Russian firms may catch up with Total, Exxon

Lukoil employees at the firm's drilling rig in Druzhnoye, East Siberia. Dmitry Beliakov/Bloomberg News

Investors punished Russia's OAO Rosneft and OAO Lukoil this year after the government raised taxes that are pegged to oil prices and the companies increased spending on production.

The RTS Oil & Gas Index in Russia has dropped 16 percent this year, while the Morgan Stanley Capital International World Energy Index climbed 15 percent.

Lukoil shares, now trading at $74.50, will advance 38 percent within the next 12 months, according a consensus of 12 analysts, and eight analysts say Rosneft shares will rise 19 percent to $9.77.

Shares of Exxon Mobil, now at $87.23, will climb 7.4 percent in that period, according to an average of 13 analysts.

"One of the safest bets now is the energy sector, and a very, very good place to be is Russian oil," said Nerea Heras, who manages $256 million in Eastern European stocks at Societe Generale Asset Management in London. "I have already started increasing my position in Rosneft and Lukoil."

At the same time, Russian oil shares are cheap, given earnings prospects. The average 2007 earnings estimate for Rosneft from 17 analysts is 52 cents a share, up 19 percent from three months ago, data compiled by Bloomberg show.

Russian oil stocks are less than a quarter as expensive as their global peers based on reserves, according to Al Breach, chief Russia strategist at UBS AG in Moscow.

He compared companies' reserves with their enterprise value, a proxy for takeover prices that is equal to the sum of debt, market capitalization and preferred stock.

Cheaper than peers

Lukoil is valued at $3.30 for every barrel of proved oil reserves, while US Exxon Mobil and French Total SA are valued at more than $13, Breach said.

Credit Suisse Group estimates that Russian oil shares are between 10 percent and 20 percent cheaper than oil industry stocks worldwide based on their price compared with estimated 2008 earnings.

"We're able to buy into assets like Lukoil at significantly cheaper levels per barrel than almost any other oil company in the world," said Daniel Broby, chief investment officer of Renaissance Investment Management in London. Broby said Lukoil is among Renaissance's top five holdings, and he is buying more shares.

UBS analysts Alex Fak and Maria Radina in Moscow raised their 2007 earnings estimate for Rosneft by 13 percent to $5.4 billion on July 4, citing higher oil prices. Margins at Russian oil producers will be "the best ever" in the second quarter, they said.

"The immediate outlook for the sector is pretty bullish," said Ian Hague, who manages about $1 billion in Russian equities at Firebird Management LLC in New York.

Rosneft set to surge

Deutsche Bank AG said it expects Rosneft shares to surge 77 percent from current levels in the next year. On August 16, Morgan Stanley named Lukoil as one of its 20 recommended stocks in emerging markets.

Russian energy stocks slumped this year as the government raised taxes on petroleum exports.

The state sets the tax every two months, based on the average price of oil in the previous two months.

Crude oil futures have surged 23 percent in New York trading this year, reaching a record $78.77 a barrel on August 1.

Not everyone agrees that now is the time to jump back into Russian oil shares. Dmitry Loukashov, an oil and gas analyst at Moscow-based Alfa Bank, has a "hold" recommendation on Rosneft shares and a price estimate 15 percent below the current level.

Alfa has a "sell" recommendation on OAO Surgutneftegaz, even after Russia's fourth-biggest oil producer reported record second-quarter profit of 31.2 billion rubles ($1.2 billion) last month.

The stock has climbed 9 percent since the preliminary report, which was based on Russian accounting standards.

Bloomberg News

(China Daily 09/07/2007 page16)