Page 9 - RusRPTDec20

number of US government bonds, but now Russia holds less of them than, for example, Egypt or Peru. The tightening of relations with the West has also boosted Russia's efforts to strengthen economic relations with China.
2.2 ​ ​OIl Stocks: Buy them now
The dramatic underperformance of Russian oil stocks was assisted by the equal demise in international peers ​which, in addition to the challenge of the pandemic and collapse in oil prices, suffered a crisis of self-identity on the back of world decarbonisation. However, we tend to think that Russian oils are immunised against this decease in GHG emissions. We also believe that the market has overreacted to the recent tax changes and consider Russian O&G names to be fundamentally attractive, even under conservative macro assumptions. We now see our entire coverage universe in Russia, except Bashneft, as a Buy, says VTBC.
2020 is the worst. The collapse in oil demand and drop in oil prices, product cracks contraction, crude output cuts, the damper and domestic market contraction, made us think that this year was to be the worst ever for Russian oils (Deep Diving, of 14 April). Russian oil stocks have underperformed other Russian sectors by 25pp YTD. However, they were not alone at this bargain-sale, with international oil majors performing even worse.
Decarbonisation is overwhelming, but Russians have a vaccine. The challenge facing mankind (with oil companies in the front line), and the lack of ready answers, has forced International Oils to search for solutions in commitments to invest in alternatives, declarations of production cuts, and even eliminating the word ‘oil’ from their own names. Russian oils are not under such financial and public pressure around GHG emissions. They are already (and surprisingly) more GHG efficient than their peers, do not have to buy ‘emissions permits’ and spend billions in self-distracting capex. This might mean a sorrowful end in 30-50 years, but that gives them enough time to provide shareholders with generous reverse mortgage take-outs.
Tax changes are bad, but not that crucial. The unexpected and quick passage of the oil tax bill at the end of September added negatives to Russian oils’ fundamentals and sentiment, increasing oil stocks’ underperformance. Meanwhile, we estimate an EBITDA fall of just USD 1.7bn in 2021F because of tax changes, which is significantly less than the government or public estimates, and less than was priced through the 18% Russian oils market cap drop since the announcement.
Buy it now. We see many catalysts that could instigate the wind-down of the large undervaluation of the Russian oil sector in the short to medium term. Having had the sector Under Review we now assign a Buy recommendation to Lukoil, Gazprom Neft, Surgut ords and prefs, Tatneft ords and prefs. We upgrade Novatek to Buy and reiterate our Buy for Gazprom. Bashneft is reinitiated with Hold for ords and prefs. The largest risk, which is skewed to the upside in our view, comes from oil and gas price dynamics.
9 ​RUSSIA Country Report​ December 2020 ​ ​www.intellinews.com