Bargain Hunting in Emergng Market Oil Stocks

12 December 2014
Emerging market oil shares have fallen hardest during the recent price collapse. Some could bounce back fast when crude recovers

Barron’s

 

Dec. 13, 2014

It’s a decent bet that the price of oil will rebound sooner or later from its current five-year low, and oil company stocks with it. Emerging-market petro-shares have been beaten down hardest over the past five months of crude free fall, and might be expected to bounce back accordingly — some of them anyway.

Emerging-market oil probably conjures visions of Russia and its sanctions-afflicted state behemoths Gazprom and Rosneft. But the developing world is full of big, liquid oil names, from China to Brazil. Their shares have been more volatile than those of U.S. or European peers. ExxonMobil (ticker: XOM) has lost 10% of its value since crude oil began its swoon on Sept. 1. Petrochina (PTR), China’s biggest energy company, has shed 30%.

Diving global prices also have consequences that could actually benefit the bottom lines of emerging-market firms. India’s government has rolled back controls on retail fuel prices, and China and Indonesia may follow suit, bolstering their local oil firms’ downstream earnings. At least part of what Russian oil companies lose from diving export receipts they gain back from a crumbling ruble, which shrinks their expenses in dollar terms.

Against this backdrop, veteran emerging-market investors are hanging on to some oil positions. Petrochina is a key sector holding for Aberdeen Asset Management, which runs the $9.5 billion Aberdeen Emerging Markets fund (ABEMX). The firm, based in its namesake Scottish city, likes Petrochina’s position in Asian gas markets, which may prove more buoyant than global oil, says Devan Kaloo, global head of emerging-market equities.

Another keeper for Aberdeen is Thailand’s PTT Exploration & Production (PEXNY), whose shares have fallen by a quarter since Sept. 1. Big strikes for the wildcatter in Myanmar and Algeria should keep production growing by 10% in 2015, Kaloo says. In Latin America, Aberdeen is sticking with Ultrapar Participacoes (UGP), a regional natural-gas and oil products distributor based in Brazil. Its shares have also crashed by 25% since Sept. 1, but its markup as a middleman is stable regardless of crude prices, and its long-term prospects are aided by expanding car ownership in the region, Kaloo figures.

Investors have not stopped scouting for bargains in Russian energy, though most are steering clear of the state colossi. One relative favorite is privately owned gas producer Novatek (NVTK.UK), down 25% since Sept. 1. Novatek has also been slapped with Ukraine-related sanctions from the U.S. and the European Union, thanks to its principal owner, oil trader Gennady Timchenko, but it looks to have enough financing from Chinese partners to complete a giant liquefied-gas project in the Arctic. The company figures as a top-five holding in Oppenheimer’s $40 billion Developing Markets A fund (ODMAX).

Other investors, like Aberdeen and Citigroup in a recent research note, prefer Lukoil (LUKOY), Russia’s biggest private oil producer, which is down 23%. Its long-term strategy of international diversification is bearing some fruit with the blossoming of a mega-project in Iraq and promising gas wells in Uzbekistan.

Speaking of Iraq, truly adventurous investors may want to look at two oil companies drilling in that country’s Kurdish autonomous region, say managers at New York-based frontier-market specialist Voltan Capital. The pair, WesternZagros (WZGRF) and Gulf Keystone (GFKSY), have had troubles beyond collapsing crude prices, namely the Islamic State on their doorstep. Each has lost about half of its value since July. But turmoil has produced a silver lining: A Dec. 2 agreement with the Iraqi government allows Kurdistan for the first time to export oil with Baghdad’s blessing, up to 550,000 barrels a day. Crisis inevitably breeds opportunity. Some of it might be found in the emerging-market oil patch.