World Economy

Russia Energy Sector Rises by 22%

Russia Energy Sector Rises by 22%Russia Energy Sector Rises by 22%

Most investors are probably steering clear of the global energy sector these days—nearly every country has seen their oil and gas sectors fall — but there has been one unlikely bright spot among all the bad news: Russia.

Year-to-date, Russian energy sector returns have risen by about 22 percent.

No other country comes close. Canada, another oil- and gas-heavy nation, has seen industry equity returns rise by just 1.8 percent this year, while the MSCI USA Index is up only 0.7 percent, CNBC reported.

Why is Russia, which is fraught with geopolitical problems and currency issues, dramatically outperforming everyone else? In part, because its market dropped well before the oil crisis began.

“The market fell when the oil environment was good,” said Karen Kostanian, an oil and gas analyst with Merrill Lynch Russia. “So when everyone downgraded their oil price assumptions, these companies were already cheap.”

They continue to be inexpensive today. At the moment, the Russian energy names Lukoil and Gazprom have a 2015 price-to-earnings ratio of about 4.1 times, while developed-nation oil stocks are trading at about 11.5 times earnings, said Will Riley, a portfolio manager with Woodland Hills, California-based Guinness Atkinson Funds. His Global Energy Fund has about 3.3 percent of its assets in Russian energy stocks.

Russian valuations are always more depressed than developed markets, but these ratios are below the usual 6 or 7 times PE (price-earning). With valuations as low as they are today, some investors don’t mind taking on the risk that comes with Russia.

Oil is priced in US dollars, so it generates revenue in greenbacks.