New IN V E S TME N T O VE RV IE W · 2020. 9. 14. · TRADE ALERT: RUSSIAN OIL & GAS SEPTEMBER 2020 IN V E S TME N T O VE RV IE W T hi s i nvest m ent t ak es advant ag e o f a uni

TRADE ALERT: RUSSIAN OIL & GAS SEPTEMBER 2020

INVESTMENT OVERVIEW

This investment takes advantage of a unique situation in the energy markets - a financial crisis, amazing supply destruction, a denial from the market of future energy needs, and the virtue

signalling abandonment of fossil fuels led by Western oil companies.

THE SUMMARY

● Oil is going well over $100 per barrel… for so many reasons ● Western oil companies are abandoning oil “because ESG” ● Western oil companies are investing into uneconomic energy “because ESG” ● Russian oil companies are taking advantage of this ● We’re buying Lukoil (NK Lukoil PAO) on Moscow or London exchanges ● We’re buying Tatneft (Tatneft PAO) on Moscow or London exchanges ● We’re adding 1% of each into our portfolio ● Other ways to play (read more below):

- VanEck Vectors Russia ETF (RSX) - VanEck Vectors Russia Small-Cap ETF (RSXJ) - Holding the Russian ruble

This investment idea is taken from our fund Glenorchy Capital, where we provide accredited investors with managed accounts… meaning you can still get all the Insider content, while

having Chris MacIntosh and Brad McFadden manage your portfolio for you.

https://glenorchycapital.net/

From To Russia With Love… No foreplay today. We’re going directly to the sex. Yes, we’re male.

We’re buying Russia’s Lukoil. We want to increase our weighting to the oil sector but at the same time we don’t want to touch Western oil majors. There is far too much business, social, political risk to these companies. This may sound funny or bizarre, however if you've been following our work for some length of time, you’ll understand why. We believe there is less risk in Lukoil than BP, Shell, Chevron, etc.

But if you look at Russian oil companies objectively (trying to divorce yourself with connotations of the past), there are some really interesting standouts:

● They have far less debt than western oil majors ● Are better capitalized. ● Have higher reserves and continue to replace lost reserves ● They are unashamedly proud to be involved in the oil and gas industry (unlike their

Western counterparts, who are ashamed of their existence) ● They aren’t facing domestic social and political backlashes for their involvement in

the oil and gas sector ● They have little/no exposure to shale oil ● Valuations are dramatically lower than Western oil and gas majors

© 2020 Capex Administrative Ltd. | Unauthorised sharing may result in limb loss 2

Oil is Going Well Over $100 a Barrel

And that is why we want to up our exposure to oil. It is, we think, the most asymmetrical sector right now.

I will remind you that what we do here is buy when things are dirt cheap, when nobody wants them, and when you are looked upon as a madman, and yet where the fundamentals are in your favour. We are quite comfortable with being laughed at while we do this as. To be frank, we don’t give a isht what consensus thinks. We’ve done our homework and we’re quietly confident.

In the last 13 years global oil consumption has risen by roughly 15m barrels per day — an increase of 17%.

About half that increase in production was accounted for by the United States (+7m bpd) and this came entirely from shale oil fields.

But now that the shale oil “revolution” is coming to what we always said was inevitable — a rapid end. Reality does that. As drilling has focused on highly productive “tier one” assets over the last 6 years, these were already showing signs of exhaustion ahead of the WuFlu and subsequent lockdowns. Furthermore, financing shale developments has become rather expensive in light of the market finally realizing (some things take so long to come to fruition) that shale oil developments as a whole only ever lost money right from the outset.

So cutting a long story short, shale oil is now in serious trouble and its production peak is behind us.

This brings us to the obvious question... Where else are the big conventional oil developments?

In the last 10 years shale has hoovered up the overwhelming majority of exploration and development capital. In what has been a stunning display of herd behaviour, capital literally poured into a sector which continued to destroy shareholder value. It really was something to witness and for long-term readers you’ll recall how we pointed, shook our collective heads, and encouraged you all to think rationally about the entire fiasco.

The consequence of this manic capital spending boom into shale has been that relatively little has been spent on discovering and developing big conventional oil reserves to replace existing reserves being used, let alone spending on growing reserves. This is why we are very


confident that the world is facing an oil supply deficit sooner rather than later — hence the reason for our bullish view on oil.

Western Oil Majors Embarrassed to be in the Oil Business

Things this time around are particularly dangerous on the geopolitical front. The absolutely insane policies being pushed forward by the United Nation’s Agenda 21, and championed by many Western governments mean that there exists significant risks to investing in the right sector, but the wrong companies and countries.

