Page 84 - RusRPTMay20

The oil and gas sector remain in the front line as the fate of Russia’s biggest hydrocarbon producers is intimately tied to the efforts to create a new​ O​ PEC++ production cut deal that will reduce production of oil by 9.7mbpd​ that was agreed on April 14. The sector’s stocks are down by 39% YTD and have not moved much since the selling began in the last week of March.
OPEC expects a historic record fall in oil demand this year of 6.8mn barrels per day (bpd), the organisation said in a report on April 16. Global oil demand in 2020 is expected at 92.82mn bpd. The new OPEC++ deal can cut Russia's oil and gas condensate output by 1.3mn bpd compared with 2019, to 10.14mn bpd, whereas under the old OPEC+ deal it only had to cut 300,000 bpd.
Utilities, formerly an investors favourite in the first two months of this year, also remain depressed having lost 22% YTD as of April 17. The problem with sector is previously investors had expected sector-friendly adjustments to tariffs, but with a recession looming those tariff changes are less likely now. And Financials have lost 34% over the same period. Banks are a proxy for rising incomes and economic growth, but again neither of those things are likely to happen now for a few years.
Analysts at the investment banks are still upbeat , simply because even if the medium-term outlook remains grey, they still expect more “dead cat bounce” in the short-term. They point to the good news on OPEC++ and the flattening infection curves as indicators that the market may turn soon.
“Markets may also take heart in headlines that Saudi Arabia and Russia have signalled intent to further reduce output, citing an inadequate price reaction to the latest OPEC+ deal,” said Mark Bradford, a strategist with ​BCS Global Markets​. “The recent downturns offered players an opportunity to embrace headlines that implied COVID-19 may be at least approaching peak, as more hard hit countries prepared to slowly re-open their economies.”
Oil prices will weigh on valuations
But confusion reigns. While stocks are unquestionably cheap, if you compare the current valuations to the oil price then the RTS looks more overvalued than at any time in the last five years.
Traditionally there has been a fairly tight relation between oil prices and the cost of oil: a simple rule of thumb of Russian stock watching is the value of the RTS is usually roughly twenty times the price of oil. If the price of oil is $100 then the RTS should be 2,000. In the past this rule has worked pretty well.
Over the first four months of this year the price of oil has crashed. The value of the RTS index has also plummeted, but a lot less fast and a lot less far than oil. Using the rule of thumb and the RTS is currently about 600 points overvalued.
The average price of oil over the first 15 days of April was only $21.2, down from $63.7 for the month of January. Applying the x20 rule April’s price of oil implies the RTS should be a mere 641, against its actual value of 1,129.5 on April 15. In other words, the current RTS value is twice what it should be if compared the price of oil.
The RTS at 600 is extremely low, if compared to other factors that determine a stocks value, like earnings per share. Even in the depths of the 2014 oil shock when oil prices fell to around $30 then too, the lowest the RTS fell to was just above 800 and then for only a few days before it rebounded to around 900.
Clearly valuing stocks is very difficult at the moment. It appears that investors are not valuing share prices on basis of current oil prices, but what they expect
84​ RUSSIA Country Report​ May 2020 ​ ​www.intellinews.com