Getting back to the situation in Ukraine..... Or in the case of this post- oil/currency/ratings wars. Oh and an update to a previous post!Obviously some are very concerned with keeping tabs on this situation. By "concerned" I mean those that are waging economic warfare against Russia. While harming many other nations globally too!For now, check this out- Russian Oil and Gas Firms Can Cope With Low Oil Prices
The Russian economy has endured more than a few tumultuous quarters and there appears to be no visible uptick in activity on the horizon. To make matters worse, the oil price is falling and international sanctions imposed in wake the Ukraine crisis continue to bite.
With the ruble taking a tumble in December and the economy tipped to enter into a recession, agencies have downgraded Russia’s sovereign rating to junk status. However, the country’s oil and gas companies are coping with bearish sentiments and the market kerfuffle much better than some would have you believe.
According to a stress test conducted by Fitch Ratings, assuming no recovery in oil prices (with 2015-17 average oil prices at $55 per barrel and $1 fetching 60 rubles), the credit burden of Russian companies, as measured by net leverage, should remain “acceptable”.
“As per our sensitivity analysis, Brent falling from US$80 to US$55, or by 31%, will result in the companies’ EBITDA [Earnings before Interest, Taxes, Depreciation and Amortization] declining by a median of only 23% in dollar terms. This also takes into account the ruble depreciation effect: we assume US$/RUB50 at US$80/bbl, and US$/RUB60 at US$55/bbl,” says analyst Dmitry Marinchenko.
A 23 percent decline in EBITDA earnings-
Fitch flags up three major factors that contribute to the scenario (charted above). First, a progressive tax regime, which means that the effective tax rate paid by Russian oil producers decreases as oil prices fall, and vice versa. Second, a relatively flexible exchange rate regime, which means the ruble will depreciate in response to oil price falls, cushioning the impact of lower export revenues.
Third, the regulation of domestic gas prices, which are set in rubles, but which fall in dollar terms more slowly than oil prices do as long as the ruble depreciation does not exceed the fall in crude prices.
“The importance of these factors was demonstrated in 2009, when the EBITDA of the Russian oil and gas companies declined more slowly than that of most international peers,” Marinchenko adds
While it does suggest they can withstand lower oil prices better, Fitch does not discount other pressures on the ratings profile. While lower oil prices in themselves should trigger no downgrades, ratings of Russian oil and gas companies remain increasingly (and predictably) dependent on the direction of their country’s sovereign rating.
Talked about the Fitch downgrade last week
Fitch downgraded Russia to ‘BBB-’/Negative in January, and as it caps the ratings of Russian oil and gas players at the sovereign rating, this was replicated for higher-rated industry players. S&P has also downgraded Russia to junk status. The agency now rates the country down a notch at BB+.
“Russia’s monetary-policy flexibility has become more limited and its economic growth prospects have weakened. We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy,” it adds.
Market evidence does suggest Russian oil and gas capital expenditure (capex) would fall as many global players also review their spending. Fitch expects capex to go down at least in dollar terms as a result of the ruble devaluation, as up to 75% of it is ruble-pegged.
“In addition, we expect Russian companies to reduce their capex budgets in response to weaker oil prices and fewer financing options through stricter capital discipline, negotiations with contractors and possibly putting some new projects on hold,” Marinchenko says.As always, there are some notable caveats. Russia might alter its favorable tax regime for oil and gas companies which could hurt them. A stronger currency without an oil price recovery, quite possible in theory, could also pose problems. However, most market commentators see a very low probability of either happening and on the latter point Fitch does not think such a recovery is a significant risk at $55 per barrel.
Nonetheless, Russian Arctic ambitions are likely to be put on ice. Truncated financing options and international debt markets being off limits would also see liquefied natural gas (LNG) terminals backed by Novatek, Rosneft and Gazprom face delays. The Kremlin could step up state support, but much needed international technical cooperation is also off the table.
I just don't see the Arctic ambitions being put on ice- Despite the Arctic ice growth and it's growing! As it grew in 2014 "500,000 square kilometers (193,051 square miles) above the record low for the month observed in 2010. Both Hudson Bay and Baffin Bay are now essentially completely ice covered") No matter how much the global market is manipulated.Through falling oil, currency shenanigans and nonsensical ratings services
A gradual global correction in oil and gas production levels is inevitable if not imminent and Russia won’t be immune. In fact, it might be the first major oil producer to blink. However, at present the only pressing concern Russian oil and gas companies have is to ensure survival in their current corporate entity structure. Fitch’s stress test seems to suggest they would manage that comfortably over 2015-16 and as well as repay their upcoming debt maturities.
Why does he think Russia will stop producing oil, moving forward, when they have been making energy deals all over the place? Now an update:Last Tuesday morning I had my crystal ball out...(though admittedly I could have got that post up and my predictions sooner)
Gazing into my crystal ball................As you read this article below it should be quite clear that the ECB stimulus, Canada’s Central Bank rate cut and the Swiss decoupling from the Euro were ALL moves undertaken to enable the Federal Reserve to keep interest rates down and the US dollar high!
And sure enough, though I am a bit late in getting to this- the Federal Reserve stayed the course on interest rates- No interest rate increase!
The Federal Reserve signaled it would keep short-term interest rates near zero at least until midyear...
Thanks to Canada, the ECB, the Swiss and the downgrade of the Rouble- Economic warfare working to the advantage of the Federal Reserve/US dollar