On a number of occasions, we have highlighted the risk of further potential tax amendments in the Russian oil industry. We now see these as imminent. In anticipation of greater volatility in the sector – and at the very least a discussion on potential tax changes – and also reflecting the impressive performance of most oil stocks in the last month, we have returned to our bearish view on the sector. We are downwardly revising our recommendations for Novatek, Gazprom Neft and Surgut ords to Hold. Gazprom is now our top pick (Buy).
Among the specific implications, we believe that downstream (primarily, refining and bunkering) is likely to be more negatively affected, while upstream might even benefit from tax reform. Hence, Bashneft, Gazprom Neft and Lukoil would be affected most, assuming no operational changes, while Tatneft and Surgut might even benefit, due to their greater exposure to upstream. However, the well-established trend of efficiency deterioration will find further support, in our view.
After the recent rally on Russian stocks we are returning to our negative view on the sector in general, despite the undemanding valuations. Our reservation here is that in cases of sell-offs of Russian stocks, Russian oils are considered a defensive play, and we do not expect that it would be different if such a broad sell-off happens again. Due to the decent dividend yield and significance of the strategic agreement with China, we believe that Gazprom shares are probably one of the most comfortable plays for all types of investors with any view on overall Russian market trends. We are downwardly revising our recommendations for Novatek, Gazprom Neft and Surgut ords to Holds.