Are Russian Oil Companies Invincible? They've Survived Sanctions, Cheap Oil

Russia’s President Vladimir Putin with Rosneft Chief Executive Igor Sechin at the Black Sea port of Tuapse. Beating oil and sanctions, sort of, U.S. credit rating agencies say. (Photo by ALEXEI NIKOLSKY/AFP/Getty Images)

U.S. energy companies are defaulting on loans and filing for bankruptcy protection as oil prices stay under $40. But their peer group in low cost Russia has managed to survived the double whammy of cheap oil and Western sanctions that have banned them from European and American finance.
Fitch Ratings said on Tuesday that its low oil prices (averaging under $40) will not require any downgrades of the major Russian energy companies. By comparison, Standard & Poor’s said last week that the U.S. oil and gas sector accounted for 29% of total distressed debt in the the country and had the second-highest sector distress ratio at 79.6%. That is worse than the 2009 distress ratio of 70%.
Some 45% of U.S. corporate downgrades through February this year are from the oil and gas sector. The oil and gas sector leads both investment and speculative-grade corporate downgrades in 2016 through February, Standard & Poor’s said on Wednesday.
In the last month, Energy XXI Ltd; Denver Parent Corp.; PetroQuest Energy Inc and Chaparral Energy have all defaulted or entered into a debt exchange agreement with lenders. “By most of our measures, the default rate could still fall below its long-term average, but if global economic and financial headwinds continue on their present course, it could surpass that,” S&P analyst Diane Vazza says.
Fitch said that the low investment grade credit rating of Russian companies like Gazprom Neft and Novatek, which both have BBB- ratings, will remain unchanged over the next six to 12 months.
Russia’s central bank was wise to let the currency full free-float in late 2014. While it sent shock waves through the market, the ruble went from a traditional trading range in the 30s, to as high as 71 to the dollar. It’s been averaging in the 60s for the past several months, though if oil falls to the low $30s again, Sberbank CIB expects that the currency will weaken to 82 rubles to compensate.

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The weaker ruble has not been good for inflation, but it has helped Russian energy companies, and even the Russian government’s fiscal accounts.
“Russia (has been) protected from the full impact of weaker oil prices by a devaluation of the ruble,” Moody’s says. The Russian government’s devaluation of the ruble boosted ruble-denominated earnings from oil exports, which are priced in dollars.
Russia is not getting the last laugh, though. The economy is in its second year of recession. Investment is declining from the public and private sector, off by 4.4% annualized in February, according to Sberbank CIB. Consumer spending is down and real incomes are down by 10% over the last 12 months.
It is safer to say that Russian oil companies have survived sanctions and cheap oil, but the economy is still holding on for dear life with category four hurricane force tailwinds still blowing its way.
In December, a Lavada Center poll showed that more than half of Russian respondents still said they had enough money for the basic costs in life, and had enough left over for big ticket items.
In the stock market, Russia’s biggest energy companies are a mixed back. In dollar terms, Gazprom is up 15.53% year-to-date; Lukoil is up 20.7% and in rubles, Rosneft is up 21.7%. All three are beating the dollar-denominated Market Vectors Russia (RSX) exchange traded fund and the RTS-Micex Index in Moscow. They’re also beating the MSCI Emerging Markets, up just 4% so far this year.