Sometimes crude oil is referred to as “black gold”. For traders this is a major commodity. For investors this is a major investment object and a source of income.
Crude oil has been the reason for multiple wars (for example, Iraq, Libya, Persian Gulf) and international confrontation (USA – Iran, USA – Venezuela ).
Tips for beginners: crude oil is considered the most liquid and competitive commodity and energy carrier. Russia controls 1/6th of the global market of crude oil. It is the world’s number 7 in terms of oil reserves and a major oil exporter.
In 2011 crude oil appreciated by 38% from $75/b up to $103/b and there was a trading volume increase in the market of oil products.
In other words, it is not accidental that (according to RusEnergy’s long-term rating of investment attractiveness, Russian oil companies consolidated their positions in the global market of crude oil in 2011, thus gaining million of dollars for their shareholders, investors and traders who bought oil futures and options. What’s next?
Russian Oil
Crude oil is “the blood in the vessels” of Russia’s economy. Oil makes up 42% of the country’s export and accounts for 17% of its GDP. The global crisis only intensified the country’s dependence on oil and natural gas.
In 2010 Russia’s oil-and-gas industry earned 4.1 trillion rubles, in 2011 – over 5.2 trillion rubles. All the info mentioned above implies that any negative changes in the price of crude oil can turn into major problems for the country’s budget.
In 2011 Russia’s budget surplus was equal to 0.8-1% of the country’s GDP (for the first time in 2 years) due to higher oil prices. Some experts say the country’s budget will remain balanced if crude oil prices stay around $117/b or higher. Others believe $110/b is enough. If oil prices retrace to $100/b, Russia’s budget will face a deficit equal to 1.5% of its GDP.
Moreover, the money earned from the export of crude oil helps to solve multiple social problems. For example, during the period of 2000-2006 the Russians’ personal income increased by 400%. If oil prices collapse down to $80/b or lower, Russia will have difficulty financing numerous social programs. Some experts have estimated that each 10$ decline in the global market of crude oil will cost Russia 500B rubles, thus forcing the authorities to implement unpopular and painful austerity measures.
Russian oil companies
95% of Russia’s oil production is done by 11 major oil companies. The following information, courtesy of , reflects their strengths and weaknesses:
№1. Rosneft. This is the leader of Russia’s oil industry. The company’s capitalization is around $94B (April 2011). As of Dec 31st 2010, its proved reserves are equal to 22,765B barrels of oil. In 2011 Rosneft became the world’s leader in terms of oil production (88,6M tons), thus outpacing ExxonMobil.
If to consider Rosneft’s performance in 2011, it is necessary to mention considerable over-performance in a number of aspects:
• Oil and natural gas production: 122.5M tons (+2.5%)
• Refining: 57.9M tons (+14.7%)
• Licenses: 21 new licenses received
• Total investments: 420B rubles. In 2-3 years Rosneft may invest in refineries up to $3-4B.
• Net income: 393.6B rubles (+14,7%)
What lies behind these improvements? According to experts, the major reason is a production increase (mainly at the expense of The Vankor Field), higher oil prices. Moreover, the company keeps cooperating with China. Last summer it signed an agreement with ExxonMobil over strategic cooperation in Russia’s Arctic Shelf. ExxonMobil is expected to spend $2-4B on geological exploration in the area. In its turn, Rosneft will get an opportunity to join ExxonMobil’s projects in Texas, thus becoming the first Russian company to produce oil in the USA.
If to consider the company’s weak spots, it is necessary to mention the following factors:
• Rosneft’s stock depreciated by 3% in 2011, while the MICEX index lost 18%.
• There is overdependence on Uganskneftegas and the Priobsk Field (25% of Rosneft’s total production).
• The company’s key oil fields have already entered the stage of declining production.
• In 2011 the company lost the right on tax rebates for the Vankor Field
• Rosneft has many refinery-modernization issues despite investing a lot of money in it.
• The prospects of Russia’s north offshore areas are still unclear.
