Surgutneftegaz going down despite with higher oil prices

Surgutneftegaz's stock has been declining over the last couple of years, even as oil prices have risen. After struggling for about a few years around 2014 with the fall in oil prices, Surgutneftegaz had risen for a couple of years before declining again post 2016. Surgutneftegaz has posted decent 3rd quarter earnings. Revenue has risen by 13% Y-o-Y while net income after taxes compared to December 2016 has almost doubled. However, the most significant factor for Surgutneftegaz is the cash and cash equivalents on its balance sheet. That entry is now worth over $12 billion. The market cap of the company is around $17 billion.

A lot of this $12 billion is in the form of US dollar denominated short term securities. The fluctuating exchange rate between RUB and USD causes net income to be volatile, even when operating income is relatively more stable. On the production front, investments in upstream production are expected to go down. Hence, we do not expect to see any significant increase in production volumes in the future. Dividends are likely to sustain and that remains one of the attractive factors for investors besides the balance sheet and the low P/E.

Surgutneftegaz's valuation seems close to fair, trading at a P/E ratio of 7.62x when compared to Tatneft's 8.9x and Lukoil's 6.9x. The Russian energy sector's industry average is about 9x. We estimate the fair value at RUB 30. The stock is heavily dependent on oil and gas prices, which are expected to remain in the range of $50-$60.

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