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Royal Dutch Shell Plc .com: Why Rosneft is a good bet – perhaps

From The Daily Telegraph

By James Quinn
(Filed: 13/07/2006)

Behind the headlines of stolen assets and jailed oligarchs, Rosneft has considerable potential.

The key to the investment case is the growth potential within the company.

The base case for oil production is two million barrels a day by 2010, implying a 7pc growth rate compared with a Russian average of 3pc. It is among the world’s fastest-growing oil companies, and even before it got its hands on Yukos’s YNG it was seeing growth in production of 13pc a year.

The exploration portfolio it controls contains 30 billion barrels of oil equivalent, and the majority tends to be relatively young fields with low depletion rates.

It could be one of the biggest gas producers after Gazprom. Its gas reserves support production of more than 40 billion cubic metres by 2012, with proved reserves and potential bookings of 691bcm. In comparison, Novatek is valued at $11.4bn for its reserves of 640bcm.

But risks remain. Questions have been asked about the liquidity of the shares, or global depositary receipts as they will be called in London, given the number of “strategic” rather than financial investors. But the latter should be in part provided by the tens of thousands of private Russian investors taking part in the equity offering. Note, too, that the former Yukos shareholders are suing the Russian government and not Rosneft.

Taking all that into account, however, the shares, expected to be priced at the top end of the $7.15 to $7.85 grey market range, will be more expensive than most peers’ shares. Based on estimates from within joint bookrunner Morgan Stanley, at a price of $8, the shares will sit on a price-earnings multiple of 25.8 times to 2008, against Gazprom’s 15.1, BP’s 14.2 and Shell’s 13.3. Such a premium may be justified given the growth story. But it could be argued the moral concerns mean the shares are best avoided. Only time will tell.
 
 

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