Alfa Bank has lowered its recommendation for the entire Russian oil and gas sector. Analysts see no prospects for rising oil prices and oil company profits

Alfa Bank analysts downgraded their recommendations for securities in the Russian oil and gas sector as a whole from “above the market” to “over the market,” according to a review of the oil and gas sector published on October 26. Economists do not expect that shares of companies in this industry will be able to outperform the MICEX index in the coming year and recommend holding their securities.

Senior analyst Alexander Kornilov explained the downgrade of the recommendation by the recent increase in sector quotations after a short-term rise in oil prices, the lack of reasons for further growth of shares and the expected weak results of oil and gas companies for the third quarter of 2015.

The bank lowered target prices for shares and depositary receipts of six companies in the oil and gas sector and recommendations for four (see table). The reason for this was a change in the forecast for oil prices (up to $60 per barrel in 2016 and $75 per barrel in the long term instead of $70 per barrel and $80, respectively).

The only company in the oil and gas sector for which the recommendation was kept at the “above market” level was LUKOIL. Although Alfa Bank analysts lowered the target price for the company's shares to $52, they still have a positive assessment of the company and believe that its shares are undervalued.

According to Kornilov, LUKOIL is attractive to investors: the company has a high return on free cash flow, reduces investments in international projects, and is not subject to sanctions. In addition, the company's shares could rise following an expected interim dividend announcement this week.

Company Previous recommendation New recommendation Previous target price New target price Upside potential

"Rosneft"	above market	by market	$5,4	$4,6	13%
LUKOIL	above market	above market	$57	$52	40%
"Surgutneftegaz", GDR	by market	by market	$6	$5,6	-3%
"Surgutneftegaz", usual.	by market	by market	36 rub.	34 rub.	-4%
"Surgutneftegaz", priv.	above market	by market	45 rub.	47 rub.	11%
Tatneft	by market	by market	$32	$32	0%
Gazprom	above market	by market	$6	$4.9	10%
NOVATEK	above market	by market	$115	$107	9%

The Russian oil and gas sector, at the current level of oil prices, has exhausted almost all of its growth potential, agrees BCS analyst Kirill Tachennikov. “In general, almost all the securities of these companies are traded close to their fair value,” he notes. According to the analyst, the shares of Bashneft, Gazprom Neft and LUKOIL remain undervalued.

Alfa Bank's decision to lower its recommendation is a completely logical step, given the situation on the oil market as a whole, says Nordea Bank analyst Denis Davydov. “Indeed, recently we have seen a noticeable surge in interest in oil, as in all risky assets, but this was followed by a decline in prices,” he says.

According to Davydov, the economies of China and the United States - the main consumers of oil - continue to experience problems. Therefore, OPEC's forecasts for an increase in oil demand may not come true. One should not expect a strong rise in oil prices, as well as profits from oil companies, says Davydov.

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