􀀗 Russian gas is seeing improvements in
demand, as we expected
􀀗 However, we are now more cautious on
broader Russian market perceptions:
the oil price appears too high
􀀗 We reduce our TP for Gazprom to
USD25/ADR and raise it for Novatek to
USD50/ADR but downgrade our ratings
for both to Neutral (V) from OW (V)
Overheated oil price might see
correction, breaking momentum for
Russian gas stocks
What’s happened. The Russian energy stocks have had a
strong run in share prices y-t-d, not least helped by the
recovery in the oil price. We are now worried about the
sustainability of USD70/bbl oil without the backing of
fundamentals. A correction in the oil price would drag the
Russian market down, led by cyclicals. On top of this, the
Russian gas price liberalisation has now been delayed.
Impact. Lower gas price assumptions and a higher
additional company equity risk premium for Gazprom have
driven our target price cut to USD25/ADR from
USD37/ADR and a corresponding downgrade in our rating
to Neutral (V) from Overweight (V).
The negative impact of slower gas price rises on Novatek’s
financials is offset by a lower company equity risk premium
(to reflect Novatek’s tendency to outperform in market
corrections), allowing us to raise its target price to
USD50/ADR from USD45/ADR. We downgrade Novatek’s
rating to Neutral (V) from Overweight (V) on valuation.
Catalysts. In the longer term, we continue to see value in
both Gazprom and Novatek although to realise that value,
strong signs of improvement on the macroeconomic side are
necessary. On a stand-alone basis, cutting the risk-free rate
and equity risk premium to normalised levels (5.5% and
7.0% for Russia, respectively) and removing companyspecific
equity risk premia would drive our target prices up
by 52% for Gazprom and 25% for Novatek.