Rosneft: Arctic ambition (stays BUY)

We have added the value of Vostok Oil (USD 2.1/GDR) to our Rosneft price target (PT), which is now USD 8.0/GDR, following management’s presentation on the strategy for Vostok Oil at the end of 2020. On paper, assets that could produce c.115mt per year (50% of Rosneft’s current overall production) and enjoy large-scale government support (including zero MET during the first 16 years of production) should be worth considerably more, in our view. However, we use a 15% discount rate and apply an additional 50% haircut to reflect a number of risks. In particular, we note the limited geological studies, with only 13 wells drilled at the core Payakha cluster, the lack of sufficient infrastructure, and possible logistical bottlenecks, including in drilling operations. As Rosneft brings more strategic investors into the project and makes more operational progress, Vostok Oil’s risk profile should change, affecting its valuation positively. We expect this project to be one of the key drivers for Rosneft’s shares in the medium term, although the most important question for the minority shareholders, in our view, is to what extent the value created at Vostok Oil might be shared with them, rather than re-invested into high-cost projects with unclear economics (e.g., the Far East Petrochemicals project). We maintain our BUY on the stock.