(MENAFN - Gulf Times) All around the world, oil company shares are in recovery mode, many of them climbing back to levels not seen since crude slumped three years ago. But Russia's largest producer is still waiting for lift off.
Rosneft shares have risen just over 3% since the end of June, just a fraction of the double-digit gains posted by Royal Dutch Shell, Chevron Corp and even Lukoil. While the rebound in oil prices to two-year highs buoyed international rivals, the Russian giant led by a close ally of President Vladimir Putin has been hobbled by sanctions and exposure to both Opec cuts and volatile Venezuelan politics.
'Rosneft is getting it worse than most because of Venezuela and Opec, said Alexander Kornilov, an analyst at Aton.
There are several market-based factors that could explain Rosneft's performance. The burden of the production cuts agreed with the Organisation of Petroleum Exporting Countries falls most heavily on the company that pumps 40% of Russia's oil, said Anastasia Levashova, a fund manager at Blackfriars Asset Management in London.
The strengthening of the rouble is negative because it boosts domestic costs relative to the dollar-denominated crude price, said Pavel Laberko, a London-based equity money manager at Union Bancaire Privee. Rosneft, which already had the largest debt load in Russia, spent about $12bn in the last 12 months adding an Indian refinery, regional oil producer Bashneft and a stake in a huge Egyptian offshore gas field to its portfolio. Payments for some of those assets may appear in the company's third-quarter results this week, leading to a further increase in leverage, VTB Capital said in research report.
Rosneft has become the world's largest traded oil producer on the back of more than $100bn in acquisitions made during the Putin era. The Kremlin has made the company a cornerstone of national energy policy, a status that has aided its expansion but also left it exposed to political risk.
Sanctions imposed over Putin's support for an insurgency in eastern Ukraine hit Rosneft harder than other Russian producers, limiting its access to financial markets and personally targeting Chief Executive Officer Igor Sechin. While Gazprom, Russia's natural gas monopoly, and Lukoil, the nation's second-largest oil producer, have sold Eurobonds to fund development, Rosneft has relied on an opaque rouble-bond repo transaction with Russia's central bank for financial support.
The optimism felt a year ago that Rosneft would benefit from improved US-Russia relations following the election of President Donald Trump has faded, said Levashova.
'Trump's victory came with high expectations of sanctions removal or at least relations normalisation, Levashova said. 'Not only didn't relations normalise, but Trump approved another round of sanctions in August.
While those additional restrictions on Russian oil producers and pipelines were softer than measures initially considered by Congress, and Trump signed them reluctantly, the overall effect has been negative.
In addition to financing restrictions, Rosneft's exploration partnerships with Exxon Mobil Corp, Eni and Statoil related to exploration in the Arctic, Black Sea and shale formations have been stymied by sanctions. The US Treasury fined Exxon $2mn, claiming sanctions violations over signing documents with Sechin. The US company has challenged the penalty.
In a 2013 presentation, Rosneft estimated that international partners would invest $14.4bn exploring the offshore through 2018. Should Rosneft press ahead alone with any of these risky ventures, it would have to draw heavily on its own resources.
The Kremlin has occasionally used state-run energy companies to further foreign policy goals, sometimes a great expense. Russia's Gazprom has implemented a costly strategy of building pipelines directly to Europe through the Black Sea and Baltic Sea to bypass Ukraine. In Rosneft's case, financial support for Kremlin ally Venezuela has put $6bn of cash at risk.
Not everyone agrees on the scale of the Venezuelan risk. In the big picture, Rosneft's exposure is 'peanuts, said Aton's Kornilov, who has a buy rating on the stock. Renaissance Capital's Alexander Burgansky has already written off the Venezuelan loans, but still recommends that investors purchase shares in the Russian company.
The headquarters of Rosneft in Moscow. Rosneft shares have risen just over 3% since the end of June, just afraction of the double-digit gains posted by Royal Dutch Shell, Chevron Corp and even Lukoil.