Russian Oil Stocks Rally May Be Over on Ruble, UBS Says

Russian oil producers, which have rebounded this year as crude prices recovered from the lowest levels since 2009, are probably going to see profits hurt as a strengthening ruble increases refining costs, according to UBS Group AG.

The bank lowered its recommendation on OAO Lukoil, OAO Gazprom Neft and OAO Tatneft to the equivalent of hold and cut OAO Surgutneftegas’s ordinary shares to sell from buy. Analysts led by Maxim Moshkov also raised their rating on the natural gas producer OAO Gazprom.

The ruble’s 19 percent rally this year and lower gasoline prices in Russia as the economy heads toward the first recession since 2009 have dimmed the outlook for oil producers profits, Moshkov said by phone Tuesday. An oil tax regime that was based on higher prices also is weighing on profitability, he said.

“Russian oil companies are unattractive at their current valuations,” Moshkov said. “They rallied a lot this year and look expensive now.”

Brent crude, the oil grade traders use to price Russia’s main export blend, has rebounded to $58.83 a barrel from $46.59 in mid January. Even at that level, an agreement between the government and Russian oil companies last year to cut export duties in return for higher extraction levies is unprofitable for producers because it was based on oil costing $100 a barrel, Moshkov said.

UBS raised Gazprom, Russia’s largest company, to buy from hold. The bank reiterated its buy rating on OAO Novatek.

“While there are clear risks to Russian oil companies, gas companies look attractive,” Moshkov said. “Gazprom increases its exports to Europe and Novatek benefits a great deal from the strengthening ruble, as about 60 percent of its sales are in rubles.”

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