Russia Integrated Oils
Update PTs on lower oil; weaker ruble is near-term
supportive. WSIB upgraded to N, Sibir cut to UW
Integrated Oils
Nadia Kazakova, CFAAC
(7-495) 937-7329
nadia.kazakova@jpmorgan.com
J.P. Morgan Securities Ltd.
Andrey Gromadin, CFA
(7-495) 967-1037
andrey.gromadin@jpmorgan.com
J.P. Morgan Bank International LLC
See page 42 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
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investment decision.
Key risks:
􀂾 Oil price volatility
􀂾 Ruble FX rate
􀂾 Output targets not met
􀂾 State control over
resources, infrastructure
• We cut our PE/DCF-based Dec-09 PTs for integrated oils by 8% on
average on lower oil prices assumptions. The WTI oil price forecast for 09E
is down 37% to $43.25/bbl. We use a modeling assumption of $55/bbl for 10E
(-35%) and continue to use a long-term real oil price of $87/bbl for 11E and
beyond. The negative impact of a lower oil price is offset by a much weaker
ruble: we use a spot rate of RUB32.3/$ for 09-10E (vs 27.5) and RUB27 from
2011.
• Mid-term financials are adjusted for lower output, weaker oil price, slump
in ruble. We update our model to incorporate new assumptions. EBITDA
estimates for integrated oils are reduced by 28% and 25% for 09E and 10E. The
positive impact of ruble devaluation is reflected in 2011E EBITDA estimates
which are 14% higher on average. Net income estimates are 37% and 31% lower
for 09E and 10E, but 18% higher for 11E.
• Lukoil is better positioned for cash-strapped year, remains top pick. We cut
Lukoil's PT by 22% to $57, OW unchanged. The company completed a major
upstream development project in Timano-Pechora in 08, which should prop up
production levels in 09. It has also cut back on expensive exploration projects in
the Caspian region and stepped back from the acquisition of the Repsol stake,
which should preserve cash. Rosneft (PT $5.7 (from $5.4), N), should show
positive output growth and be a clear beneficiary of ongoing ruble devaluation.
However, execution risks at Vankor development are high and the company needs
to re-finance around $9-10bn of short-term debt in 09E. We also expect Lukoil to
show better per bbl and absolute profitability in 09E vs. Rosneft. We upgrade
Western Siberia Resources to N from UW and downgrade Sibir Energy to UW
from N to reflect our new PTs and the stocks’ relative performance.
• Sector production outlook remains uncertain; ruble devaluation reduces
opex, capex. The crude output outlook for 09E remains uncertain. Lukoil and
Rosneft target flat to slightly higher y/y volumes, with Rosneft's output growth
dependant on a timely Vankor launch. We expect other larger oil companies to
keep production at 08E levels. Russia’s support for OPEC output cuts might
result in lower than expected crude production (and downgrades), but it is not
our main case scenario.

Table of Contents
Summary investment case ......................................................3
Production outlook for 09E is very uncertain ..............................................................6
Upstream capex should decline; major downstream upgrades postponed ...................8
Weaker ruble supports economics ...............................................................................8
Summary financials................................................................11
Risks to our ratings and price targets .........................................................................12
Valuation summary....................................................................................................12
Sensitivity analysis ................................................................14
Valuation tables......................................................................15
Company profiles ...................................................................17
Lukoil.......................................................................................18
Keeping leading position – OW reiterated.................................................................18
Lukoil: Summary of financials ..................................................................................20
Rosneft ....................................................................................21
Toiling away to launch Vankor, reduce debt .............................................................21
Rosneft: Summary of financials.................................................................................25
SurgutNG ................................................................................26
Surgutneftegaz: Summary of financials.....................................................................28
Gazprom Neft..........................................................................29
Gazprom Neft: Summary of financials ......................................................................31
Tatneft .....................................................................................32
Tatneft: Summary of financials..................................................................................34
Sibir Energy ............................................................................35
Sibir Energy: Summary of financials.........................................................................37
West Siberian Resources ......................................................38
West Siberian Resources: Summary of Financials ....................................................40