Right now shareholders are crucifying big Western oil majors for their involvement in the O&G business.

The political pressure has translated into large capital allocators such as sovereign wealth funds, pension funds and the like pulling investment capital from the sector en-mass. They have become businesses that investors are embarrassed to be associated with. Not only that — the companies themselves have taken to virtue signaling to this new climate change religion. You’d be better off clubbing babies to death — thereby reducing carbon emissions — than investing in an oil company.

The result of this has been more capital expenditure on “renewable” “low carbon” businesses and precious little spent on maintaining existing oil reserves, let alone growing them. This is clearly illustrated by BP’s new strategy:

This all sounds very cute, however, when you come to look at it in detail it becomes rather bizarre to say the least. BP seems hell bent on completely reinventing itself, i.e. killing its existing O&G businesses. From the Globe and Mail:


https://www.bp.com/en/global/corporate/who-we-are/reimagining-energy/our-ambition-and-aims.html

https://www.theglobeandmail.com/business/industry-news/energy-and-resources/article-bp-poised-to-sell-stranded-assets-even-if-oil-prices-rally-set-to/#:~:text=A-,BP%20poised%20to%20sell%20stranded%20assets%20even%20if%20oil%20prices,invest%20more%20in%20renewable%20energy&text=However%2C%20BP's%20new%20divestment%20strategy,stranded%20oil%20and%20gas%20assets.

“BP is preparing to sell a large chunk of its oil and gas assets even if crude prices bounce back from the COVID-19 crash because it wants to invest more in renewable energy, three sources familiar with BP’s thinking said.

The strategy was discussed at a BP executives meeting in July, the sources said, soon after the oil major lowered its long-term oil price forecast to $55 a barrel, meaning that $17.5 billion (13 billion pounds) worth of its assets are no longer economically viable.

But even if crude prices bounce back to $65-$70 a barrel, BP is unlikely to put those assets back into its exploration plans and would instead use the better market conditions as an opportunity to sell them, the three sources said.”

But these assets they sell by definition have a buyer, and that buyer isn’t going to be Alexander Occasio “we have a wonderful green deal” Corte, or Bill “let’s reduce world population for climate change” Gates, if you get what we mean. Then BP drops bombshell:

“As we look at the outlook for BP over the next few years and as we see production declining by 40% it is clear we no longer need exploration to fund new growth,” Looney said this week. “We will not enter new countries to explore.”

He said BP would continue to explore for oil near its existing production infrastructure as those barrels would be low cost – and help boost BP’s cash flow to fund its transition to cleaner energy.”

Other European oil majors, particularly Shell, are echoing what BP is doing.


While US oil majors aren’t facing the same political or shareholder pressure as the European majors are, the pressure is certainly there and the risks to their business, which now are largely dependent on political outcomes in the US, mean that this area presents to us risks which we are uncomfortable with. Additionally, we don’t like their recent and heavy focus on shale. To us that’s like investing in the Titanic as it was taking on water.

And speaking of virtue signaling twats, this just came across our feed.

From our analysis of Russian oil majors there is absolutely no apologies or shame for being involved in the oil business. The same applies to Asian oil majors. They are seeking to do what it takes to maximise returns for shareholders rather than to maximise ESG or political points.

Russian Oil Stocks

Let us introduce the Russian oil majors:

● Lukoil ● Tatneft PAO ● MK Rosneft PAO ● Surgutneftegaz

Here are some interesting observations you’ll never hear in Western media.


https://on.ft.com/3hbvbEM

Russian oilers have been outperforming Western oil majors for the last two years. Below are charts of the Russian oilers relative to the DJ Global Titans Energy Index. Why this outperformance?


Simple. As the woke “ESG” movement and hysteria over “climate change” has captured people's minds, in the same way that hunting witches in the 17th century did, the capital divestment in Western oil companies, and subsequent virtue signaling by Western oil majors has gone parabolic. That it coincides with the fiasco that is the shale sector hasn’t helped. And as the “strategies” dreamt up in boardrooms by Perrier drinking, cowardly virtue signaling board members, these companies have seen a redeployment of capital into “low carbon” strategies, which are in many instances wildly unprofitable.

The Russian oilers have for the most part simply carried on business as usual. The divergence as you see is dramatic. Suicide by one party does that.

Reserves: Russian oilers have significantly more years of reserves than Western oilers.

● Lukoil 18 years (from Jan 2020) ● Tatneft PAO 30 years (from Jan 2020)


● MK Rosneft PAO 20 years (from Dec 2018) ● Surgutneftegaz N.A.

