Russian oil companies wonder how to spend profits
It is believed that the reimposition of the sanctions against Iran has proved beneficial for Russia - Russian oil will replace Iranian in Europe and Asia. However, not only this increases the profits of the oil companies in Russia. As Financial Times writes in the article Russian oil groups hit sweet spot as profits surge, Russian oil companies have rarely had it so good. Rising oil prices coupled with a weakening rouble have sent profits for exporters surging above forecasts.
Some companies have already made investment decisions to capitalise on high earnings, but the moves came just as the oil price started to slide.
It has dropped about $20 a barrel since its four-year peak of $86 in early October. The joy for the oil groups, therefore, may be shortlived.
However, the weakness of the rouble, which plunged to a two-year low in September, is still propping up earnings for groups as they repatriate foreign currency-based revenues back to Russia.
Indeed, third-quarter profits have been on the rise across commodities — for oil, gas, and metals companies, which together contribute a large chunk of Russia’s budget.
But while metals businesses are more used to high earnings, and their shareholders to high dividends, it has taken energy companies by surprise.
“They [Russian oil and gas companies] are having an absolutely fabulous year,” said Alexei Bolshakov, general director of Citigroup Global Markets. “They earn more per barrel than they did even during $100 a barrel oil prices. These guys have exorbitant profitability.”
Another senior analyst at one of Russia’s leading banks said: “Russian oil and gas companies are flooded with cash, they don’t know what to do with it.”
Additionally for the oil companies, an improved macro environment and an increase in production quotas under Russia’s deal with Opec and other non-Opec producers since June, has resulted in higher sales at higher prices. Rosneft, Russia’s top crude producer and the world’s largest listed oil company, kicked off Russia’s oil reporting season in November with a tripling of net profits in both the third quarter and the first nine months of the year as well as a more than quadrupling of free cash flow, one of the key numbers looked at by investors.
Novatek, the country’s top independent gas producer, increased net profit by 22 per cent on the year in the third quarter as it started exporting liquefied natural gas last year at a time when largely oil-linked gas prices also rose.
Russian oil and gas companies’ 2018 earnings before interest, tax, depreciation and amortisation will be 30-40 per cent higher year on year on high oil prices, including for Russian Urals blend, said Denis Perevezentsev, vice-president of Moody’s.
The trend continued on Friday with the announcement by Gazprom Neft, Russia’s third-largest crude producer, that it had also sharply increased net profits, by 70 per cent on the year in the third quarter.
For the oil groups, which have enjoyed big increases in their share prices since the start of the year, the key question now is how to spend their money, the senior analyst said.
State-controlled Rosneft, which accounts for about 40 per cent of oil production in Russia, plans a 20-25 per cent year-on-year increase in next year’s capital expenditures, and 80 per cent of that will be pumped into upstream projects. Yet, Rosneft does not think it can sustain profit increases, even until the end of the year. The tumbling price in Brent crude has already brought down expectations for fourth-quarter results.
“I frankly don’t share the optimism of a situation where we would continue living in the same macro conditions. We consider the current situation temporary,” Rosneft’s first vice-president Pavel Fyodorov said in a recent conference call.
BCS analysts added: “Strong growth momentum will most likely disappear in the fourth quarter of 2018, given low spot quotes and we see no other positive catalysts for oil producers.”
It appears the bumper profits may turn out to be a blip rather than a more permanent trend.