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Russian Oils: favourable macro environment has never been so good


Oil remains high, RUB is weakening. The macro environment has never been more favourable for Russian oils as it is right now. The combination of an extremely weak local currency and relatively strong oil prices, if sustained, is set to provide significant support to Russian oils’ profitability. As the lion’s share of revenues comes from international sales (both crude oil and products), i.e. denominated in USD, and all key operating expenses incurred domestically are in RUB, Russian oil companies are now generating higher margins. If this trend is sustainable, we believe more investors will be attracted to the sector.

Potential 15-18% upside. We estimate the current favourable macro conditions (33.7 RUB/USD and USD 100/bbl) for the Russian oil sector would provide additional value of around USD 50bn (or c.17%) by 2020, were we to incorporate it into our models. On a company level, it implies some 15-18% upside to our 12-month Target Prices, depending on their exposure to export and the operating expenses breakdown.

Weak RUB to help offset negative effect of export duty lag. Additionally, we believe a weak domestic currency will help offset the negative effect of the export duty lag (when oil companies overpay export duty because of declining global oil prices) more smoothly. Increased exchange rate volatility may also influence net income, particularly in 2Q12 owing to potential sizable FX gains/losses.

We reiterate our bullish view on Russian oil companies. On top of excellent financial results driven by management value-accretive activities (expansion to ‘non-core’ businesses), Russian oils are now enjoying the most favourable macro environment ever.

Dmitry Loukashov, Ekaterina Rodina, Alexander Kirevnin, Elena Kopylova, Mikhail Zarkhi
VTB Capital analyst

oil, ruble, USD, FX market

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