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Alfa Bank Gives Oil Cos. Big Thumbs Down
Alfa Bank released a report yesterday with a critic evaluation of the perspectives of oil producing companies in Russia. In the report, analysts lower their recommendations for securities from all leading companies in that sector and lowered target prices 15-30 percent. The bank says that oil companies' capital outlay for production and the taxes they pay offset their profit even with high oil prices and make the development of most new deposits unprofitable. This comes after a reconsideration of the accounting model to calculate long-term outlays from oil production.
LUKOIL and TNK-BP fared worst in the bankers' eyes. Their target prices were reduced by 30 percent and their recommendation was lowered to “hold.” At the heart of the report lies doubt that the companies will be able to maintain profitability in the face of rising production costs. The report notes that oil production in 2005 and 2006 grew at a much slower rate (2.8% and 2.2%, respectively) than between 2000 and 2004 (8.5% annually).
“The key is that the rapid and seemingly costless growth of production in 1999-2004 was never real,” the report reads. “From the very beginning, it was understood that an extremely critical situation would follow, in which the only possible way to maintain the existing level of production (regardless of the pace of growth) would be to raise capital outlay sharply.” The analysts note that false assumptions about the profitability of Russian companies' production misled not only the stock market, but the authorities as well, who created an inadequate tax system.
The current tax system, the report remarks, is designed for companies that with a natural decline in production of 2-4 percent working at established deposits in areas with a developed infrastructure and capital outlay of $2 per barrel, cost of production of $2 per barrel, pipeline fees of $2 per barrel and an increase in production of 10 percent per year. At present, however, the rate of natural decline in production is 5-10 percent, the capital outlay $7 per barrel, administrative costs are rising and there is a critic lack of services.
Alfa bank analyzed 45 projects to develop new deposits and found only eight that were profitable in the model. Only large deposits and those with tax benefit attached were promising. In Western Siberia, the analysts calculated, wells would be profitable only if the price of oil exceeded $100 per barrel.
Oil companies contacted by Kommersant confirmed that their capital outlays would be rising in coming years. Other analysts are differ in opinion with Alfa's conclusion, however. Renaissance Capital analyst Roman Elagin estimates that Russian oil production will remain profitable as long as oil prices remain above $40 per barrel.
www.kommersant.com
All the Article in Russian as of Mar. 15, 2007
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