Surgutneftegaz, Russias third biggest Oil Company

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Gold/Mining/Energy
Surgutneftegaz, Russias third biggest Oil Company

An SI Board Since May 1999

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Introduction Compact

Everyone is talking of LUKOIL, well here is an interesting article on Surgutneftegaz. As I 've found no thread, perhaps we start a new one. Is anyone involved in this stock ?

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A Slick Payoff for Investors in This Oil Company

By Gena Beyderman

NEW YORK, May. 14, 1999 -- (worldlyinvestor.com)
Never mind some puny setbacks, the Russian stock market is in the middle of a serious upswing. Not every stock is rallying of course, but Surgutneftegaz (quote, chart, profile), a huge Russian oil company, is among the market leaders.

Surgutneftegaz stock has surged 80 percent in the last three months alone and Valeriy Nesterov, an oil and gas analyst with Fleming UCB in Moscow, calls it one of the "bright leaders" of the Russian market.

What is fueling such a spectacular ride of Russia's third biggest oil firm? Is it SNG's fundamentals is it the Russian stock market in general

Boris Sinegubko, an oil analyst with Brunswik Warburg in Moscow, warns that even though the recent rally looks huge, it was preceded by huge fall. At the current price of $6.50,SNG still trades 40 percent below its 52-week high.

A Good Russian Company

Sinegubko believes the rally was triggered by the "fundamental attractiveness" of the company. He praises SNG's effective and honest management that succeeded in controlling expenses and salvaging sales during last summer's economic melt-down in Russia.

SNG loves cash. Nesterov attributes the "unusually low" level of non-payments, plaguing most of oil producing peers, to SNG's pre-payment policy. The company remains an exemplary salary payer in that it continues to pay its workers without delays and in cash, unlike other Russian oil giants.

He contrasts SNG with Lukoil, Russia's biggest oil company, though both passed the crisis stage "relatively successfully." The difference lies in their leverage.

Lukoil's entire export revenue is pledged for servicing debt, while SNG has no debt on its balance sheet.

Contrary to most Russian oil companies SNG's managed to accumulate a cash balance of over $1.5 billion the three years before the August-crisis. In the crisis, however, it lost a part of that money since it was parked in the shattered Russian banks. But, the firm hardly feels the effects.

"Right now the company is earning even more than it did before the crisis," says Nesterov.

He views SNG as the most profitable company among the publicly traded Russian companies. Since none use the international accounting standards, it is difficult to accurately assess the magnitude of their profit.

Says Sinegubko, "(There are) clear signs of profit - and this profit is significant."

Drilling, Investing, Planning

SNG is Russia's second biggest exporter of oil in absolute terms. As a percentage of their total output however, their exports are number one. Sinegubko estimates that SNG exports around 70 percent of their crude while Lukoil exports only 45 percent. Since export markets are so much more profitable than the domestic market, it pays off in a big way for SNG.

Exporters gained from the currency crisis in many ways. The bulk of their production costs, such as salaries and most of the capital expenses, are in rubles. But they sell their oil for dollars.

Nesterov says that SNG is the only oil company that increased its upstream investment last year. It is engaged in active developing drilling, representing one third of Russian oil companies' total. It accounts for 20 percent of exploration drilling in the time when many Russian oil firms practically stopped looking for additional reserves.

Even in 1998, SNG increased output by 3.7%while other Russian oil firms cut back their oil output by an average of 2.5%.

Conservative Disadvantage

All in all, this is a "very positive" moment for the company, says Sinegubko. But the recent remarkable out-performance raises the question of sustainability.

SNG is already the most expensive Russian company in terms of market capitalization per unit of assets - it's dearer than Lukoil in every respect.

Nesterov, however, believes the upside potential remains strong. "Our buy recommendation that we issued in October1998 remains intact," he says.

The investors who are pouring their money into SNG and Lukoil right now, he argues, used to be in different stocks before. A reshuffling has occurred as investors "turned away from the weak and embraced the healthy companies."

Sinegubko admits the analyst community is concerned about SNG's continued growth. "What's next? Does it have any interesting plans? Does it have any ideas that could fuel the rise?," he asks.

"Contrary to Lukoil, they don't own oil reserves in other regions, they don't have any interesting ideas of downstream business development. They don't seem to have a clearly-cut strategic plan of the future developments. In the days of soaring valuations this drawback can really disservice SNG," he says.

The recent events in Yugoslavia introduce a dangerous element of uncertainty - the last thing Russian markets need is worsening relations with the West.

"The political crisis could bring even more volatility to the already shaky political balance as well as alienate potential investors from Russia," says Nesterov. ( (c) 1999 worldlyinvestor.com)

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