Article / 20 October 2014 at 10:00 GMT

Oil giants with feet of clay

Russia oil and gas expert
United Kingdom
  • Lukoil, Rosneft trading higher than market cap calculations would suggest
  • Each $10/bbl drop in the oil price means a $3/bbl drop in net revenues
  • Devaluation of the ruble no great help given oil price tumble

By Nadia Kazakova

How could it be that, as the price of Brent oil price dropped by more than $10 per barrel over the last four weeks, Russian oil companies grew more expensive? Because this is what calculations would suggest...


Rosneft and Lukoil shares might be falling, but have they fallen far enough? Photo:

Since September 19, share prices for Lukoil and Rosneft are down by 6% and 9%, respectively (as of market close on October 17). This is not too far away from the 11% drop in 12-month Brent futures. 

However, oil companies are losing an estimated $2/bbl, or 13% of their earnings before interest, taxes, depreciation, and amortisation for each $10/bbl decline in the price of oil. Each $10 decline also brings revenues lower (by $3/bbl after taxes), with the boost from the ruble's devaluation representing a mere $1/bbl gain.
Source: Bloomberg, Nadia Kazakova

Adjusting for debt, the market capitalisations of these companies (and consequently their share prices) should have been down by around 16% to 23%. Effectively, Lukoil and Rosneft are now trading on higher enterprise value/EBITDA (2015E) multiples than they did four weeks ago. 

Investors might be hoping for a rebound in the oil price or they might want to have a closer look at the economics of the Russian oil business.

The economics of the Russian oil barrel

The best way to look at the impact of falling oil prices and depreciating ruble is to concoct a rough estimate of what happens to each barrel of oil produced by a hypothetical Russian oil company. 

Oil refinery

From this point onwards, it gets a little complicated. Photo: Tomas Sereda \ iStock

Based on semi-annual statistics, Russian oil companies export around 43-45% of their output as crude oil, refine 55% and then export 30% of output as refined products. In total, 70-75% of their oil is shipped outside Russia. The remainder is sold domestically. 

The revenues per barrel of output are not too far away from the headline oil prices, as refined products add relatively little value. International operations (usually high turnover but low-margin) are disregarded in these calculations.

Net revenue calculations per barrel of oil output (based on 2015 taxation)

Source: Nadia Kazakova, oil company data

Oil companies pay two major taxes out of their gross revenues: a production royalty (or mineral exploration tax) and export duties on crude oil and oil products. In total, over 50% of gross revenues are paid out as taxes. 

In addition, an estimated $5/bbl is gobbled up by transportation and other costs, which are also denominated in US dollars. Roughly speaking, an oil price of $100/bbl will see our hypothetical oil company receiving just under $40 in net revenues (after paying dollar-based taxes and costs). 

Each $10/bbl drop in price of oil, then, would mean a $3/bbl loss in net revenues.

Ruble devaluation no great help

The devaluation of the Russian currency is only helping so much, at least in terms of EBITDA. The total cost of oil production, refining and transportation in Russia — all ruble-denominated costs — would add up to around $18/bbl. If one assumes a five-ruble devaluation for each $10/bbl decline in the price of oil, it would only save the oil companies around $1 per barrel of oil output. 

Impact of devaluation and inflation on operating expenses
Source: Nadia Kazakova, oil company data

All in all, EBITDA per barrel of output would fall $2 for each $10/bbl drop in the oil price, representing a decline of around 10-13%.

Weaker oil has not been fully priced in

The share prices of both Rosneft and Lukoil have fallen over the last four weeks (September 19 to October 17) and are down by 6% and 9%, respectively. This is not too far from from an 11% drop in 12-month Brent futures. Still, if investors were pricing in a $2/bbl lower EBITDA (for a $10/bbl drop in the price of oil over 2015), the share prices would have been 16-23% lower.

Effectively, both Lukoil and Rosneft are trading on higher EV/EBITDA multiples than they did a month ago.

