Page 9 - FSUOGM Week 15 2021

FSUOGM PERFORMANCE FSUOGM

Russian oil and gas names revised

as ESG pressure mounts

RUSSIA ANALYSTS at VTB Capital (VTBC) have which has probably already happened," inev-
revised the recommendations on Russian oil itably affecting oil prices and oil companies’
VTBC now believes and gas stocks incorporating an environmen- revenues.
oil demand peaked in tal "E-premium" into the valuations. "The ESG Russian hydrocarbon names are unlikely to
2019. wave is rising higher and moving faster, creat- compete with international oils in their business
ing challenges for the oil industry well beyond transformation potential to become "clean".
the commonly discussed Carbon Border Tax," However, VTBC believes that the Russian
VTBC notes. O&G sector has enough technology and exper-
As followed by bne IntelliNews, under tise, as well as strong advantages in terms of the
growing ESG pressure, Rosneft, Lukoil, Gaz- cost of energy, water and infrastructure, to com-
prom and Novatek are developing strategies to pete in CCUS (carbon capture, utilisation and
decarbonise. storage) and hydrogen/ammonia/other fossil
The challenges facing the industry range derivatives with a cleaned CO2 footprint.
from the rapid adjustment in oil demand (VTBC Still, the investors are expected to require
now believes that it peaked in 2019), through the some premium when valuing Russian O&G
choice of each company about participating in names, given the less aggressive promotion
the substitution of oil products by more ecolog- of transformational ideas and the lack of firm,
ically friendly fuels (self-defeating for the entire wide and well quantified ecology-related
industry), and finally to the selection of the fac- commitments.
tors for fund managers to understand compa- VTBC analysts are increasing the weighted
nies’ positioning in this volatile environment. average cost of capital (WACCs) across the sec-
The old paradigm that oil demand will always tor by 0.9-2.4%, which has resulted in the down-
be supported by developing countries on the grade of Novatek gas major, Gazprom Neft oil
basis of its relative cheapness is now undermined major, Tatneft reginal oil major ordinary and
by the drop in renewable energy costs to below preferred shares, and SurgutNefteGas preferred
the cost of conventional generation, as well as the shares to Hold from Buy.
worldwide availability of cheap electric vehicles Surgut's ordinary shares and Bashneft
(EVs). regional oil major ordinary and preferred shares
"ESG is now supported and funded by the are downgraded from Buy to Sell. In the mean-
rapid capitulation of oil majors reallocating their time, VTBC maintained Buy calls on Russia's
vast resources, by the fiscal/monetary expansion second largest oil producer Lukoil and natural
of world governments utilising ESG as a handy gas giant Gazprom.
justification for budget largesse and by the recent The main risks for the sector are a reappear-
arrival of a new activist, the US, which we think ance of inflation, undermining governments’
will be instrumental in co-ordinating global appetite for expansion, which would slow down
efforts," VTBC argues. the ESG wave, as well as a toughening of the geo-
This new combination, VTBC argues, is a political situation around Russia, VTBC analysts
real game-changer for oil demand, "the peak of warn. ™

Week 15 14•April•2021 www. NEWSBASE .com P9