OREANDA-NEWS. November 8, 2011. Renaissance Capital, the leading emerging markets investment bank, has initiated research coverage of the Russian oil & gas sector with two separate reports, covering the country’s major oil & gas producers and its leading oil services companies. Renaissance analysts maintain a positive outlook on the sector, favouring stocks with coherent stories and/or clearly identifiable near-term catalysts.

Renaissance Capital expects the Brent crude price to average USD 110/bl for 4Q11 and 2012, thereafter forecasting USD 100/bl on a flat real basis, underpinned by a high cost structure, decreasing resource base and limited long-term OPEC supply visibility. The report notes that, “Risk remains to the upside, given the tightening demand/supply fundamentals.” Renaissance’s 2012 call on OPEC rises to 31mb/d, a record level not seen since 2007, even under a moderate demand growth outlook. Near term, say Renaissance analysts, the 2H global crude oil supply/demand balance points towards a 1.4mb/d draw, adding that precedent hints the restart of Libyan oil production is likely to disappoint.

The report concludes that there is clear value among Russian oil & gas producers, despite a measure of regulatory uncertainty. Renaissance analysts explore what the Russian government’s so-called 60-66 tax regime means for the country’s oil producers, and take a close look at how they fit into the evolving landscape of global oil demand and supply.

Going into the 2012 contracting season, Renaissance analysts expect Russian oil services providers to benefit from substantially higher spending levels by the country’s oil producers, in response to a 45% higher YoY crude price over the first nine months of the year and the introduction of the 60-66 tax regime, which has added USD 4-5/bl in cash flow. Analysts are convinced that conventional drilling has the best balance of near-term and into-mid-decade upside. They see development drilling footage climbing by an average of 5.9%, and with a contribution from improved pricing to result in 9.9% market size growth. Pricing, says the report, should also be helped by increasingly tight rig supply, driven by the retirement of obsolete units, and higher mandatory exploration and prospecting activity taking lower-spec rigs off the market.

Among Russian oil & gas names, Renaissance favours Rosneft (rated BUY, with a USD 10/GDR target price [TP], implying 56% upside potential), Novatek (BUY, USD 200/GDR TP, 53% upside), TNK-BP (BUY, USD 4/share TP, 60% upside) and Gazprom Neft (BUY, USD 30/GDR TP, 59% upside). HOLD-rated Gazprom, Lukoil, Bashneft and Surgutneftegas face substantial headwinds and lack catalysts, Renaissance says.

In the oil services sector, Renaissance Capital favours Integra (rated BUY, USD 4.50/share TP, 180% implied potential upside), Eurasian Drilling (BUY, USD 35/share TP, 61% upside) and C.A.T. Oil (BUY, USD 8/share TP, 95% upside).