Investment opportunities in Russian oil companies
Ever since the start of industrialization, broad-based growth acceleration has had one common by-product: rising energy consumption per capita. In the early stage we had coal powering the steam revolution, now oil and gas have taken over and underpin to a large extent all of the present consumer staples.
In the previously published article “Investment opportunities in alternative energy providers”, we argued that the alternative energy sector is still far from mature and that significant psychological resistance exists in people’s mind in regards to having access to alternative energy versus producing alternative energy. This includes concerns over the pitfalls associated with being near to alternative energy production, such as noise with windmills or the aesthetic impacts e.g. solar panels or windmills everywhere. Therefore, only fossil energies have sufficient traction to meet the world’s population high energy demand.
The economic expansion we’ve experienced since 1950 is completely based on abundant energy, mainly fossil. The key question is whether there will be a major change in due course and how it will play out. We believe that no major changes will take place in over the next few decades in the way energy is being made available to satisfy growing consumer demand. However, we do believe that consumers will become more and more concerned about environmental issues and that oil majors will be able to address these issues in a more efficient manner then anticipated. The key issue here is that fossil energies are more flexible to handle than renewable energies like solar and wind, and ultimately, the consumer will choose the product which least affects his day-to-day life, as people generally don’t like switching from an already established situation.
Fossil energies and in particular shale gas will play a key role in the energy transition, yet it would be wrong to expect that this intermediary period will lead to substantial and meaningful industrial and technological innovations. Rather, this will be the case in the next phase.
It is commonly stated that energy efficiency is likely to improve sharply over the coming decades. So it’s therefore an opportune time to highlight investments which best reflect the increased efficiency in the energy sector.
While Russia is the immediate loser in the present oil price war, it will most likely be the winner in the long run as its economic strategy is focused on longer-term issues rather than short-term requirements. It has the largest number of untapped fields. Additionally, it has the one of the most modern natural gas liquefaction facilities under construction and a number of delivery services which other countries could easily rely upon during the next few decades.
Enablers and providers in the Russian energy sector
| Company | Ticker | Sector | Upside Potential | Sharpe (FY01) |
| Novatek | NVTKq.L | Exploration and Production | 61 % | 4.0 |
| Investment case: Novatek operates, together with Total (France) and CNPC (Chine), the future Yamal LNG facility with 3 NLG trains, providing a total capacity of over 16.5 million tons of LNG per year. Ultimately, the facility oversees the production of the Russian Arctic’s vast natural gas reserves – more than 200 locations, and is involved in the construction of a major new maritime route for transporting liquefied natural gas to Europe and Asia. The Yamal LNG project is one of the largest industrial undertakings in the Arctic. | ||||
| Company | Ticker | Sector | Upside Potential | Sharpe (FY01) |
| Tatneft | TATNxq.L | Exploration and Production | 56 % | 5.1 |
| Investment case: Tatneft is one of the largest Russian oil companies, operating as a vertically integrated group. Its production accounts for about 8% of all crude oil produced in the Russian Federation and over 80% of crude oil produced in Tatarstan (a southern region of Russia, greaser neighborhood: Kazakhstan and further to the east, China). The company has a number operations in foreign regions such as the Middle East and North Africa. |
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| Company | Ticker | Sector | Upside Potential | Sharpe (FY01) |
| Trubnaya Metallurgicheskaya Kompaniya OAO (TMK) | TRMKq.L | Industrial Metals | 352 % | 8.77 |
| Investment case: TMK is a leading global supplier of tubular products for the oil and gas sector. Its products include a wide range of coated and threaded pipeline products. TMK operates overs 28 facilities located in Russia, USA, Romania, and Kazakhstan. It hosts two research and development centers in Russia and in the United States. TMK is one of most experienced companies in building oil equipment for use in Arctic conditions and for structuring all types of pipelines and related instruments. It should therefore benefit from the upcoming pipeline developments geared towards Asia. |
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| Company | Ticker | Sector | Upside Potential | Sharpe (FY01) |
| Total | TOTF.PA | Exploration and Production | 25 % | 5.3 |
| Investment case: France’s Total holds a number of key investments worldwide; its exposure in Russia is significant and key to the company. Total is currently a partner in two major Russian projects: Yamal LNG (along with Novatek) and the Shtokman project (along with Gazprom). The Shtokman facility is designed to exploit the gas reserves in the north-western part of Russia. The facility is geared towards natural gas delivery via the Nord Stream pipeline to Western Europe, as well as producing Russian LNG to sell in Asia, and in particular in China. | ||||