Rosneft-Lukoil Stock Premium Shrinks on Ukraine Sanctions

By Stephen Bierman and Ksenia Galouchko

Traders are betting Russia’s conflict with Ukraine will take a bigger toll on state-run OAO Rosneft, reducing its premium to OAO Lukoil to the narrowest in more than a year.
Rosneft, Russia’s largest oil producer, trades at 4.8 times estimated earnings while Lukoil, which has avoided the kind of international sanctions imposed on its larger rival in July, is priced at a multiple of 4.1. The 17 percent premium investors are paying to own Rosneft is the smallest since May 2013, having declined from a six-month high of 44 percent in March.
The Kremlin-controlled energy company has been barred from accessing U.S. markets to finance debt with maturities above 90 days as punishment for Russia’s alleged
role in the crisis in eastern Ukraine. Rosneft has total debt of $72.8 billion, including $13.4 billion due by the end of 2014, and reported adjusted net income of $4.89 billion in the second quarter, data compiled by Bloomberg show. The company’s Moscow shares have fallen 7.8 percent this quarter, compared with a 1.9 percent advance for Lukoil.

Waging Financial War

“Investors have been worried about the implications of sanctions, which has led to significant underperformance of Rosneft lately,” Alexander Kornilov, an Alfa Bank energy analyst in Moscow, wrote in an e-mail yesterday. The spread might continue to narrow as Rosneft’s premium over Lukoil isn’t justified, Kornilov said. Rosneft has more debt and Lukoil “promises faster growth” in crude output, he said.

Photographer: Chris Ratcliffe/Bloomberg

Alexei Ulyukayev, Russia's minister for economic development, said yesterday that... Read More

Financing Needs

Lukoil has $10.4 billion of outstanding debt, including $900 million due by the end of January, data compiled by Bloomberg show. Adjusted first-quarter profit was $2.25 billion.
Moscow-based Lukoil, whose biggest shareholders include its billionaire Chief Executive Officer Vagit Alekperov and New York-based Blackrock Inc., is not government controlled, helping shield it from the impact of U.S. and European Union sanctions.
The Bloomberg Russia-US Equity Index of the country’s most-traded shares in New York fell 0.1 percent to 87.67 yesterday. The Micex Index gained 0.4 percent to 1,449.19 by 10:22 a.m. in Moscow today.
Russian President Vladimir Putin and his Ukrainian counterpart Petro Poroshenko met yesterday to try to ease tension between the two countries while the five-month conflict continued in the former Soviet republic. Putin denies his government is helping the separatists.

‘Right Game’

Rosneft asked the state for as much as 1.5 trillion rubles ($41.5 billion) of aid, a government official said on Aug. 14. The proposal is unrealistic because it would drain too much from the treasury, according to the official, who asked not to be identified because the matter is confidential. Economy Minister Alexei Ulyukayev said yesterday that the company “has a problem replacing the funding absent in global markets,” while its financing needs are far lower than 1.5 trillion rubles.
Lukoil’s strategy is to build a $30 billion reserve from its own free cash over the next five years, guarding against market disruptions and potentially financing acquisitions, billionaire shareholder Leonid Fedun, the company’s vice president for strategic development, said in a June interview.
“Investors are playing the right game,” Vadim Bit-Avragim, who helps oversee about $4.1 billion at Kapital Asset Management LLC in Moscow, said by phone on Aug. 25. “Lukoil is being viewed as a private company that’s not targeted by sanctions, while Rosneft is directly exposed to the Russian government and sanctions.”

‘Not Justified’

As a state-owned enterprise, Rosneft has gained preferred access to Russian natural resources. It owns licenses in offshore zones that are unavailable to Lukoil and began drilling a well in the Kara Sea with Exxon Mobil Corp. (XOM) this month, seeking to open a new frontier in global oil output.
The start of production from Lukoil’s Iraqi oil deposits this year and the Caspian Sea’s Filanovsky field either late next year or in 2016 will allow the company to increase output and cut spending to $15 billion to $16 billion a year from $20 billion, Fedun said in the June interview. Net debt in the first quarter was $9.9 billion, or about 0.6 times earnings, according to documents posted on the company’s website.
Rosneft’s preferred access to Russian oil reserves may not translate into superior returns for investors, Ivan Mazalov, a director who helps manage $4 billion at Prosperity Capital Management, said in an interview at Bloomberg’s Moscow offices yesterday. The premium “is not justified” as the interests of Lukoil’s management are relatively more aligned with minority shareholders than state-controlled Rosneft, he said.