Russian Oil and Gas. February 2018 - Six Easy Pieces
> As the government has succeeded in stabilizing the ruble rate, the earnings of Russian energy producers - and in many cases, their dividends too - have become much more sensitive to the oil price. This renders the 6% average yield from the sector less appealing, except to oil price bulls. We prefer companies that can yield far above the average now or in the longer term. The unresponsive ruble removes an important hedging feature from Surgutneftegaz preferred shares, and we downgrade them to a HOLD. Transneft's ruble earnings, meanwhile, become more attractive to foreign investors.> Strong FCF generation, including contributions from JVs, will afford Gazprom Neft the ability to double its dividend payout, something that may start with the 2018 final dividend. The company should become a rare Russian energy story with sagging EBITDA but growing net income and cash flows.
> Bashneft is more likely than not to continue paying out 50% of net income as dividends. This would make its more liquid preferred shares the highest yielders in our space. We remove the name from under review with a BUY on the prefs.
> Next year promises to be a blockbuster one for Novatek, with several major events converging both in the domestic business and in LNG projects. The market will be pricing them into the shares this year. Our increased fair-value estimate for the stock still leaves out what could be the company's most profitable project - Arctic LNG-2. We also estimate that Alrosa's gas assets, which will be auctioned on February 19, are worth roughly double their starting price to Novatek.
> We retain an opportunistic BUY on Gazprom - for now. Its operating earnings will keep on rising in 2018, putting the 2016 trough far behind. However, we expect its realized prices to cease growing soon enough, due to the implicit price cap imposed by global LNG. The company's growing earnings might also lure the management into hiking capex guidance.
> We are now factoring in $60/bbl oil (from $50/bbl) and USD/RUB 60 (from 65) to our models and target prices. Rosneft's target price remains unchanged because we have incorporated higher capex, per company guidance. KazMunaiGas EP is due to delist in May, so we are dropping coverage.
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.
Surgutneftegaz is vertically integrated oil company based in Russia. Co.'s activities include prospecting and exploration of hydrocarbons, oil and oil and- gas fields development and construction; oil products and petrochemicals manufacturing and marketing; power generation; gas processing and gas products marketing. Co.'s operations expand beyond Western Siberia in 3 oil production centers, two of which, in Eastern Siberia and Timano- Pechora, are to be built up within the next 3 years. Co. operates in 16 constituent territories of the Russian Federation from Republic of Sakha (Yakutia) to Kaliningradskaya Oblast. Co.'s mineral resource base comprises 134 license areas of 120,000 sq. km.
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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