The chart below gives you a good idea of how Russian oilers’ reserves stack up against their Western counterparts, It’s not perfect as it is a couple of years old but it is still relevant as Western oilers’ reserves have been depleted ever since then:

Here is a more up to date graph giving a pictorial representation of what has been happening to Western oilers reserve years:


With the exception of Exxon, Western oil companies have been depleting reserves faster than at any time in history before. And not only that, but they clearly aren’t interested in arresting this trend. As far as Exxon goes, we are somewhat suspect of their figures due to the inclusion of shale reserves. And Shell? Well, they're in big trouble.

The Russians on the other hand seem to pride themselves on replacing depleted reserves as per the example of Lukoil. Last year they replaced 107% of their depleted reserves.

Financials: Russian oilers essentially have no debt (except for Rosneft). Their return on assets is substantially higher, valuations are lower, and their liquidity higher. Why the hell would you want to own a Western oil major compared to a Russian oiler?

RUSSIAN OILERS LT D/E ROA (12/2020)

P/B Cash/Tot Debt

Lukoil 12% 11% 0.80 80%

Tatneft PAO 0% 16% 1.76 68%

MK Rosneft PAO 69% 6% 0.91 21%

Surgutneftegaz 0% 2% 0.31 150%

WESTERN OILERS LT D/E ROA (12/2020) P/B Cash/Tot Debt


Shell 55% 4% 0.79 28%

BP 105% 1.45% 1.16 40%

Total 40% 4% 1.02 38%

Exxon 26% 4% 1.01 18%

Chevron 22% 1.1% 1.25 21%

Relatively speaking Russian oilers are a screaming bargain compared to Western oilers. But shouldn’t Western oilers be priced at a premium to Russian oilers due to political risk? That’s what conventional wisdom would have us believe, and if you’d asked me this question 10 years ago I’d have said absolutely.

Today we live in a different world. As I’ve mentioned many times in these pages, we are witnessing the end of the hegemony of Western civilization. With all the pressure on Western oilers to conform to the growing ESG movement, there is more risk in Western oilers. Furthermore Western socialist democracies will absolutely tax, and otherwise hamper their productivity, perhaps even ban them outright. You think this is crazy? Watch!

All in all, it could be said that Russian oilers should be priced at a premium to Western oilers.

From an absolute perspective, are oilers cheap? Well, with oil at current levels they probably are fairly priced or at least there isn’t much upside to get excited about. However, if oil is at $100 a barrel a few years from now, as we believe it will be, then watch out.

From 2011 to 2014 West Texas averaged about $95 and the DJ Global Titans O&G index averaged 480 — that is 75% higher from current levels. From 2016 to 2019 WTI averaged $60 and the DJGT Energy Index averaged 405 — a rise of some 50% from current levels.

DJ Global Titans O&G Index & West Texas Spot


Where do we think oil is going? Higher, much higher, for all the reasons we discussed above. So at $100 per barrel we can reasonably expect that oil majors’ stock prices would double from current levels.

In anticipation of where oil prices will be within the next 5 years we believe that oil majors are a gift at current prices. That makes Russian oilers radically appealing.

Risks? When I think of the Russian stock market I don’t think too much of the LTCM crisis of 1998 (I wasn’t investing in Russia at that time). But in 2001 I bought Yukos at $4 (near enough) and sold out at $4 in 2004. Well, at least I got my money back, but it wasn’t amusing to see a 300% profit go poof!

And if you don’t know the story of Yukos... well, here is a great explanation. At the time I vowed never to touch a Russian stock again. And what happened to Russian stocks after Yukos was suspended? Up 250% three years later.


https://churchmice253.wordpress.com/2015/12/19/so-whats-the-back-story-on-yukos-oil/

Ah, the lessons we all learn.

Then we would be remiss if we failed to mention the Russian sanctions that the US hit Russia with in 2018. Western investors were essentially barred from owning certain Russian equities such as Rusal.

Russia is far from perfect and is basically run as a kleptocracy, but it has made some giant steps forward since the Yukos drama. We would be fools to imply that there is no political risk in Russia or no risk of further sanctions. That’s silly, however, we approach it like this. We see political risk in Russia less of an issue compared to the costs of confirming to the ESG movement in the West.

So we believe the risks of investing in Russia are acceptable — as acceptable as any other sector we have invested in. That is why any investment in Russia isn’t going to be more than


5% of our portfolios and never more than 1% in any one position. You, of course, can take that information and do with it what you will, but that is how we do things here.

