Rosneft May Top Gazprom as Kremlin's Crown Jewel of Energy

(Bloomberg) -- The two energy companies at the heart of Russia’s economy are on the verge of a historic reversal that could subtly shift the balance of power in the corridors of the Kremlin.

Gazprom PJSC, the world’s largest natural gas producer, is worth just $2.6 billion more than Rosneft OJSC, Russia’s biggest oil company. That premium, down from more than $250 billion in 2008, may disappear altogether as the five-year slide in Gazprom’s market value continues, according to analysts from Otkritie Financial Corp., Aton LLC and Raiffeisen Bank AO.

“Rosneft may catch up with Gazprom by market value as early as this year,” said Andrey Polischuk, an analyst at Raiffeisen Bank in Moscow. The state-run gas exporter faces rising competition and the lowest prices in more than a decade in its main European market, on top of billions of dollars of spending commitments on new pipelines, he said.

Since Russian President Vladimir Putin came to power in 1999, he has used development of the nation’s oil and gas wealth to rebuild after the economic collapse of the 1990s. In the process, the twin state-run giants Rosneft and Gazprom have become entrenched at the center of the country’s economy and political system. 

Gazprom’s press service declined to comment on market value estimates, adding that “in the long-term perspective, Gazprom will keep its financial stability” while implementing all key investment projects. Rosneft didn’t respond to a request for comment.

Kremlin Rivals

Taxes and duties paid by the two producers account for about 30 percent of the nation’s budget, according to Bloomberg calculations based on the companies’ data. They spend tens of billions of dollars each year on pipelines, ports, transport, drilling and other services that drive Russian industry.

Gazprom Chief Executive Officer Alexey Miller and Rosneft boss Igor Sechin-- allies who followed Putin to Moscow from the St. Petersburg mayor’s office -- wield considerable influence in the Kremlin. Yet on occasion they also clash as each company pursues its own interests.

“It’s a competitive world,” said Artem Konchin, an oil and gas analyst at Otkritie. “We’ve seen them scrutinizing each other’s tax return bills, contribution to the budget, dividend policies, quarterly reports.”

For Rosneft to move ahead of Gazprom “is definitely an important factor for the companies and their management, considering the history between the two,” Konchin said. Bragging rights may bring personal influence for the CEOs and boost their lobbying powers. For example, Gazprom is currently warding off a Rosneft challenge to its monopoly on Russian natural gas exports, as the oil producer seeks the higher international prices for its growing gas business, he said.

Dominant Force

More than a decade ago, there was little doubt about which company was dominant: the gas monopoly was a feared geopolitical force, while Rosneft produced just a tenth of the oil it does today. The government nearly merged the oil producer into Gazprom, but Rosneft backed out at the last moment. It was only after buying assets formerly belonging to Yukos Oil Co. starting in 2004 and acquiring TNK-BP in 2013 that Rosneft grew to be the world’s largest listed oil company in terms of production.

Gazprom still dwarfs Rosneft in terms of output. It produces oil and natural gas equivalent to about 8 million barrels a day, while Rosneft pumps roughly 5 million. The gas company is expected to report earnings before interest, taxes, depreciation and amortization for 2015 of $29.7 billion, compared with $18.9 billion for its oil-producing rival, according to a Bloomberg survey of analysts.

Gazprom faces many long-term challenges to its business, more so than Rosneft, Polischuk said. Russia’s ties are souring with Turkey, its second-biggest gas export market. The company still faces pricing disputes with vital pipeline conduit Ukraine and the risk of increasing competition in Europe from rivals including the U.S., the Middle East and Norway.

Oil prices dropped about 27 percent in the past year compared with a 48 percent decrease in Gazprom’s ratesat the border with Germany, its biggest market. Crude has recovered about 50 percent in London from a low of $27 a barrel in January, while gas prices are likely to keep falling because most export contracts are linked to oil with a time lag of six to nine months.

Gazprom has several ways to turn its share price around in the near-term, said Otkritie’s Konchin. The company could enforce stricter discipline with spending and switch the way it calculates dividends, resulting in more cash going to shareholders. Rosneft’s share price remains captive to oil prices, he said.

Rosneft’s $55 billion TNK-BP deal went sour with oil’s collapse. The whole company, TNK-BP included, is now worth only $45 billion and loaded with debt. That is about a third of the valuation target Sechin set in a meeting with Putin in 2013. The Russian president criticized Sechin last year for missteps related to the deal.

However, Rosneft also has triggers that may lift its shares, said Alexander Kornilov, an analyst at Aton in Moscow. An easing of international sanctions that block access to capital markets or privatization of part of the government’s stake in Rosneft could propel shares higher, he said. Gazprom’s access to financial markets is not directly sanctioned and the state has no plans to sell more shares in the company.

To contact the reporters on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net; Elena Mazneva in Moscow at emazneva@bloomberg.net To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net; Lars Paulsson at lpaulsson@bloomberg.net Amanda Jordan, Alex Devine

Copyright 2016 Bloomberg News.

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