Page 11 - FSUOGM Week 19 2020

FSUOGM COMMENTARY FSUOGM
Russian oil firms to show first
signs of oil price shock
Russian oil firms publish steep declines in earnings in their Q1 results this month
RUSSIA
THE first-quarter reporting season in the Rus- sian oil sector is underway and the results are showing the first signs of the oil price shock fol- lowing the collapse of prices in March.
Russian oil companies are due to report first-quarter results this month and while March, when oil prices crashed, accounts for only a third of those results, analysts are expecting the top companies to report significant declines.
“Revenues are to be affected by the drop in oil (and oil products) prices, while EBITDA [will] suffer from the increased tax burden and rela- tively strong ruble, which will not allow for cost saving,” VTB Capital (VTBC) said in a note.
While the collapse of the oil price to neg- ative values in April has been front page news around the world, less widely acknowledged is the astonishing performance of the ruble during the current crisis: average oil prices fell by 56% in the first four months of this year, whereas the ruble has only lost 19% in the same period. While the Central Bank of Russia (CBR) has not directlybeeninterveningintheFXmarketsand is not attempting to defend the ruble by tapping Russia’s vast foreign currency reserves, the gov- ernment has made some $30bn of cash available to support the currency, which has cushioned its fall.
That is a problem for the oil companies, as in previous crises the deep devaluation of the ruble has slashed their operating costs in dollar terms, which has drastically improved their profitably
in the midst of the crisis. This time round the oil companies are suffering from the worst of both worlds: deeply devalued oil prices, but a rela- tively strong ruble, which has led to significant foreign exchange losses.
“The FX loss [will] put further pressure on earnings. We believe Surgutneftegaz is going to show a relatively weak performance, with EBITDA falling 44% quarter on quarter, while Gazprom Neft [will] post EBITDA down some 27% q/q, the best achievement in the sector,” VTBC said.
Brent prices have lost 19% q/q due to the slump in demand on the back of lockdowns in China in February and, later in the quarter, else- where and the breakup of the OPEC+ produc- tion cut deal on March 6, which led the market to anticipate abundant oil supplies starting from April.
The Urals discount to Brent expanded to $2.80 per barrel, further affecting the profitabil- ity of the Russian upstream.
“AsoilsuppliestoChinafell,sodidtheaver- age ESPO-Urals spread, which contracted 7% q/q, although it was still quite strong in histori- cal terms, at $7/bbl. That helped companies with relatively high exposure to ESPO deliveries (pri- marily Rosneft),” says VTBC.
The oil downstream was also visibly affected by lower export and domestic product prices; export price declines ranged from 12% q/q for fuel oil to 23% q/q for gasoline and jet fuel in
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