcm. Co.'s total net proved reserves totals around 8,088 million barrels of oil equivalent (boe).
PJSC Lukoil is a vertically-integrated oil company engaged in the exploration and production of crude oil and natural gas. Co. is engaged in all main sectors of the modern oil business including supplies, refining, marketing, transportation, petrochemicals and oil-related activities. Co.'s operations are divided into five business segments: Exploration and Production; Refining, Marketing and Distribution; Chemicals; Power Generation and Other Business Segments. Co. owns and operates refineries in Bulgaria (LUKOIL Neftochim Bourgas AD) and Romania (Petrotel-LUKOIL).
OJSC OC Rosneft is a vertically-integrated Russian oil and gas company with upstream and downstream operations in each of Russia's oil-producing regions. Headquartered in Moscow, Co. operates ten oil and gas producing enterprises across Russia and is involved in over ten exploration projects. In addition to its upstream operations, Co. also owns two refineries, which have a combined capacity of 10 million tons per year, as well as four main oil export terminals and a nationwide network of over 600 service stations. Co.'s downstream operations consist of its crude oil export structure, refining operations and nationwide network of marketing subsidiaries.
Tatneft PJSC and its subsidiaries are engaged in crude oil exploration, development and production principally in the Republic of Tatarstan, Russia. Co. is a holding structure, which incorporates oil and gas production boards, crude oil and gas refining companies, as well as enterprises and servicing works selling the crude oil and also the products of crude oil and gas refining and petrochemical products. In addition to this, Co. is also participating in the banking and insurance activities. Co.'s operations are divided into the following main segments: Exploration and Production; Refining and Marketing; and Petrochemicals.
Transneft is an oil pipeline group based in the Russian Federation. Co. and its subsidiaries operate a crude oil pipeline system totalling 50,142 km. Co. transport millions of tons of crude oil to domestic and export markets. Co. produces a substantial majority of the crude oil in the territory of the Russian Federation. In addition, Co., through Group Transnefteproduct operates an oil products pipeline system in the Russian Federation and in the Republics of Belarus and Ukraine totalling 18,746 km. Through its associate OOO LatRosTrans, Co. operates an interconnected system in the Latvian Republic.
Sberbank CIB Investment Research is a research firm offering equity, fixed income, economics, and strategy research. It covers analysis on all aspects of Russia’s capital markets, issues and industries. The firm analyzes trends in Russia and combines local knowledge with a global perspective. It processes macroeconomic data, market and company-specific news, stock quotes and other information for providing research reports. The firm provides details and latest prices on the most traded names and most traded paper on all segments Russian market. In strategy research, it provides thematic research, tips and descriptions of the methodology used to evaluate companies.
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