• The exchange-of-stock deal with British Petroleum has failed. At this point Rosneft has little presence abroad (some minor projects in Kazakhstan , Algeria, Venezuela and UAE are still at the stage of geological exploration).
№2. LUKOIL. This is a major rival for Rosneft. Its market capitalization is roughly equal to $58B (as of April 2011). It share in the global oil reserves and production is 1.1% and 2.3% correspondingly. It produces 18.6% of Russia’s oil. LUKOIL is the world’s 3rd private oil company in terms of proved oil reserves - 17,255B barrels.
• In 9 months of 2011 the company’s proceeds increased by 29.9% up to $99 101 million.
• Its net profit increased by 32.1% up to $9 012 million.
LUKOIL’s financial growth in 2011 can be simply explained by higher oil prices around the world.
However, experts point out the stagnation if the company’s production performance.
In Jan- Sep 2011 LUKOIL’s production of oil declined by 5.5% down to 68 290K tons. Investors are getting increasingly worried about the company’s inability to curb the production decline.
The production of oil products declined by 2% down to 49 960K tons.
The production of oil keeps declining mainly because the company’s West-Siberian oilfields (which account for 50% of its oil production) are nearly exhausted. As for finding new oil deposits, the problem is that most perspective areas go to state-owned oil companies. At this point LUKOIL has to hope on its Caspian, Trebs and Titov oil fields.
Last year LUKOIL had some problems in Bulgaria: The Bulgarian authorities blamed LUKOIL for concealing €250M of taxes and suspended the work of its refinery. Later the work was resumed but the series of trials continues.
LUKOIL’s top management assures the investors that in late 2012 the situation will stabilize while in 2014-2021 the annual production growth will be equal to 1.4%.
Experts believe that LUKOIL’s stock has a chance to rally further:
№3. TNK-BP. Its market capitalization is some $50B. It is among the world’s TOP 10 private oil companies in terms of oil production. The proved reserves are equal to 8,794B barrels as of Dec 31st 2010. The company promised to invest to up to $45B in oil production by 2020.
In 2011 TNK-BP showed the outstanding performance in its history:
• The production of oil and natural gas increased by 2.1% in Jan-Sep 2011.
• The daily volume of oil refining reached $6.8B, or +75% as opposed to 2010.
• The company’s proceeds increased by 38%.
Therefore, in 2011 TNK BP increased its investment attractiveness.
Today the company has oil projects in Venezuela , Vietnam and is very likely to win some tenders in Iraq.
The mentioned info suggests that TNK-BP has all chances to become one of the most efficient and successful oil-and-gas companies in the world.
№4 Surgut NG. Surgut NG is Russia’s 4th oil company. Its market capitalization is $37.5B (as of April 2011). Its current share in the Russian oil market has recently increased from 11% up to 13%. It is famous for its considerable income. Its stock is one of the most popular assets for Russian investors (the expected dividend yield may well reach 15%).
• In 2011 the company’s net income nearly tripled, thus reaching 197, 537B rubles.
• The proceeds increased by 50.7% up to 641,531B rubles.
Surgut NG gained mostly on higher oil prices, stronger US Dollar and the expansion of its oil production. It also sold 21% of the MOL stock back to Hungary for €1.88B.
This company also has weak spots:
• Overdependence on Russia’s domestic market
• Relatively high production cost (mostly because of drilling activities).
№5. Gasprom Neft. It is Russia’s 5th oil company. Its current capitalization is some $20.2B. However, the top management is sure that the company’s stock is undervalued. By 25-30%. Gasprom Neft’s proven oil reserves exceed 4B barrels. It supplies Russia’s domestic market with 25% of its high-quality oil products.
2011 was the most successful year for Gasprom Neft:
• The volume of its oil production increased by 7%.
• Its net profit in Jan-Sep 2011 increased by 64% up to $3,875B.
• Its proceeds increased by 39% up to $32,9B.
However, experts underline that in long-term perspective Gazprom Neft will have to expand its resource base through finding new oil deposits. Last summer it signed an agreement with Shell to start joint projects in Western Siberia and in other regions throughout the world.
