Goldman Sachs Group Inc. recommended buying Russian oil producers including Rosneft PJSC, saying declines in the past two months made the shares attractive and earnings will withstand the rout in oil.
Producers in the world’s largest energy exporter are the least sensitive to swings in the price of crude among companies tracked by Goldman globally, analysts including Moscow-based Geydar Mamedov said in a report on Thursday. The bank upgraded Rosneft, Bashneft PJSC and Gazprom Neft to buy and lifted Surgutneftegas PJSC’s preferred shares to neutral.
Rosneft, Russia’s largest oil producer, has slumped 16 percent from this year’s high as Brent crude traded below $50 a barrel for most of the month. Russian exporters are able to weather the slump in oil in part because they generate earnings in dollars while their costs are mainly in rubles, which has fallen more than any other emerging-market currency in the past 12 months.
“We think current valuations offer an attractive entry point into the sector, particularly given that we do not see much downside to the outlook for free cash flow for the Russian oils in a scenario of lower oil prices,” Goldman analysts said. The stocks will have upside as second-quarter results confirm the companies’ strong cash flow levels, they said.
Rosneft’s share-price drop this year has driven its free cash flow yield -- a ratio calculated by taking the cash flow per share divided by the share price -- to 20 percent, according to Goldman, among the highest worldwide. The same measure of earnings on a trailing basis was 0.5 percent for Petrobras Brasileiro SA and 4.1 percent for BP Plc, according to data compiled by Bloomberg.
Shares of Rosneft gained 1.8 percent by 4:44 p.m. in Moscow, bringing its 2015 increase to 25 percent.
Goldman named Lukoil PJSC as its “top pick” in the energy industry, recommending investors buy shares of the non-state oil company along with those of OAO Novatek. Lukoil, which has surged 15 percent this year, added 0.4 percent on Thursday.
Shares of Bashneft and Gazprom Neft trade at 4.4 times and 3.3 times projected 12-month earnings, according to data compiled by Bloomberg. That compares with a multiple of 7.7 for the MSCI Emerging Markets Energy Index.
Russian crude production is set to grow by 1.1 percent in 2015 before expanding 2.4 percent from 2017, according to Goldman. Russia derives about 50 percent of its revenue from the oil and gas industries.