Privately owned Russian oil major Surgutneftegaz remains the investment banks' top pick as they expect it to pay out a massive 19% dividend yield this season, Sberbank CIB said in a note on August 16.
The opaque company should not be an investor’s favourite as it shares little information with investors, who are still unclear what happened to a sizeable number of treasury shares, or indeed, who actually owns the company. However, it is famous for its massive cash pile and the current market conditions mean it is making money hand over fist.
“The current macro environment is highly favourable for Surgutneftegas' earnings, which benefit not only from the recovering oil price, but also from the FX gains realised at its $40.6bn cash pile,” Sberbank CIB said in a note.
With costs denominated in rubles, but earnings in dollars, Russian oil companies are always big winners from devaluations and the ruble is down this year 16% since January, while oil prices have been averaging over $75 per barrel in the last three months – even after a fall in Brent futures on the back of the Turkish currency crisis.
“All these factors, if they persist, could well support the company’s financial performance in the second half of the year. We calculate that if the ruble stays at the current level of 66.80 by the year end and Urals averages $71/bbl in 2H18, Surgutneftegas might deliver an 18.6% DY (RUB 6.80 DPS) for 2018, the highest among Russian Oil & Gas names,” Sberbank said in a report reiterating the stock as the bank’s top pick in the oil and gas space, and reaffirming a Buy recommendation with a 12-month target price of $0.66 and a 30% ETR.
Part of this year’s currency depreciation has already been reflected in Surgutneftegaz’s results for 1H18 under Russian Accounting Standards (RAS), as net other income, which primarily comprises foreign exchange gains/losses, grew RUB286bn y/y in 1H18 (with leading net income to soar 486% y/y to RUB 371bn for the period), Sberbank reported.
And the situation is only improving. Following the ruble’s slide earlier this year from fears over sanctions, it has been on the decline again recently with Turkey fighting a currency meltdown. While the consensus is that Turkey’s problems will not infect other emerging markets and cause a 1997-style Asian debt crisis in emerging markets, its problems have been acute enough to pull many EM currencies down – especially those of countries with a large trade turnover with Turkey such as Russia.
The ruble has depreciated another 6.4% since 30 June and now trades at RUB66.80 to the dollar, while the Russian Urals oil blend is trading at $72/bbl on average in July-August so far, above the 1H18 average Urals price of $69/bbl (Urals blend typically trades at about a dollar less than Brent).
Surgut dividends this year for the prefs might reach as high as 18.6% says Sberbank – the highest in the industry.
“The growth [in dividend yields] partly comes from the company's operating performance and general macro trends (the operational business generates some RUB3.20 in DPS or 47% of total DPS), which still implies a healthy c.8.6% DY, on our numbers. Another RUB 0.80/share in DPS (12% of total DPS or 2.2% DY) is generated by the interest income earned at Surgutneftegas' sizable cash pile, which reached RUB 2,548bn ($40.6bn) in 1H18. The remaining RUB 2.90/share (42% of total DPS or some 7.8% DY) is attributed to the FX gain reflected due ruble depreciation. We note, though, that RUB volatility might imply a different $dividend yield to our dollar-denominated 12-month Target Price,” Sberbank explained.
The stock has already performed well recently along with other commodity companies on the back of rising oil and metal prices, gaining 10.3% in dollar terms since the end of June and outperforming the RTS oil and gas index that makes up 60% of the markets capitalisation by 18.1%. “But we believe there is some room for upside left,” Sberbank said in a note.