The U.S. dollar has never been this strong since 2004. Even looking at history with the chart below, predicting a future recession would be close to impossible (grey areas are recession).
Nevertheless, Business Insider put up an informative article early last year about the dollar's correlation with other commodities.Ă‚
The most negatively correlated commodity is Brent crude followed by crude oil. The data suggests that as the dollar gets stronger, oil prices will only get cheaper.
Russia
A country whose economy depends mostly on oil would definitely earn less and may continually struggle until oil prices recover and/or until the strength of dollar recedes.
The Wall Street Journal could not have been more helpful by providing these charts explaining how much each "petrostate," specifically Russia, relies on their oil exports.Ă‚
My assumption: I can buy more of Russian equity using my stronger U.S. dollar today as long as the dollar remains strong. These series of events may present an investment opportunity.
A Bloomberg report in late 2015 stated that "At a time when the collapse in crude prices pushes Russia’s economy into a recession, the nation’s oil producers are managing to beat their western counterparts on measures including cash flow, profit margins and share prices, OAO Rosneft, Lukoil PJSC-- Russia’s two largest oil producers -- and OAO Gazprom Neft are performing better than Royal Dutch Shell Plc, BP Plc or Exxon Mobil Corp.”
*Gazprom Neft was formerly known as Sibirskaya Neftyanaya Kompaniya (Siberian Oil Company) or Sibneft for short. In 2005, Gazprom, Russia's state-controlled natural gas monopoly, bought 76% of Sibneft and eventually changed its name into Gazprom Neft. Gazprom now holds the world’s largest natural gas reserves.
The numbers
Profit margin
Gazprom, not Gazprom Neft, has been the most profitable oil and gas company in Russia until 2014.
Free cash flow in millions of dollars (FOREX 1 Russian ruble = 0.013 USD)
Both OJSC Rosneft Oil Co. GDR and Gazprom PJSC ADR are standouts in this metric. I still cannot comprehend how Rosneft can produce such high free cash flow; the company completely outperformed its peers on this one. It will be interesting to see its shareholders return (dividends and buybacks) later.
Debt to equity
This metric revealed that these large Russian oil companies have at least maintained debt to equity of at least 1 over the years regardless of oil price. Through this data, I assume that none of these oil companies are at risk of going into bankruptcy. This is despite the following two reasons:
1. 175 or so out of 500 oil companies could go bankrupt this year.Ă‚
2. About 60 oil and gas companies have filed for bankruptcy in the past 16 months.
Shareholder returns (dividends and buybacks) in millions of dollars.
Both Gazprom and Rosneft have been outstanding shareholder return providers in terms of giving dividends and buybacks. Share repurchases have not been consistent throughout the past decade, however.
Valuations
Current PE
Rosneft and Gazprom appear to be cheap with their earnings multiple.
Current PB
Lukoil and Gazprom are priced very cheaply against their book value.
Dividend yield
Graham multiple
Takeaway
Gazprom appears to be the most valuable among the group and roughly has 140% upside when using the Graham Multiple.
*Note: This is not a buy recommendation. Further research must be made prior to buying Russian ADRs. Political risk, sanctions, etc. must be weighed prior to initiating purchase in any Russian ADRs.
Happy Investing!
Mark Yu
