Russian Oil & Gas: Ready for the oil price war? (Gazprom, Lukoil, Novatek, Rosneft, Surgutneftegas and Tatneft)

While there is little certainty over how far oil prices can drop and for how many months, we remain convinced that extrapolating the lower profits as a result of a unique combination of adverse factors will not reflect the true earnings potential of the Russian oil & gas companies. We see a USD 30/bl oil price as unsustainable in the medium term, as not only will this not cover the marginal cost of supply of individual producers globally, but it will also prevent the governments of key oil-producing nations from fulfilling their social commitments, leading to bigger political consequences. We estimate that the almost 50% correction in the Russian oil & gas stocks since the start of this year is excessive, as the sector FCF has declined only c.32%, on our estimates, suggesting that stocks are now pricing in oil prices remaining below USD 30/bl for an indefinite period of time. We view Tatneft and Lukoil as the most oversold stocks, based on our sensitivity analysis, while Rosneft and Novatek still have some downside, in our worst-case scenario.