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Goldman Sachs Busts Myth Of Impending Russian Oil Collapse

Goldman Sachs Busts Myth Of Impending Russian Oil Collapse

Yesterday's Russian downgrade pulled yet another raft of "smartest people in the room" to tell investors how screwed Russia is by low oil prices (and yet the US Shale industry is fine and will manage through this). However, Goldman Sachs prefers facts in its analysis of the Russian oil sector and concludes, investor concerns about the health of Russia's oil industry should remain more myth than reality.

Via Goldman Sachs,

Geydar Mamedov discusses myths and realities in the outlook for Russia's oil sector

There are increasing concerns among investors that lower oil prices might hit Russian crude production and materially worsen Russian oil companies' financial position. Where are the myths and realities in this narrative? While refining segment margins will narrow, low upstream sensitivity to changes in the oil prices means that, if anything, Russian oil production should grow. And Russian oil companies' strong financial position makes them capable of navigating the oil price downturn - even in the face of sanctions limiting their access to external funding.

Myth: Lower oil prices mean lower production

Two factors contribute to the low sensitivity of Russian upstream cash flow to oil prices. The first is upstream industry taxation: the per-barrel tax rate decreases as oil prices fall, shifting most of the upside/downside due to changes in the oil price from the oil producers to the state. The second factor is a ruble-denominated cost structure. Russian oil producers' opex and capex mainly consist of ruble-denominated contracts, as the services industry is localized. These factors offset the negative impact of oil price declines on upstream earnings. Related: Russian Sanctions Might Be Obama’s Greatest Blunder


Effectively, at US$110/bbl oil and 33 RUB/USD, Russian upstream free cash flow (FCF) for the companies we cover is roughly the same as under US$60 oil and 60 RUB/USD. Hence, we do not expect to see a slowdown in upstream activity. Moreover, the Russian government is likely to incentivize output growth in order to mitigate the impact of lower oil prices on budget revenues. Given that Russia has one of the lowest cash costs of production in the world, it would make sense in the current oil price environment for Russia to maintain its market share. We therefore expect production to reach 532 million tons in 2015 from 527 in 2014.

Reality: Russian refining will take a hit

In most countries, lower oil prices negatively affect the upstream industry while positively impacting refining due to feedstock cost reduction. In Russia, however, the tax system is designed in such a way that changes in oil prices have no major upstream implications but strongly influence refining profits. Refining margins in Russia mainly consist of the tax differential between upstream and downstream, and this tax differential is linked to the oil price. Hence, at a lower oil price, Russian refining margins get squeezed.

So if Russian oil producers see a need to cut capex, it will mainly happen in refining. Related: The Cure For Low Oil Prices Is Low Oil Prices


Myth: Russian oils are at risk of default

On our estimates, the Russian oil companies we cover have a combined cash position of over US$90 bn, of which US$26 bn represents cash needed for current operations and US$64 bn is "excess cash," held predominantly in USD. With the sector's total 2015 debt payments at US$40 bn, accumulated cash balances fully cover outstanding 2015 debts payable. On top of that, we estimate that the sector will generate at least US$13 bn of FCF in 2015 (and this is assuming no cuts to capex plans and dividends). Effectively, we believe the industry can navigate through at least next year with low oil prices and no access to external funding. Indeed, at an oil price of around US$60-70/bbl and an exchange rate of 60 RUB/USD, Russian oils should be able to maintain 2015 capex, dividends, and debt payments even without refinancing. Longer term, some companies (Gazprom-Neft and Rosneft) would need funding to maintain investment plans and pay down debts. This funding could potentially be provided by state.



Even if the operating environment turns more negative- assuming RUB/USD of 70, a 20% decline in capex volume, and no dividend payments - the companies' strong starting positions would allow them to navigate 2015 at an oil price as low as $40/bbl (below our commodity research team's forecasts). In sum, provided that the ruble continues to adjust to the shock of weaker oil prices, investor concerns about the health of Russia's oil industry should remain more myth than reality.

By Zerohedge

Source - http://www.zerohedge.com/ 

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  • Giraffe on January 27 2015 said:
    Yeah right.

    Goldman Sachs forgot to reveal that as you increase production close to output capacity, your cost is not linear but could be a lot higher due to reaching limit constraints in transportation, storage logistics, etc but oh well, GS is selling another bs story to maybe get out of its long term futures positions with less loss?
  • Capitalist on January 27 2015 said:
    sounds like Moscow troll wrote such socialistic view of facts.
    All of sudden Russia is 100% independent and low price of oil means nothing.
    Fantasy or Putin dreaming of new paradigm??
    And get ready for oil to hit 10 I wish and hope so, we wil have a few years of peace on earth.
  • Crooktooth on January 28 2015 said:
    Of course, Russian oil firms will be fine. They the goose that lays the golden eggs.

    The problem is that the eggs have shrunk drastically in size. The fact that the marginal revenue loss hurts the taxman more than the oilman is great news for the oilman. It's a disaster for the taxman. Russia's government has already discovered it lacks the foreign exchange (forex, in the ugly language of the article) to import food and consumer goods. Prices are skyrocketing in Moscow, and becoming irrelevant in the provinces (who cares how much a side of beef costs if there's no beef to buy?)
  • SpeakTruth on January 29 2015 said:
    This is an insanely biased article, even Russian government officials are saying the exact opposite of this article.

    As a matter of fact here is an article from Reuters titled "Russia's Gazprom says falling oil prices to hit business"


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