Russia's Oil, the Winner of All Sanctions
The U.S. Administration has underestimated the ability of major Russian oil and gas companies to dodge sanctions and benefit from recent depreciation of the ruble on the back of emerging markets slowdown and escalation of China-U.S. trade wars. Major oil companies like Rosneft, which trades on the London exchange under symbol ROSN, have posted record 2Q earnings on increasing production and this trade is likely to continue towards year's end. If there's a "long Russia" trade to make, it's Rosneft shares.
Rosneft stock is up 44% for the year and over 55% over the last 12 months, in rubles, with Lukoil (LUKOY) trailing just behind at 31% and 42%, for year-to-date and the last 12 months, respectively. A stellar run versus shameful performance for our integrated oil U.S. champions, Exxon Mobil (XOM) and Chevron (CVX) which are down for the year, underperforming the market by more than 1,200 basis points.
Rosneft, The Big Bear in the Room
Rosneft produces more oil than any other publicly traded company in the world, about 4.5 million barrels of crude a day. Thanks to the depreciation of the ruble, 2H18 EBITDA increased by 48% year over year. Rosneft production has bounced beyond the November 2016 production cuts agreed by OPEC+ countries. Iran sanctions have only given Russia more power to accumulate market share, along with Saudi Arabia.
Rosneft has technological capacities to ramp-up production by 200,000 barrels a day this quarter, of which 120,000 barrels a day increase was already reached last June and July. Thus, Rosneft is poised to continue braking its own production records by year's end. Given the outlook for the energy markets in light of the Russian sanctions, we expect Rosneft stock to continue outperforming the market.
Lukoil, 2% of World's Production
Lukoil produces half of Rosneft production at 2.2 million barrels per day with high yield margin barrels of 24%. It is the most diversified Russian oil major with strong assets outside Russia in key production regions like West Africa, the Middle East (Iraq, Egypt) and Mexico. The stock has a 7% dividend yield, making it an attractive investment for major long-term investors.
Despite the U.S. sanctions, Lukoil still has strong partnerships with U.S. companies like Chevron and Exxon Mobil in the operation of the Tengiz field in southwest Kazakhstan on the shores of the Caspian Sea. Along with BP (BP) , Shell (RDS.A) and Eni S.p.A. (E) , they operate the Caspian Pipeline Consortium, transporting Tengiz oil through Russia into the Black Sea. Lukoil also has large gas production in Uzbekistan which primarily exports to China thus shielding some of its revenue from U.S. sanctions.
Glencore and Qatar Ties to Rosneft
It is notable to remember Rosneft keeps strong ties with Western and Middle East investors. Ivan Glasenberg, CEO of Glencore (GLNCY) and Faisal Alsuwaidi, representative of Qatar Investment Authority (QIA), were appointed to Rosneft's Board of Directors in June 2017 as part of a joint venture formed in 2016 by these two entities to buy at 19.5% of Rosneft or around a $9 billion stake. As part of the deal, Glencore struck a five-year agreement to buy 220,000 barrels a day of crude from Rosneft for its trading business. Qatar subsequently bought out its partner becoming the third largest shareholder after Russia state (50%) and BP (19.75%).
Gazprom, LNG Powerhouse
According to a GlobalData report, Gazprom leads a ranking among big oil and gas spenders, with estimated capex of $160 billion to be spent on 84 oil and gas projects worldwide. This is more than double the $77 billion earmarked by Exxon Mobil for 60 large projects, and the $86 billion allocated by Royal Dutch Shell for 90 projects. Gazprom is mainly investing in the midstream sector, primarily in pipelines and gas processing plans.
We expect Rosneft shares to continue to outperform Lukoil's, thus we'd recommend a relative value trade by going long Rosneft shares and short Lukoil shares thus reducing 'Russia' headline risk and focusing on profitability.