Page 6 - FSUOGM Week 11

FSUOGM COMMENTARY FSUOGM
BCS GM marks raft of Russian
stocks up to buy on market
collapse
The investment firm is advising investors to buy or hold shares in Russian oil and gas companies
RUSSIA
Low share prices have made Russian oil and gas stocks attractive.
A Russian investment bank has marked a raft of stocks up to Buy after the market divested by more than a third in the last two weeks, the bank said in a note to clients on March 16.
Portfolio investors are smarting after the dol- lar-denominated Russia Trading System (RTS) index gave up all its gains from a strong start to the year during the traditional spring rally. The RTS topped 1,600 for the first time in about five years, but closed at 991.69 on March 13, a level it last saw in 2016.
No one is expecting the oil price or stock mar- ket to recover anytime soon, but the analysts at BCS GM believe stocks are at or close to bottom and it is time to hunt for bargains.
The oil and gas sector is an obvious place to start shopping, as this sector took the brunt of the sell-off after the OPEC+ production cut deal collapsed on March 6, sending oil prices down overnight to around $32 per barrel from around $55.
BCS GM changed its market recommenda- tions on a number of oil and gas stocks.
“Given the new global oil price environment (after the OPEC+ agreement break-up) and recent dramatic drop in stock prices, we are upgrading our sector stocks: Gazprom to Buy (from Sell), Novatek to Hold (Sell), Lukoil to Hold (Sell) and Surgut ords to Hold (Sell).
BSC GM pointed to Gazprom as one of the stocks that could bounce back in the medium term. The oil and gas sector has borne the brunt of the selling in the last weeks after the OPEC+ production cut deal collapsed on March 6. Fol- lowing a fall of 37% by the RTS last week, the oil and gas sector was the worst performing, down 44%, but BCS GM says much of the fall in oil prices is now priced into the stocks in the sector.
“Add Gazprom (GAZP) to the [medium and long-term portfolio],” BCS GM said in a note. “Oil prices have dropped -33% in March, but gas prices in Europe have remained largely unchanged. The prior weakness in gas prices (-47% year on year in 2019 and -20% in 2020
YTD in dollar terms) had weighed on Gazprom’s fundamentals. We believe that the ongoing cor- rection in Gazprom ords (GAZP, -42% YTD) supports the hypothesis that low gas prices are priced in, limiting the downside risk for the stock.”
The Gazprom story is buoyed by the expecta- tion the company will stick to a promise to pay- out 50% of its net profits as dividends in 2021.
“Our Oil & Gas team has upgraded the stock to Buy with a 19% upside and dividend yield of 9.5%, despite cutting its 12-month Target Price by 10% to $2.80,” BCS GM said in a note.
The bank also highlighted Transneft’s prefs (TRNFp) to its medium and long-term outlook Buys.
“Following the recent price performance (-34% in dollar terms since the peak on 8 Jan- uary), the stock offers a 58% upside to our Oil & Gas team’s 12-month Target Price of RUB215,000, and a 2020F dividend yield of almost10%,”BCSGMsaid.“Thestockisagood hedge against the turbulence of global markets in our view, given its low beta to oil. Furthermore, TRNFp stands to benefit from higher volumes if oil output in Russia grows.”
Russian companies have promised to increase production once the OPEC+ deal offi- cially expires on April 1 and as Transneft is Rus- sia’s pipeline monopolist, that will increase the company’s income.
“The stock is trading at undemanding 2020F EV/EBITDA and P/E of 2.0x and 4.8x respec- tively,” BSC GM said.
However, BCS GM warns there will be a great deal of uncertainty and volatility in oil prices as there are so many moving pieces in play at the moment, including: the affect of low oil prices on US shale production; increase in production from Saudi and Russian producers to compen- sate for lower prices; and fall in demand due to the coronavirus (COVID-19).
“This implies that there could be wide fluc- tuations in oil price over the coming months.
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w w w . N E W S B A S E . c o m Week 11 19•March•2020