Table of Contents
Summary company recommendations .................................................................... 4
Benchmarking analysis........................................................................................ 6
Investment summary – Selected value in Russian Oils................................................. 7
Key value drivers for Russian Oils .......................................................................... 9
Key risks for Russian Oils ................................................................................... 12
Sector valuation and sensitivities ......................................................................... 13
Our estimates differ considerably from consensus................................................. 16
Positive outlook for gas industry – Gazprom our top pick ......................................... 17
Demand drives Russian gas production ................................................................ 19
Economic recovery to drive rebound in domestic demand ..................................... 19
2009 production collapse – a one-off ................................................................. 25
Russian gas production – Gazprom to restore its market share in 2010...................... 26
Domestic gas tariffs – netback parity may take time ................................................ 28
Taxes – direct gas taxation rather than ’indirect’..................................................... 29
Delayed tax changes on oil sector may provide some support .................................. 30
Downstream improves profitability, but increases oil price sensitivity........................... 33
Oil price assumptions – Finding a balancing point in global oil markets ..................... 34
Company Sections ........................................................................................... 37
Gazprom (BUY, PT $36.2) – Best of a bad bunch ................................................. 38
Gazprom business overview .............................................................................. 39
DCF valuation and sensitivity analysis .................................................................. 40
Key risks ...................................................................................................... 41
Financials ....................................................................................................... 42
Rosneft (Neutral, PT $7.9) – High growth, but premium valuation.............................. 43
Rosneft business overview .................................................................................. 44
DCF valuation and sensitivity analysis .................................................................. 45
Key risks ...................................................................................................... 46
Financials ....................................................................................................... 47
Lukoil (Neutral, PT $59.0) – Attractive valuation, disadvantaged asset base................ 48
Lukoil business overview .................................................................................... 49
DCF valuation and sensitivity analysis .................................................................. 50
Key risks ...................................................................................................... 51
Financials ....................................................................................................... 52
Novatek (Reduce, $32.0) – No longer the growth story.......................................... 53
Novatek business overview................................................................................ 54
DCF valuation and sensitivity analysis .................................................................. 55
Key risks ...................................................................................................... 56
Financials ....................................................................................................... 57
Appendix 1 – Fiscal system unlikely to get worse in the near term.............................. 58