Review of the Russian Oil Stock Market in June

June saw month-on-month price increases for Urals (+7 percent) and Brent (+5 percent) blends, which climbed to $69 per barrel and $65 per barrel, respectively. Crude prices remain in the range of $65-70 per barrel, a level at which we expect them to remain for the near future.  Meanwhile the RTS Index fell 18 percent for the month, which we view as a downward correction of its 27 percent rally in May, when it outpaced the equity markets in Brazil, India and China. We see June’s downtrend in equities as a transitory “time out” for the Russian market, a pause before a new uptrend. It is worth noting here that the oil and gas sector contributes 60 percent to the overall capitalization of the Russian stock market; the stocks of Russian oil and gas majors trade on P/E at a 28 percent premium to international oil majors, and at a mere 2 percent discount to emerging market peers. In terms of EV/Reserves, Russian oil stocks trade at a 68 percent discount to international majors and at a 77 percent discount to EM peers. Consequently, the Russian energy sector remains attractive to investors.

Gazprom Neft’s stock was the sole market advancer in June, rising 12 percent, a movement that we attribute to market expectations. In particular, investors anticipate that Gazprom could transfer the licenses for the exploration and development of some greenfields on the Yamal Peninsula to its oil-producing subsidiary. With its late-June purchase of the 23.35 percent equity in Sibir Energy owned by Russian businessman Igor Kesaev, Gazprom Neft boosted its share in that company to a controlling stake (57.5 percent).  Sibir owns 50 percent of the Moscow Refinery, and Gazprom Neft’s additional share of the company could add 6m tons to its total refining capacity (a 14 percent increase). Moreover, some media sources indicate that Gazprom Neft could also acquire another mid-sized oil company, RussNeft. Such speculations has helped push up the price of Gazprom Neft’s stock.     

While Gazprom Neft’s stock price was on the rise, TNK-BP Holding’s common stocks fell by 6 percent month-on-month, in part because it paid out the highest dividend yield in the domestic energy sector. It should also be noted that TNK-BP Holding managed to raise its 2008 dividend by 70 percent year-on-year, while boards of some of the state-owned corporations asked shareholders to approve a reduction of dividends, or at least maintain 2007 dividend levels. In addition, TNK-BP Holding’s parent company (TNK-BP International) identified two candidates for the CEO position, which provides hope to investors that the ongoing disputes among TNK-BP’s shareholders could be resolved.

Other oil majors fared worse in June, with Lukoil stocks dropping 20 percent, Surgutneftegaz falling 15 percent and Rosneft down 18 percent. A lack of clarity from the Russian government regarding cancellation of the export duty for Eastern Siberian oil contributed greatly to the negative performance of these domestic oil industry leaders. In our view the Russian Finance Ministry is unlikely to cancel export duties amid the economic downturn. Alas, such a policy could hinder the development of new oil fields, at a time when oil production is declining. We believe that by year’s end the government could cancel the export duty on Eastern Siberian oil, which in turn could spark a rally on the equity market.