Eurasia Drilling’s $1.5 Billion Dive Ends With Merrill Downgrade

OAO Eurasia Drilling, the Russian oil driller that lost $1.5 billion of its value this month, was downgraded by Bank of America Merrill Lynch and Morgan Stanley.

Eurasia fell 4.7 percent to $34.41, the lowest since March, by 10:59 a.m. in London as Merrill cut its stock rating to neutral and Morgan Stanley to equal weight. The driller, down 24 percent since Jan. 7, yesterday forecast flat sales this year.

HSBC Holdings Plc and Renaissance Capital were among those that raised ratings, saying the price slump has gone too far.

Eurasia forecast $3.4 billion to $3.5 billion in sales, against $3.48 billion last year, it said in a statement. The company’s also still in talks on OAO Rosneft contracts, raising concerns it may lose business with Russia’s largest oil company.

“We are confident in the guidance we are providing at this juncture even if current negotiations result in reduction of our activity with Rosneft,” Eurasia’s Chief Financial Officer Richard Anderson said in the company statement yesterday.

Eurasia needs contracts with Rosneft to help diversify its business. The driller was spun off from OAO Lukoil, Russia’s second-biggest oil producer, which remains its biggest client. Its dollar share price has also been hurt by the ruble’s slide, reducing the foreign-currency value of its Russian sales.

The ruble is down 8 percent in the past three months.

Rosneft, which in March bought TNK-BP to become the world’s largest traded oil producer by output, may be trying to use its dominant position in Russia to get lower prices, Ekaterina Rodina, an oil and gas analyst at VTB Capital, said in a note.

Price Pressure

“All oil field services players are to face similar price-pressure risks as a result of the oil industry consolidation in 2013,” she said in the note. VTB kept its buy recommendation.

Rosneft’s press service didn’t immediately respond to queries for more details on their negotiations, while Eurasia referred Bloomberg to yesterday’s release.

Sberbank also maintained its buy recommendation, saying in a note today that Eurasia had excluded a sizable part of the uncommitted business with Rosneft from its 2014 estimates.

“We are not aware of any significant spare capacity elsewhere, which means that anyone else stepping into Eurasia Drilling’s place will have to purchase rigs, a process that takes 12-18 months,” Sberbank wrote in its research report.

Rosneft, employing 30 Eurasia rigs in 2013, may not have the option to replace the company for longer-reach horizontal wells it plans this year, the bank said in the report.

HSBC and Renaissance raised ratings to overweight and buy.

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