Owning stock in a Russian company can be more than a risky investment. The Russian government marches to the beat of Vladimir Putin and the oligarchs that control the vast natural resources in the nation. Rosneft is one of the leading Russian oil companies run by Igor Sechin, one of President Putin’s closest allies. A combined investment in Russia and oil turbocharges the risk. The global pandemic crushed oil demand, which has caused the company to lose money in Q3.
On November 12, Rosneft reported a third-quarter net loss of 64 billion roubles or $827 million, after reporting a net income of 43 billion roubles in Q2. The company attributed the loss to falling production and a weak rouble.
I am always dubious when it comes to earnings reports from Russia, as regulations are, shall we say, below the US and European standards. However, Rosneft could be an exciting candidate for investment over the coming months as the prospects for the oil price are looking brighter. Moreover, the US could be preparing to take a step back on production, handing the Russians and Rosneft a lot more power. On Yahoo Finance, the Public Joint Stock Company Rosneft Oil Company (RBFTF) is represented under two symbols in the OTC market (OJSCY). The company trades under the symbol ROSN.LN on the London Stock Exchange. Rosneft has a close relationship with the British.
Saudi Aramco is the world’s leading oil-producing company, with Rosneft second. Rosneft is the third-largest company in Russia and produces over 40% of the country’s crude oil and condensate. Condensate is a very light hydrocarbon with an API specific gravity is greater than 50 degrees and less than 120 degrees. Condensate is readily refined into gasoline because it contains hydrocarbons within the gasoline boiling range.
While Rosneft is the leading exploration, development, production, and marketing petroleum and gasoline company in Russia, it also has assets and operations worldwide. Rosneft has interests in Venezuela, Cuba, the United States, Brazil, Norway, Germany, Italy, Mongolia, Kyrgyzstan, China, Vietnam, Myanmar, Turkmenistan, Georgia, Armenia, Belarus, Ukraine, Egypt, Mozambique, Iraq, and Indonesia. Aside from petroleum and oil products, the company also produces petrochemicals. Rosneft also has a retail network of filling stations and provides survey and drilling services.
At $5.58 per share (the OTC listing, ticker OJSCY) on November 18, Rosneft’s market cap was just over $54 billion. The company pays shareholders a $0.50 or 9% dividend. The global pandemic and cooperation with OPEC and other leading oil-producing companies caused production to fall in 2020 and Rosneft to report a substantial loss in the third quarter of 2020.
A joint venture with BP- A long position on BP is a wager on Rosneft
British Petroleum is one of Europe’s leading energy companies. At $19.90 per share on November 18, BP had a market cap of almost $67 billion. Like the rest of the global oil industry, COVID-19 hit BP shares like a ton of bricks.
BP shares rose to an all-time high of $79.77 per share in late 2007 when the oil price was heading for its record high in 2008. In March 2020, BP fell to a low of $15.51. While the rest of the stock market soared, and the price of oil recovered from the late April bottom in the energy commodity, BP fell to an even lower low of $14.74 on October 29 before recovering to near the $20 per share level.
BP has a long history in Russia dating back three decades. The company owns a 19.75% stake in Rosneft. BP operates in three segments, Upstream, Downstream, and Rosneft. Therefore, a long position in BP is also an investment in Rosneft, given BP’s exposure to the Russian energy giant.
I believe we could be on the verge of a significant recovery in the commodities asset class, which would likely boost the value of BP, Rosneft, and all oil companies after underperforming the stock market over the past years.
Reason one- A commodity bull market
Three factors are pointing to a significant bull market in commodity prices over the coming years. While the 2008 global financial crisis was a far different event than the 2020 worldwide pandemic, central banks have used the same tools to provide liquidity for the financial system. Short-term interest rates in the US are back at zero percent. In Europe and Japan, they are in negative territory and lower than a dozen years ago. The quantitative easing levels to suppress rates further out along the yield curve are even more significant today than in 2008. Low rates and quantitative easing encourage borrowing and spending while they inhibit saving. Low rates weigh on the value of fiat currencies. As the purchasing power of currencies declines, commodity prices tend to rise.
The tidal wave of government stimulus is another factor that weighs on currency values, increases deficits and government debt, and increases the money supply. In 2008, the US government borrowed a record $530 billion to fund the stimulus. In 2020, the Treasury already borrowed $3 trillion. More borrowing is on the horizon in 2021 with another massive stimulus package that addresses the second wave of COVID-19 and the lingering impact of the virus’s first wave.
Record levels of liquidity and stimulus and a similar economic leadership approach under the incoming Biden administration is a copy of the landscape in 2008 under the Obama administration. From 2008 through 2012, commodity prices rallied to multi-year and, in some cases, all-time highs. With the same prescription to deal with the pandemic, why should we expect a different result in markets? We have already witnessed emerging bullish trends in a host of commodities, and crude oil is no exception.
Reason two- The US could hand control of oil back to OPEC and Russia
An integral part of the Democrats’ platform for the November 3 election was to address climate change as an “existential threat.” While President-elect Biden is a political moderate, progressive forces within his party are likely to push his policies to the left, which includes limiting or banning the production and consumption of hydrocarbons.
The Democrats will have a majority in the House of Representatives. A victory in the two runoff Senate elections in Georgia would hand them control as Vice President Harris would be the deciding vote. Therefore, the Georgia contests on January 5 will determine the policy path for many issues, including US energy production.
Oil and natural gas continue to power cars, trucks, planes, and other transportation modes and businesses worldwide. The US became the world’s leader in oil production over the past years. Limiting or banning fracking or far stricter regulations would cause production to decline. Meanwhile, OPEC, Russia, and other world producers will not follow the US’s lead. They would likely take control of the energy markets, causing higher prices for consumers if the US retreats from its current output levels. A progressive approach to energy could hand pricing power back to the Middle Eastern producers and Russia over the coming years.
The bottom line is higher oil prices in a commodity bull market and more influence in global control by Russia and Saudi Arabia would likely result in higher profits for Rosneft and the leading foreign petroleum producers.
Reason three- Technical factors in crude oil point higher
Meanwhile, after trading around the $40 pivot point since early June, the price of nearby NYMEX crude oil futures attempted to break lower in late October and early November. Crude oil recently fell to a low of $33.64, the lowest level since May 2020, before rising back above the $40 level.
Price momentum in the crude oil market continues to support higher prices. Relative strength is just below a neutral reading, which could signify that the energy commodity has room for further gains after six months of price consolidation around the $40 per barrel level.
Moreover, a close above $41.70 per barrel at the end of this month would create a bullish reversal on the monthly chart. The technical pattern could cause follow-through buying in December and beyond. The price of nearby December NYMEX futures settled at $41.82 per barrel on November 18.
Investing in a Russian oil company is a risky proposition.