The Russian (Oil) Revolution
forbes.com Money & Investing Megan E. Mulligan, 04.28.03
Russia has more oil reserves than any other non-OPEC nation, and ADRs for Americans who want to brave a rather forbidding climate for investors.
As the Soviet Union sank, a cluster of insiders plucked vast energy resources from the state at knockdown prices and turned them into an oil industry. Many of these oligarchs are now listing their companies on U.S. exchanges, thus offering equity investors an opportunity to drill for hidden value.
Lukoil, with $14.8 billion in revenues in 2001, is the industry's heavyweight. It pumps 460 million barrels of oil a year, 20% of Russia's output, and has at least another 30 years' worth in the ground at present production rates. Lukoil also operates gas stations across the ex-Soviet republics, and it bought Getty's gas stations in the U.S. It owns refineries throughout eastern Europe. Vagit Alekperov, an oil-and-gas minister in the former Soviet Union, cobbled the company together out of some of the best Russian oil properties. The 10% stake he stitched up for himself is worth $1.2 billion, and he ranked number 329 on FORBES' list of the world's billionaires.
Lukoil, which has joint ventures with BP and ConocoPhillips, is pushing for new deepwater facilities in the all-weather port of Murmansk. That would let it ship more oil to North America.
The analysts' consensus estimate is that the company will earn $9.79 per American Depositary Receipt for 2003, and Lukoil is trading at a mere 6 times that amount. That makes it look like a bargain in comparison with U.S. oil majors. ExxonMobil shares cost 16 times projected 2003 earnings. But lately Lukoil has had its problems.
Alekperov has endured the mysterious kidnapping of his chief financial officer, a messy political struggle with the governor of the oil-rich Nenets region and Saddam Hussein's tearing up a long-standing contract to develop one of Iraq's biggest oilfields. The ADR has dipped 10% since January.
Yukos, with $9.2 billion in annual revenue, is Lukoil's rising challenger. Run by 39-year-old Mikhail Khodorkovsky, a former Communist Youth Leaguer who is now the richest Russian (26 on the FORBES list), Yukos has been transformed since he bought it for a song in 1995. Hardball tactics that had aroused complaints from shareholders, foreign banks and partners like Amoco have been changed by Western directors, managers and auditors. Yukos seems destined to become Russia's number one in production, profits and market value.
Like Lukoil, it wants to export more crude. Storms close its Black Sea oilterminals in winter. In February Yukos bought the Eastern Oil Co. of Siberia. Khodorkovsky is urging the Russian government to build a pipeline to connect Siberian oilfields to China and the Pacific coast port of Nakhodka.
Moscow's recent announcement that foreign oil firms investing in Russia will no longer get special legal protection could also work to the advantage of Russian outfits. The Russian oil and gascompanies listed below all trade in the U.S. as ADRs. Two warnings: First, while they make a show of following U.S. accounting standards, they sometimes publish balance sheets that are as impenetrable as a Siberian winter.
Second: Lukoil and Yukos have big interests in Iraq. The retention of these is far from certain.
Put a Bear in Your Tank Russia is the world's number two oil producer and exporter. These Russian oil and gas companies are growing to keep up with demand. Company ADRprice Change from 52-wk high 2001 revenues ($bil) Market value ($bil) Gazprom $11.70 -42% $19.3 $27.7 Lukoil 55.38 -24 14.8 11.8 Sibneft 20.55 -20 3.4 9.7 Surgutneftegas 14.50 -39 5.6 10.4 Yukos 145.00 -16 9.2 21.6 Prices as of Apr. 1. Sources: Bloomberg Financial Markets; J.P. Morgan Chase; Worldscope via FactSet Research Systems.