Renaissance Asset Managers favours oil over gas

Gazprom, Russia’s largest company and the world’s largest gas producer, is one of the world’s cheapest stocks, according to Bloomberg. Yet Renaissance does not like its stocks and is negative on the gas sector as a whole. Oil, on the other hand, is in the manager’s good books.

Dmitry Mikhailov, fund manager for Russian equities and balanced funds at Renaissance Asset Managers, said: “The fundamental risk of investing in Russian oil is lower than market participants think. Foreign investors think that oil companies are really exposed to oil price fluctuations, so they decrease their oil weightings, but they simply don’t understand the relationship of oil prices to the earnings of oil producers.”

He explained that as the oil price drops, the Russian rouble depreciates against the US dollar. Russian exporters profit from this, as Russian exports becomes cheaper. The oil sector in Russia, which is often criticised for its heavy reliance on foreign investment flows, profits as a consequence.

The heavy taxation of the oil sector by the government is also a benefit, Mikhailov continued. The federal budget takes 85% of the benefits from oil price increases, so when oil prices drop it is the budget, not the companies themselves, that suffers losses.

At the same time, Moscow has a vested interest in supporting oil companies. “If their output drops, the federal budget would suffer significant losses. Output per barrel is only around $1-$2, but the budget would lose $50-$60 every time,” said Mikhailov.

As a result, it can be expected that the taxation regime will be tailored to give oil companies an incentive to continue investing in their own growth.

The gas sector is a different story. Although taxation is much lower, companies have much more exposure to the market environment. Recent overproduction of shale gas in the US and a decline in demand as a result of the European debt crisis have had negative effects on the industry as a whole.

“Gazprom’s volumes are down 50% because its largest customer is Germany, and demand has significantly weakened there. Surgutneftegas has only made a profit in Q2 because of rouble depreciation against the US dollar—of its $3.2bn profit, $2.9bn came from foreign exchange gains,” commented Mikhailov.

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