At first blush, international energy companies operating in Russia the last few months haven’t been so kind.
With Russian leader Vladimir Putin deciding to essentially invade the Ukraine, both the United States and Europe have turned the thumbscrews tighter and tighter on Russia.
The weapon of choice for the E.U. & U.S. has been a whole host of economic sanctions targeting Russian businesses and its uber-wealthy oligarchs.
The vast bulk of those measures have been targeting Russia’s vital energy industry. And those sanctions have basically made Russia’s energy sector off-limits for international energy stocks wanting to tap the nation’s huge reserves.
But taking a second glance, it seems that the various energy stocks in Russia have been very busy indeed. So the real question investors need to ask is not “How are the limitations effecting my energy stocks?” but rather, “What energy sanctions?”
Some Big Energy Firms Just Shrug
As the Ukrainian crisis has escalated, much of the developed world has fought back with diplomacy and good old-fashioned economic penalties. The first round of energy-related sanctions banned technology transfers that applied to Arctic frontier and Kara Sea. Over the summer, the E.U. & U.S. put more pressure on Putin and Russia by placing additional rules forbidding energy firms from helping Russia extract any oil from conventional Arctic, shale or offshore fields.
That’s a huge issue for Russia as the majority of its reserves are either located in the frozen deepwater of the Arctic or locked within shale fields. And without the much-needed fracking technology or deepwater drilling expertise, Russia’s vast energy reserves are going unused.
And those reserves are enormous. Russia has some of the largest oil and natural gas reserves on the planet — holding 25% of world’s proven natural gas reserves. But when you add in newly prospected regions like Eastern Siberia, the Russian Arctic, the Caspian Sea and Sakhalin Island, the potential for Russian energy is greatly increased. The Arctic Ocean alone is estimated to hold 90 billion barrels of oil.
So what’s an international energy firm to do that has Russian ambitions in the face of crippling sanctions? Ignore them, of course. A whole host of energy stocks have continued to make big deals, prospect and add acreage in Russia as the penalties continue to play out.
A prime example is energy stock kingpin Exxon Mobil Corporation (NYSE:XOM). While the restrictions have basically caused a stoppage of work at XOM’s projects in the Arctic with Russian energy firm Rosneft, that hasn’t stopped the firm from plowing some big bucks into the nation.
Exxon has quietly scooped up some pretty impressive prospecting acreage. XOM now owns drilling rights on 63.7 million acres in Russia. That’s about triple the amount of exploration acreage it owns in the U.S. Clearly, Exxon isn’t thinking the sanctions are going to last a very long time.
In fact, plenty energy stocks seem to care little about the sanctions..
Norway’s Statoil (NYSE:STO) has continued to honor and expand its multi-year partnership with Rosneft. STO has even moved forward with Norwegian-based projects — which aren’t subject to any sanctions — with the Russian firm.
German Chemical firm BASF’s energy division, Wintershall, recently signed a multi-field exploration and pipeline deal with Russia’s Gazprom (OGZPY), while oil services firm Schlumberger Limited (NYSE:SLB) set itself up nicely by spending $1.7 billion to buy a stake Russia’s largest drilling firm, Eurasia.
All in all, energy firms wouldn’t be making these kind of long-term, big-dollar deals and agreements if they thought that the sanctions would last forever.
Maybe It’s Time To Buy Russian Energy Stocks
Statoil’s CEO Helge Lund perhaps said it best as “Europe and Russia will be energy partners for many decades to come. That is fundamental.” I tend to believe him. And so do most firms in the energy sector.
For investors, that means Russia’s energy sector could make for great long-term buys. Any international firm wanting to get into the nation is going to have to partner with a Russian company. The sector is certainly cheap enough as pessimism spikes. Even though they’ve bounced back from their lows, Russian energy stocks currently trade for peanuts. Gazprom trades at a P/E of just 2.14, Rosneft for 2.85 and LUKOIL (LUKOY) for less than 7.
While you can certainly buy the major Russian energy stocks on the OTCCBB and pink sheets, a better option could be the Market Vectors Russia ETF (NYSEARCA:RSX). The fund tracks 49 different Russian stocks, with more than 61% of its holdings in energy and basic materials. And sporting a P/E of 5 and relatively low operating expense ratio –0.63% — RSX could be a great broad holding for energy investors in the long term.
The Bottom Line: Despite the sanctions in Russia, a variety of international energy stocks are still making big-time moves into the nation. All in all, those moves could signal that the penalties could end sooner than later. For investors, that means that Russian energy stocks are a great buy.
As of this writing, Aaron Levitt did not hold a position in any of hte aforementioned securities.