Russian Energy derivatives – alternative option

Russian Energy options
In this report we introduce derivative ideas on Russian energy stocks. Our option
strategies are driven by the long-term fundamental views of our analysts as well
as possible short-term price-sensitive catalysts, or lack thereof. In this introductory
publication we search for alternative, low-cost ways to express directional views
on Gazprom, UES and Rosneft. Along with Lukoil, these names represent the
bulk of a liquid derivatives market in Russian stocks.
Gazprom – long-term bargain with short-term catalysts
Gazprom is one of our top picks in the Russian energy space. Our fundamental
view is that the stock is relatively inexpensive compared to its emerging market
peers and earnings momentum is skewed to the upside. In terms of short-term
catalysts, we are looking forward to relatively high crude oil prices to support
Gazprom’s performance and to the strategy presentation at the end of November.
Trade idea: Buy US$54/US$59 call spreads and sell US$48 puts to fund.
Structure cost US$0.25 (against reference price of US$51.45)
UES – short-term trouble but long-term value
UES’s EGM on 26 October approved the last corporate procedures for the
company’s final restructuring. However, the voting at the EGM exposed UES to
the possibility of as much as US$4.3bn in share buyback expenses. We expect
the threat of buybacks to keep UES’s share price within a corridor close to the
share buyback price for the reminder of the year. In the longer term, we expect
share price outperformance due to the accelerated restructuring of the company’s
distribution, hydro and transmission assets.
Trade idea: Buy US$129/US$148 six-month call spreads funded by US$129
three-month calls. This structure cost US$1.97 (against reference price of
US$123.25). We also advocate selling covered US$129 three-month calls for
income enhancement at US$3.93 premium.
Rosneft – strategy presentation as downside catalyst
Unlike Gazprom, Rosneft looks expensive relative to developed and emerging
market peers, trading at 15.3x 2007E P/E compared to 12.7x for Gazprom and
Lukoil. We also expect the recurring delay of the strategy presentation to act as a
near-term negative catalyst. Our strategies are based on the potential near-term
decoupling of Rosneft from the overall performance of the commodities-linked
Russian stocks.
Trade idea: Buy US$9.2/US$8.3 put spread for US$0.27 (against reference price
of US$9.2).