- Falling taxes and lower costs help to boost Russian companies
- Producers have stronger free cash flow and profit margins
At a time when the collapse in crude prices pushes Russia’s economy into a recession, the nation’s oil producers are managing to beat their western counterparts.
On measures including cash flow, profit margins and share prices, OAO Rosneft, Lukoil PJSC-- Russia’s two largest oil producers -- and OAO Gazprom Neft are performing better than Royal Dutch Shell Plc, BP Plc or Exxon Mobil Corp.
“When oil goes down, the western companies are hurt more than the Russian companies,” said Maxim Edelson, a senior director at Fitch Ratings in Moscow. Because Russian tax rates adjust automatically to lower prices the nation’s companies enjoy a buffer to the slump in crude while “a lot of the hit is taken by the government,” he said.
The oil industry is struggling to adapt after prices fell to the lowest level in six years amid a global supply glut. While energy producers have fallen more than any other group this year on the MSCI All-Country World Index, Russian companies have been the most resilient. Rosneft shares gained 3.4 percent and Gazprom Neft added 2.5 percent in London trading this year. Shell’s B shares, the most widely traded, lost 27 percent and BP 17 percent.
The plunge in crude prices of more than 50 percent in the past year has pushed the country into its first recession since 2009. Russia also relies on oil and gas for about a half of its budget revenue. The faltering economy, combined with the effects of international sanctions over Russia’s involvement in Ukraine, has weakened the ruble, benefiting oil companies that earn dollars and pay costs in the local currency.
The tax and currency benefit this year means Rosneft and Lukoil will yield free cash flow at more than twice the rate of Shell and BP, according to Barclays Plc data. Russian producers are generating cash as if the price of oil were still $100 a barrel rather than $50, Goldman Sachs Group Inc. said in a research note Sept. 1.
“Production costs in Russia are still among the lowest globally,” because not so much advanced technology is applied to boost extraction as in other parts of the world, Philipp Chladek, a London-based oil-sector analyst with Bloomberg Intelligence, wrote in a Sept. 2 report. “Rather than trying to increase the recovery rate in mature fields to keep the oil flowing, Russian companies can still tap new resources.”
Rosneft has some of the industry’s lowest costs, Chief Executive Officer Igor Sechin told reporters in Beijing on Thursday. The producer’s capital expenditure of $4.20 a barrel is a sixth of the $27 a barrel Exxon Mobil spends, according to a company presentation. Brent crude, the global benchmark grade, rose 2 percent to $48.57 a barrel at 3:54 p.m. on the London-based ICE Futures Europe exchange.
Almost all of the Russian oil companies with both production and refining had a pretax earnings margin -- a measure of profitability -- that was higher than their peers in Europe in the second quarter, Chladek wrote.
While Russian oil companies’ performance has been stronger than competitors, they are not immune to the effects of the price slump. Rosneft and Lukoil’s revenue dropped from a year earlier for three consecutive quarters. While Lukoil’s production of oil and condensate rose 5.2 percent in the first half, Rosneft’s crude output fell 1.1 percent as it cut spending in dollar terms. The nation’s largest oil producer must service or refinance $26 billion in debt from the second half of this year to the end of 2016 while international sanctions restrict its ability to access capital markets.
When asked about the future of oil prices, Sechin declined to make a prediction. “Don’t turn to me, go to some fortuneteller, because there are too many uncertainties,” he said.