Page 67 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
Table 3.21: Energy stocks related to oil price senarios
Current Base case Conservative A Conservative B Conservative C Conservative D Stock Price(US$) TP(US$) Upside(%)TP(US$) Upside(%)TP(US$) Upside(%)TP(US$)Upside(%)TP(US$)Upside(%)
LUKOIL 80.39
105.00 31 2.40 4 4.00 –12 9.45 5 1.03 –18 1.03 14 4.20 –5
102.73 2.34 3.89 9.38 1.02 1.02 4.12 15.74 10.53 67.27
28 2 –15 4 –18 13 –6 0 –3 19
100.68 25 2.29 0 3.78 –17 9.30 4 1.00 –20 1.00 11 4.02 –9
15.22 –3 10.36 –4 67.06 19
50.00 47.90 45.90 44.00
98.60 2.24 3.67 9.23 0.99 0.99 3.92 14.69 10.20 66.85
23
–3 –20 3 –21 9 –11 –7 –6 18
96.48 20 2.18 –5 3.56 –22 9.15 2 0.98 –22 0.98 8 3.82 –13
14.16 –10 10.03 –7 66.63 18
40.00 41.30 42.60 44.00
TNK-BP Holding Gazprom Neft Rosneft Surgutneftegaz, ord. Surgutneftegaz, pref. Tatneft
2.30 4.57 8.98 1.25 0.90 4.40
Bashneft 15.75 Gazprom 10.82 Novatek 56.50 Oil price, Brent
2007F 2008F 2009F 2010F
16.30 10.70 67.50
4 –1 19
61.00 54.00 49.00 44.00
55.00 51.10 47.40 44.00
45.00 44.70 44.30 44.00
Source: Bloomberg, Deutsche Bank research estimates
While Russia's production and export have been rising fast over the last decade, it is still a price- taker and once the greatest beneficiary of the high prices.
Despite the Kremlin's best efforts to diversify the economy, oil will remain an important source of income as Russia holds the second largest reserves of oil in the world, after Saudi Arabia. It also holds the second largest reserves of gas. However, the Kremlin's strategy is not to squander this resource and since Putin took office the state has effectively capped oil production by limiting access to pipelines and is going slow on plans to build new pipelines. The strategy going forward is to keep production increases to a minimum and instead create more free gas for export by improving energy efficiency at home, as the legacy of the Soviet economy is that Russian industry is one of the most wasteful in the world.
The motive for the cap on production is that oil already produces significant trade balance surpluses and the CBR is struggling to sterilise the incoming petrodollars. The Kremlin is afraid of suffering from the so-called Dutch disease, where petrodollars quickly drive up the value of currency making it difficult for domestic industry to compete in export markets. While the ruble has been appreciat- ing strongly, economists say that Russia has not yet caught the Dutch disease; however, they warn that the pressure from the rising ruble is increasing and this problem is a real danger.
The effect of oil on liquidity
Despite the obvious increased diversification of the Russian economy since Putin took power, there is a real debate among analysts over the importance of oil to both the economy and the stock market's performance through its effect on liquidity.
Alfa Bank's Chief Economist, Natalia Orlova, wrote about this in a note entitled ‘Oil Price Vulnerability Back on the Agenda’ (26 October 2006) in which she illustrated the inter-relation- ship between oil and the monetary base. One of the important conclusions was that, without some flexibility to the government's current approach to the Stabilisation Fund, should the oil price average US$50/bbl in 2007 rather than US$60/bbl then the CBR's reserves would only rise by US$40bn rather than the expected US$100bn. In that case, the Stabilisation Fund would only receive an extra US$40bn rather than the expected US$60bn. That would also mean zero allocation to the monetary base and a severe liquidity squeeze. The fiscal growth that has sustained economic growth through the last several years would disappear.
On the other side of the fence, some argue that the relation between oil price and the RTS index is breaking down. Certainly, since the end of 2006 when oil prices began to fall thanks to an unsea- sonably warm winter, the RTS continued to rise despite a sharp adjustment in the price of a barrel of oil (see Figure 3.8). The proponents of this argument believe that Putin's cap on oil and his ‘Nine commandments to business’ (see Chapter 1) have already moved the stock market's centre of gravity towards the consumer sector, which depends on the domestic engine of consumer spending and is relatively immune to what is happening on international commodity exchanges.
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