Russia's biggest oil producers have never had it so good

MOSCOW (Bloomberg) -- Russia’s oil and gas companies are living through the best of times, simultaneously enjoying record production and the highest prices ever in the local currency.

An index of the companies this month hit an all-time high in rubles and reached levels not seen since June 2014 in dollars. Russian crude producers are raking in cash as the rally in dollar-denominated oil prices is amplified by a weakening ruble, helping the industry achieve record-breaking revenues and shrink debts.

But there’s a cloud on the horizon. There’s a risk that the U.S. could toughen sanctions on Russia in connection with this year’s chemical weapons attack in the UK or continued allegations of election interference.

"All investors are asking themselves -- OK, the Russian companies look attractive right now, but what about the next six months, what about the next 12 months?" said Alexandre Dimitrov, head of Emerging Europe EQ Funds at Erste Sparinvest Kap. "Everyone is looking at November, when we have mid-term U.S. Congress elections and the new sanctions against Russia."

An agreement between OPEC and its allies in June to relax output curbs has allowed Russian oil companies to resume production growth. They’re doing it so actively that the industry is said to have set a new post-Soviet record this month.

Russian producers are an attractive investment long-term because they have some of the lowest extraction costs globally, focus on domestic projects with a long reserve lifespan and offer growing dividend yields, said Ekaterina Iliouchenko, a money manager at Union Investment Privatfonds GmbH in Frankfurt. Yet their shares remain undervalued compared with Western peers because of the sanctions risk.

In late November, the White House is set to decide on new restrictions from a list prepared by lawmakers, which includes a ban on almost all goods and technology exports to the country. Since the wording of the plan is vague, investors fear the new penalties might cause more serious damage to Russia’s energy sector than earlier sanctions, potentially even echoing the crisis around aluminum giant United Co. Rusal earlier this year.

“There are so many different scenarios that may come out,” said Mark Schlarbaum, the managing partner at Krane Fund Advisers responsible for emerging-market funds with a total $1.5 billion of assets. “Even if stocks are cheap, things are really unpredictable -- people can’t model out what’s going to happen because that’s such a great unknown.”

So far, the global oil market is bolstering Russia’s big players as concerns of a supply deficit mount and crude-price forecasts remain bullish. Investors in the Russian stocks, however, are still cautious.

“Until we know what exactly is going to happen in terms of the new sanctions, the skew is on the downside risk,” Erste Sparinvest’s Dimitrov said.