Russian Oil Giants Get Record Prices, But Not Profits to Match

The price of crude in rubles has surged to an all-time high, but Russian oil producers will miss out on record first-quarter profit because of a rising tax burden.

Investors in Lukoil PJSC or Rosneft PJSC — which is due to publish earnings on May 14 — will probably have to wait until later in the year to see the full benefit of the surge in crude. So far, Russia’s government has done a better job of translating record prices into revenues, said Denis Borisov, a director at the Ernst & Young Oil and Gas Center in Moscow.

“The golden rain will likely fall on the companies in the second quarter if key conditions — the oil price and ruble exchange rate — remain in place,” Borisov said on Thursday.

The price of international benchmark Brent crude averaged 3,823 rubles a barrel ($67.23) in the first quarter, just a hair away from the previous quarterly record in 2014. It’s risen further to as high as 4,881 rubles this month. Yet the price of Urals crude in Russia’s currency, net of taxes, was 3 percent lower from January to March compared with the fourth quarter due to higher oil-extraction levies, according to Deutsche Bank AG.

Tighter Burden

Tax costs of Russia’s producers have been rising since last year

The industry also faced a jump in petroleum-product excise tax — an additional support to the state budget to fund road construction that may reach 40 billion rubles this year, according to Finance Ministry’s estimates made last year. However, Russia’s domestic gasoline price increases lagged crude in the first quarter, possibly showing that companies were holding back from shifting part of this burden onto consumers ahead of presidential elections in March, said Ildar Davletshin, an energy analyst at Wood & Co.

The revenue of state-run Rosneft, which pumps more than 40 percent of Russia’s oil, could have hit a record of 1.73 trillion rubles in the first quarter, according to Renaissance Capital. However, it expects net income to drop 19 percent from the fourth quarter to 81 billion rubles.

Rosneft plans to start its first-ever share buyback program this quarter, spending $2 billion over three years. That means investors will also be closely watching cash flow. Renaissance Capital expects the company to generate 75 billion rubles in the first quarter, almost 16 percent lower than a year ago, Bloomberg calculations show.

Several of Rosneft’s peers are planning or implementing buybacks as a way to share the rewards from rising crude prices with investors. Lukoil announced a five-year repurchase scheme worth as much as $3 billion back in January — four months before Rosneft. The move boosted the stock’s appeal to investors and helped close the gap in the market value of the rivals.

For 2018 as a whole, Lukoil and Gazprom Neft PJSC are expected to post big gains in net income, according to analysts surveyed by Bloomberg. Rosneft’s cash flow should more than double to some 550 billion rubles, which is enough to cover interest payments, dividends and as much as half of the planned share purchases, Davletshin said. Another Rosneft plan — to cut its debt by 500 billion rubles this year — may need proceeds from selling non-core assets, he said, a move the company is already considering.

Still, the size of the tax burden remains a risk, particularly as Russia forms a new government. President Vladimir Putin’s administration will soon lay out targets for the economy and budget for his fourth term. While the state has promised to avoid significant changes in oil taxes this year, Prime Minister Dmitry Medvedev said this week that Russia will need at least 8 trillion rubles in additional spending to fulfill its plans