Estimated changes in share prices for an actual drop in the oil price, by %
Source: Nadia Kazakova, oil company data, Bloomberg (Notes: EV = market capitalisation (number of shares * share price) + net debt. Estimated changes in share prices are calculated by reducing EV as of September 19 by 15%, then deducting the debt to arrive at the estimated market cap. Estimated market cap divided by number of shares gives estimated share price.)

More interestingly, Rosneft's share price is faring better than Lukoil's. Presumably, investors believe that Rosneft is going to be bailed out (or at least re-financed) by cheap government funding. 


Sometimes a loss can be a rally in disguise. Photo:

However, the most that Rosneft might get in the short term is money to cover the substantial interest payment on its $44.5 billion debt. A larger bailout might not be entirely without costs to minority shareholders. This does not seem to be priced in, either.

-- Edited by Michael McKenna

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector.
Artie Artie
Интересно, насколько "глинянее" ноги у западных нефтяных компаний?) Может быть эта ситуация все-таки больше связана с общим дисконтом российского рынка?
Nadia Kazakova Nadia Kazakova
Наверное, у статьи не самый удачный заголовок. Основная идея в том, что цены на акции не полностью отражают падение цены на нефть (если брать цену фьючерса ноября 2015 года). При прочих равных, это делает акции более дорогими по EV/EBITDA.
Mikhail Kalugin Mikhail Kalugin
Мягко говоря, далеко не первая статья с "не самым удачным заголовком" ;) Вследствии чего логичный вопрос - в чем мотив? Возможно следовало бы обратить внимание в обзоре на прогноз MStanley, в особенности по оценке "заложенных чрезмерных рисков" для российского рынка, акции перепроданы до падения цен на нефть как и весь российский рынок (15-20% - по MSt), так что Artie +
Diplot Diplot
В военных экономиках с элементами рынка разве могут быть перспективы у акций
Mikhail Kalugin Mikhail Kalugin
Diplot, что вы имеете ввиду - "в военных...", большая угроза по моему мнению в "социальной" экономике с недоразвитыми рыночными меанизмами/, если речь ведете о большом ВПК, то стоит иметь ввиду и значительную долю мирового рынка вооружений у России, если ваша мысль о больших тратах на перевооружение армии, то считаю впервую очередь необходимо оценивать платежный баланс и общий долг страны (+корпоративный), по этим показателям у России дела неплохи, если не сказать лучше чем у большинства стран, а в принципе состояние экономики страны и компании связаны лишь опосредовано, прямой зависимости нет, как то так
andy capp andy capp
Thanks for this post on Oil Giants... and also your comment below on Stephen Popes piece on the RUB.
Do you think nevertheless the USD/RUB will continue the daily rising trend for some time or revert?
Interested in your view.
Many thanks
Nadia Kazakova Nadia Kazakova
Hi Andy, I think there might be a reversal. The rouble tends to get slightly stronger last week of the month as oil companies convert their export revenues to pay taxes. Also, the Russian Central Bank will start offering currency repos on October 29th-30th. The oil price is stabilising. Theoretically, though, it is all known to the market (i.e. should be priced in). Besides, the situation in Ukraine remains very fragile and unpredictable. On balance, assuming no bad news in Ukraine, the rouble might have a bit of reversal.
Diplot Diplot
Согласен что военный экспорт-значимая доля доходов Российской фабрики смерти и партии войны г-на Рогозина. Который не потрудился выполнить свою работу в США и привел Россию к конфронтации может быть и преднамеренно. Риски как внешнеполитические так и внутренние эконономические выросли несмотря на залив денег в оборонку и истерик Минфина. Удастся ли прокормить Россию на штыках ВПК-вопрос. В любом случае сложившаяся модель Российского государства крайне неустойчива с моей точки зрения будет разрушена возможно и внешним вмешательством.Не вижу места акциям.


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