Trades

We’re going to invest in both Lukoil and Tatneft — 1% each into our portfolio. Granted, this isn’t a big allocation, but our objective here was to increase our weighting to the energy sector. So these two trades sit alongside our oil services theme.

Why not Rosneft and Surgutneftegaz? Rosneft has too much debt for our liking and Surgutneftegaz isn’t transparent enough in their reporting. So to hell with them!

Lukoil and Tatneft trade on the Moscow exchange (which we can now access via Interactive Brokers) and the London Stock Exchange (where they both trade in dollars).


Other Ways of Trading Russian Equities

While we want to tell you about what we are buying, at the same time we don’t want to be prescriptive. We invest due to our specific objectives and investment style. We realize that everyone has differing objectives and risk profiles. So in addition for us “walking the talk” these Trade Alerts are also about highlighting variant ways of investing in deep value themes.

We have highlighted a few Russian oilers, but we were specifically looking for opportunities in the energy space. We would encourage folks to take a closer look at Russia in general. The market cap of the Russian stock market is about $600 billion. As a reference, Tesla’s market cap is $300 billion (the number will probably be out of date by the team you read this), Home Depot is $302 billion, and JPMorgan is $311 billion. Whichever way you look at it, there is “beyond reasonable doubt” absolute bargains to discover in the Russian equity market. Ranking on a price/book basis:

Or from a dividend yield perspective:


The Russian economy shouldn’t be written off. Russia is the eleventh largest economy in the world. It is the world’s largest producer of oil (14% of world output), natural gas (18%) and nickel (12%). The energy sector is the most important, contributing 20-25% of GDP, 65% of total exports and 30% of government budget revenue.

It would seem that after the dramas of the late 1990s Russia has got its finances together and the economy is being run far more responsibly, certainly when compared to many Western governments. As an example, debt relative to GDP has come down dramatically over the last 25 years, whereas other governments have “achieved” the opposite. Note the graphs below are some 18 months old but the trends haven’t changed, rather they have become way more accentuated due to the corona.

Russia — Debt to GDP


US — Debt to GDP

UK — Debt to GDP


Australia — Debt to GDP

The more we look at Russia the more bullish we become, especially in light of the self destructive social and anti-capitalistic policies hurtling down the tracks of the West.

VanEck Vectors Russia ETF (RSX)

You probably know about the existence of this Russia ETF (RSX), but what you might not be aware of is the weighting of it towards commodities/basic materials — some 60%. So if you are bullish on emerging markets, commodities, and value over growth, RSX is a reasonable “one stop shop” investment.

With such a big exposure to energy and basic materials it is perhaps not surprising to see the ETF some 60% below its 2008 high. The VanEck Vectors Russia ETF (RSX) essentially tracks the Russian Traded Index (RTX) Index.

Russian Traded Index & TR CRB (Commodity) Index


It’s amusing to note that the Russian Traded Index is trading at the same level as it was in 2006 but GDP has increased by some 80%. Crazy, huh?

We shouldn’t forget how much of a geared play the Russian stock market is to rising commodity prices. From the start of 2002 to April 2008 the CRB index climbed almost 200% whereas the Russian stock market advanced 500%.

Russian Trade Index and the TR CRB Commodity Index


The projected dividend yield of RSX is some 6%. If you were “hungry for yield” and weren’t afraid of stock picking, then it isn’t too hard to find yields well in excess of this.

VanEck Vectors Russia Small-Cap ETF (RSXJ)

Russian small caps provide a more distributed exposure to various sectors within Russia and are still supporting a respectable dividend yield of 5%.

Now, here is something that few are aware of... An investment in RSXJ at the start of 2015 would have given you the same performance as the Russell 2000 from a capital gain


perspective and probably about 25% on top of that when you take into account dividend differentials.

The Ruble: A poster child of “toxic waste” for currencies. However, the blowout in the ruble has occurred with the collapse in crude prices — almost a 1:1 relationship. So a long RUB position is a wonderful way to position for a stronger crude price. So instead of holding cash in your account, why not hold some in rubles?

Russian Ruble and West Texas Spot


So there you have it folks. Our thoughts and actions in both energy and with respect to the global macro environment.

Wishing you only the best!

Sincerely,

Chris MacIntosh Founder & Editor In Chief, Insider Founder & Managing Partner, Glenorchy Capital


https://glenorchycapital.net/

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New IN V E S TME N T O VE RV IE W · 2020. 9. 14. · TRADE ALERT: RUSSIAN OIL & GAS SEPTEMBER 2020 IN V E S TME N T O VE RV IE W T hi s i nvest m ent t ak es advant ag e o f a uni