Oil Output Deal With OPEC Proves No Boon for Russian Producers

(Bloomberg) -- Russia's deal with OPEC to curb output is proving no bonanza for country's oil industry as the largest producer Rosneft PJSC reported first-quarter profit that missed analyst estimates.

The deal with the Organization of Petroleum Exporting Countries is good for Russia's state budget, which captured the bulk of the price increase in the quarter, but less so for producers, said Alexander Kornilov, an oil analyst at Aton. Instead, the recovery in the crude market since the agreement has strengthened the local currency, increasing the cost of services for Russian companies.

The “environment remains difficult,” Rosneft Chief Executive Officer Igor Sechin said in an emailed statement. “Continuing world commodity-markets volatility, ruble appreciation -- all of this impacted the company's financial results.”

Rosneft's net income, the key metric for dividends, climbed 8.3 percent in the period from the previous year to 13 billion rubles ($220 million). While the Russian oil giant missed the average estimate of analysts surveyed by Bloomberg, the “supermajors” of Europe and America -- Royal Dutch Shell Plc, Exxon Mobil Corp., Chevron Corp., Total SA and BP Plc -- beat first-quarter predictions.

Benchmark Brent crude gained 55 percent in the quarter from a year earlier as OPEC and and non-OPEC members agreed to cut output by 1.8 million barrels a day. Russia's currency followed the price rebound, becoming the world's second-best performer over the past year.

“The ruble stinks, for sure,” said Kornilov. “It dried out the effect of the higher oil price in the first quarter after the OPEC deal.”

Output Levels

Rosneft's average output in the first quarter was 70,000 barrels a day less than October levels, the benchmark for the OPEC agreement, while oil production declined 1 percent from the previous quarter to 4.62 million barrels a day. That was still 11 percent higher than the year-earlier period, following the acquisition of Bashneft PJSC.

Russian output fell by the agreed 300,000 barrels a day against the October level on May 1, a level that it will maintain through June according to the current deal with OPEC, according to the country's Energy Ministry.

OPEC ministers, led by Saudi Arabia, meet in Vienna on May 25 to decide whether to prolong the output cuts. Russia is inclined to extend the six-month agreement to curb production in a bid to erode a global supply glut, Energy Minister Alexander Novak said on Thursday.

The extension is expected to be for a minimum of another six months, according to a Russian government official.

“For the market to fully recover, the initiative must be extended,” Novak said.

While the increase in prices that accompanied the current deal provides motivation for Russia, “the pain level will be higher” for companies in the second half of the year,” said Artem Konchin, an oil analyst at Otkritie Capital. The voluntary compliance of Russian producers may also lead to less predictable reactions from some companies, he said.

On Friday, oil slid below $45 a barrel for the first time since OPEC agreed to cut output in November as U.S. shale confounds the producer group's attempts to prop up prices. Russia's second and third-largest producers, Lukoil PJSC and Surgutneftegas PJSC, have yet to announce when they will report first-quarter results.

Capital expenditure at Rosneft rose 57 percent to $3.3 billion from a year earlier, yet fell 11 percent from the previous quarter. Free cash flow fell 7 percent to $1.4 billion from the previous year, but was more than triple the fourth-quarter figure.

“It was a tough quarter for Russian oils as a whole, so nobody was holding their breath,” Kornilov said. “Nonetheless Rosneft doesn't look bad at an operating and cash flow level.”

To contact the reporter on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net.

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Dylan Griffiths, Alex Devine