Russian oil companies are becoming increasingly generous to investors, a fact that could outshine a weaker earnings season.
So far this year, the nation’s producers have offered higher total returns to shareholders than most of their international peers, according to data compiled by Bloomberg. While second-quarter earnings will be hit by production cuts due to the Opec+ deal and the Druzhba pipeline contamination crisis, each of the companies has found its own way to entice investors.
From Gazprom Neft PJSC’s promise of higher dividends, to Lukoil PJSC’s share buybacks and Tatneft PJSC’s maxed-out payouts, a new focus on returns has added to their allure, according to Bank of America Corp.
“Russian oil stocks are now absolutely more attractive for international investors,” said Karen Kostanian, a Moscow-based oil and gas analyst for Bank of America. “Lately, the Russian stocks have provided the largest dividend yield among global majors, while trading at 50% of their valuation of their global counterparts.”
One important exception to the trend is Russia’s largest oil producer, Rosneft PJSC. It’s lagging far behind domestic peers and only slightly ahead of its European rivals. The company’s promised share buyback programme hasn’t materialised, and it’s already paying out 50% of its net income as dividends – the targeted level for state-controlled companies.
Rosneft investors may have to wait until next year for greater rewards. Citigroup Inc named it one of the “two big mid-term dividend growth stories” in the Russian energy industry, along with Gazprom PJSC. The bank’s analysts expect the oil giant to increase payouts from 2020 as the ramp-up of new projects and adjustments in foreign-exchange accounting standards boost profits.
Shares in Lukoil, Russia’s second-biggest oil producer, have been boosted by its $3bn buyback programme, which the company announced a year ago and completed ahead of time. Earlier, Lukoil said that it plans to decide on the terms of a new repurchase program after publishing the results of the current one.
For Rosneft’s peers, expanding returns could help investors to get over weaker second-quarter earnings. The companies are set to post lower net income than a year earlier, driven partly by lower oil prices, according to estimates from HSBC Holdings. That’s the same trend as several European competitors, yet on a smaller scale because Russian crude producers are less exposed to the slump in international natural gas markets.
“The Russian oil majors are currently in a way better position than any of their European peers,” said Rollo Roscow, a fund manager at Schroders Plc. “They can withstand lower oil prices.”
Brent crude, the international benchmark, was about 9% lower in the second quarter than a year earlier. The decline was less of a problem for the Russian oil industry, which enjoys one of the lowest production costs globally.
The weaker rouble also helped to offset crude’s drop, as companies generate export revenue mainly in US dollars, while their operating costs are mostly in the Russian currency.
While they enjoyed some in-built advantages, in other ways Russian companies had a uniquely painful quarter.
Through most of the period, they battled the worst disruption to Russian production in modern history. The temporary shutdown of the Soviet-era Druzhba crude pipeline due to chemical contamination had a profound effect on the nation’s output, taking it below the level agreed by the Organisation of Petroleum Exporting Countries and its allies from May to July. That deprived producers of revenue, even though Transneft PJSC has agreed to pay compensation related to the crisis.
Rosneft reported yesterday, that its production of hydrocarbons fell by 3.3% in the second quarter, from the preceding three months, as the company complied with its pledge under the Opec+ agreement to curb output and Transneft temporarily limited oil intake in its pipeline system during the Druzhba crisis.
As ever with Russia, investors have to handle political as well as commercial dangers. While fears of US sanctions have receded, new risks have emerged.
“We have not seen any serious sanctions for a while and today the investors are not so easy to scare away” from Russian oil stocks, Konstantin Asaturov, a portfolio manager at Sistema Capital LLC, said by phone.
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