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Putin Oil Thirst Driving Eurasia Bonds to Record: Russia Credit

Eurasia Drilling Co. is rallying in the bond market as investors bet increased spending by Russia’s biggest crude producers will drive the field-services provider’s revenue to a record.

The yield on Eurasia’s dollar-denominated bonds due April 2020 dropped 26 basis points this month to 4.50 percent today. That compares with an increase of 18 basis points to 3.63 percent for similar-maturity debt from higher-rated Geneva-based driller Weatherford International Ltd.

OAO Rosneft and OAO Lukoil have boosted spending on new wells and hired drillers to tap new fields, including Arctic deposits, as President Vladimir Putin vows to maintain stable output of the country’s chief export earner. Eurasia Drilling Chief Executive Officer Alexander Djaparidze predicted on April 29 a “record” year for the company after Brent crude rebounded from below $100 a barrel.

“The name is new, the name is good, so when oil prices resume their ascent, why not buy its debt?” Dmitry Dudkin, head of fixed-income research at UralSib Financial Corp. in Moscow, said by e-mail on May 8. “Service companies are the first derivative of the situation with oil and gas giants.”

Biggest Clients

Rosneft, the world’s largest publicly traded oil company by output, and Lukoil, Russia’s biggest non-state crude producer, account for more than 80 percent of Eurasia Drilling’s orders, according to a company presentation. Moscow-based Lukoil said in April it plans to boost spending to $20 billion this year, 25 percent more than had been proposed previously.

Russia increased crude and condensate production 1.5 percent in April from a year earlier to 10.47 million barrels a day, close to a post-Soviet-era record, according to preliminary data released May 2 by the Energy Ministry’s CDU-TEK unit. Putin has called for oil output to be maintained at more than 10 million barrels a day.

Eurasia is ranked BB+ at Standard & Poor’s, it highest junk status, and one step lower at Fitch Ratings. The company sold its $600 million of the 2020 bonds in April at a yield of 4.875 percent.

Revenue will advance to $3.6 billion this year from $3.2 billion in 2012 as Eurasia benefits from so-called horizontal drilling projects, Chief Financial Officer Richard Anderson said in January. Drillers can charge oil companies higher rates for developing horizontal wells, which can increase flows from deposits, allowing them to exploit unconventional resources profitably.

Brent fell for a second day, retreating 1.1 percent to $102.73 a barrel.

Ruble Risk

Depreciation in Russia’s exchange rate may hurt the company’s finances as capital spending is mostly in dollars while sales are in rubles, Ildar Davletshin, an oil and gas analyst at Renaissance Capital in Moscow, said by e-mail on May 8. The company has plans to buy and build rigs through 2016, he said.

The ruble added 0.1 percent to the dollar to 31.3200 by 2:54 p.m. in Moscow. The currency declined 2.2 percent versus the greenback in the first quarter, and will be at 31.1000 at the end of the second quarter, according to the median estimate of 26 analysts surveyed by Bloomberg.

“A possible devaluation of the ruble could negatively impact its credit profile,” Davletshin said.

Yield Gap

Russia is ranked BBB at Fitch, the second-lowest investment grade. The yield on the country’s dollar bonds due April 2042 rose one basis point, or 0.01 percentage point, to 4.50 percent. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries rose five basis points to 175, according to JPMorgan Chase & Co. indexes. The difference compares with 153 for debt of Mexico and 162 for Brazil.

The cost of insuring Russia’s debt using credit default swaps increased two basis points to 130. The swaps cost 14 basis points more than Turkey, which is ranked one step lower by Fitch at BBB-. The contracts, which decline as perceptions of creditworthiness improve, pay the buyer face value in exchange for underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

As a client of Eurasia, Lukoil helps investor confidence, Ian McCall, who helps manage about $107 million in emerging market assets at Quesnell Capital SA in Geneva, said by e-mail on May 10.

“This is a sector -- oilfield services and drilling in particular -- that is pretty easy for most investment managers to understand,” McCall said. “And this company is arguably the leader in many drilling sectors in Russia.”

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