№6. Tatneft. It is the 6th biggest oil company in Russia. Its market capitalization is equal to $14B.
These are its major performance stats for Jan - Sep 2011:
• Oil production - 19,393K tons, or +0.2%
• Net profit - 47,8B rubles, almost twice as high.
• Proceeds - 229,46B rubles, +25,3%
However, the company has a lot of problems:
• Its resource base is one of the worst in the industry. Most of its oil deposits have entered the stage of declining production.
• The production cost is very high. It means that once oil prices decline, Tatneft will lose its income much faster than other companies listed above. Moreover, its oil is of poorer quality, which forces the company to spend extra money on oil refining facilities.
• Unfortunately, Tatneft had to close its projects in Libya and Syria (because of the civil war in Libya and the anti-government actions in Syria).
• It was going to sign an agreement with Iran but as we know, the tensions around Iran keep escalating.
№7. Slavneft. It is Russia’s 7th biggest oil company. The proved reserves are equal to 216.8M tons. The production decreased by 1.8% in 2011. However, the company refined 9.6% more oil than a year before. Its net income declined by 28.7% down to $122 B.
The company’s major concern is how to stabilize and expand the production of crude oil.
№8. Bashneft. According to Platts’ ratings, the company is recognized one of the most promising and dynamic oil companies in the world.
In 2011 Bashneft produced 11 257K tons of oil, which is 7% more than in 2010. The company’s production is relatively stable. In 10-15 years Bashneft is planning to double the production. In 2011 its net income increased by 52%. The company’s success is explained mainly by higher oil prices and production growth. Bashneft’s oil deposits are at the stage of declining production but the company is doing its best to expand its resource base.
According to the experts of , the price charts of Rosneft, LUKOIL, Surgutneft, Gazprom, Tatneft show reversal patterns. Bashneft’s stock is declining, with no reversal sings. TNK-BP’s stock is flattish.
Russia’s Black Gold: Weak Spots
According to Eugene Olkhovsky, ’s leading expert, on the face of it, the situation in Russia’s oil sector is gradually improving. However, Russia’s oil sector has some major weak spots:
The reserves of high-quality light oil are running low. Today only 30% of the oil produced in Russia is light, the remaining 70% of it is heavy and hard to extract. The reserves of heavy oil are growing.
Moreover, Russian oil companies keep reducing the volume of geological exploration as it is rather costly. At the same time, experts warn that in 2013 the production of crude oil in Russia may start slowing down.
The industry lacks competitiveness. That is why the companies are not interested in improving the refinery infrastructure.
There are no state policies concerning small-scale oil companies, which account only for 4% of Russia’s oil production (as compared to 10% in 2000). The authorities recollect about them only when there is some force-majeure.
Tax issues. The current tax system implies the unfair rule: the costlier the oil becomes the less income an oil company gets. This makes most of new oil deposits unprofitable to develop. The government has already started introducing some point tax cuts and rebates for specific oil deposits. But these steps are not enough as oil companies need a lot of money for long-term planning and investing in the development of new oil deposits.
Russia’s oil industry lacks highly skilled specialists who could improve the infrastructure. There are multiple innovation issues. The refinery facilities are mostly outdated and need modernization.
The total capacity of all the Russian refineries is as low as 270M tons a year.
As for the quality of oil products, it is relatively poor. It is sufficient to say that the Euro-3 / Euro-4 gasoline makes up only 38% of the entire market while the Euro-4 / Euro-5 diesel fuel makes up only 18%. Where are the major Russian chemical companies? They are not in Top 50, unlike Chinese, Korean, Indian, Brazilian and Mexican counterparts. Still, Russia’s oil refining quality is gradually improving. By 2020 its depth is expected to reach 85%, thus making 80% of gasoline and 92% of diesel correspond to the Euro-5 standard.
And finally, another drawback of Russia’s contemporary oil industry is corruption.
The bottom line: Despite all the mentioned drawbacks, the country’s oil industry is improving. Consequently, the stocks of Russian oil giants definitely deserve attention.
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