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After bestowing big tax breaks on state-owned energy companies for developing Russia’s offshore Arctic oil and gas reserves, Vladimir Putin threw a crumb of hope to the country’s independent drillers.
As we mentioned in our recent post, Russia’s latest round of upheaval-spawned volatility created plenty of value opportunities in a list of the country’s biggest companies. Traders can take a look at Neftyanaya Kompaniya Lukoil, otherwise simply known as Lukoil (LUKOY, quote).
People who are being described as “protesters” — and so are not officially endorsed by the Iranian government — have stormed the British embassy in Tehran. Expect an official response soon, and keep your oil trades handy.
Russian independent oil producer Lukoil delivered solid quarterly numbers this morning. The problem seems to be figuring out where the company fits into the new Russian energy industry.
Lukoil (LUKOY) looks likely to get a tax break on its Caspian fields. This should boost the Russian oil company’s bottom line in 2011 and 2012 and makes the stock incrementally more attractive.
LUKOY is reportedly close to a deal with the government that would give the company a rebate on export duties for the crude it pumps out of the Yury Korchagin field.
If this goes through, this could save LUKOY $460 million in taxes next year alone, and would add 2% to the company’s 2011 and 2012 profits.
A similar deal prevailing in the company’s Siberian fields cuts the amount it pays the government by 55% as long as oil prices remain above $50 a barrel. Naturally, bigger breaks mean bigger a bigger profit boost, so it will be interesting to see exactly how much the government offers the company once the details shake out.
Even adding 2% to this company’s bottom line makes it a screaming value play. Forward P/E is 4.6. Added profitability would drop that valuation into the 4.5 range.
We talked about Petrobras this morning on CNBC’s Trading the Globe. Given the Gulf drilling ban, this Brazilian oil giant looks more important than ever. Watch the video here.
The disaster for BP (BP) and the Gulf may end up making Petrobras (PBR), which is still producing 2.7 million barrels of oil a day from its deepwater wells, the undisputed leading energy supplier in this part of the world.
In fact, the giant company (14% of the Bovespa index all by itself) gets 89% of its oil from offshore wells, tapping deposits of roughly 100 billion barrels of crude. Just yesterday, the company renewed its commitment to double its offshore production over the next decade.
Now that the Gulf is locked down for at least six months, energy prices should go higher. This, in turn, would generate instant upside for emerging markets oil companies
Getting past the share sale
PBR has been held back over the last few months by nerves surrounding its upcoming share sale. Once the sale is completed, the stock is free to climb.
Unfortunately, even though the company released its five-year business plan yesterday, it contained little fresh insight into either the deal or exactly what Petrobras plans to do with the money (usually estimated at around $60 billion).
The fact that the company had to correct its own numbers and issue a revised version only underscores how poor its communication with the investment communication has been, how disappointing the lack of details is and how rushed the July offering is shaping up to be.
Regardless, we do know that Petrobras is going to spend a lot more (about $74 billion) on areas of its business beyond the standard exploration and production activities. This means that the company wants to become a full vertical, with a hand in every stage of the oil life cycle from exploration and drilling to refined products.
In theory, PBR could evolve into a giant in petrochemicals, fertilizers and even ethanol production — all markets in which other Brazilian are world-class competitors. Braskem (BAK) makes petrochemical products. Bunge (BG) makes fertilizer. Cosan (CZZ) is a leading ethanol producer. A fully vertical Petrobras could change the landscape for all of these companies and plenty of others.
Too many questions?
Other investors are nervous about the sheer size of PBR’s funding requirements. The company says it needs $224 billion to reinvest in its business over the next ten years, but its forecasts have traditionally been on the low side.
In fact, Petrobras takes in $110 billion in revenue every year and yet somehow reports consistently negative cash flow. This government-owned behemoth is grossly inefficient as it is, and throwing money at it will only make it the behemoth bigger and not necessarily better.
Finally, while BP’s disgrace is bullish for oil prices as the drills stop in the Gulf, it does not necessarily change PBR’s fundamental profile.
The company remains devoted to drilling in complex, challenging deepwater fields where today’s big finds are being made. Okay. But should we reevaluate the risk that something might go wrong? If so, maybe other emerging oil companies may be due a second look: Russian majors like Lukoil (LUKOY) or Rosneft (RNGZY), or Chinese names like CEO.
The Bottom Line: This is one of the biggest deals ever for one of the most important companies in the world. It affects all emerging markets investors. You need to know about this. We will keep you posted.
A year ago, the Russian economy was contracting fast. Now it looks like the factories are open again and the opportunities to bet on even bigger growth ahead are still out there.
Russian industrial production expanded 12.6% on an annualized basis in May, well above a consensus forecast of 10% growth in overall output. The numbers were especially bullish because they showed a month-to-month increase, even though May usually sees a slight seasonal decline.
In light of other green lights for the Russian economy (purchasing managers, electricity production, cargo data and especially oil prices) and upward revisions of the numbers for January through March, the question is not really whether to buy into Russia but what to buy.
The ETF RSX is an obvious core holding here, since it provides relatively balanced exposure not only to the energy titans like Lukoil (LUKOY), Rosneft (RNGZY) and Gazprom (OGZPY) but also whole sectors like banking and utilities that are very hard to trade from the United States.
Do not forget that bustling factories tend to translate into a gainfully employed populace willing to spend their paychecks on everything from phones to luxury cars. Consumption and consumer lending are already coming around. To get a more direct piece of the Russian consumer story, our plays remain telecom-heavy: VimpelCom (VIP), Mobile TeleSystems (MBT).
Milk distributor Wimm-Bill-Dann (WBD) is an interesting recovery play and one of the few non-telecom Russian consumer ADRs out there.
And as for the factories themselves, steel maker Mechel (MTL) is a long-time favorite. It is one of the best steel names out there as well as a great Russian industrial powerhouse in its own right:
