Investor doubts hold back Russian oil powerhouse

The Star

The Russian oil company Surgutneftegaz owns refineries and gas stations, sells a valuable product and makes a profit. But it sometimes fails another test of the capitalist world.

The company is valued by the Russian stock market at even less than its cash and easily sold assets. That astonishing fact suggests that investors see no real value in the business.

Surgut, as it is known for short, is Russia’s fourth-largest oil company after Rosneft, Lukoil and TNK-BP. Its sprawling oil fields, pipelines and drilling rigs should be highly valued in the investment arena. It pumps 1.1 million barrels of oil a day. So the struggle to raise its stock value in the eyes of portfolio managers, while more extreme than many of its Russian peers, is emblematic of investors’ broad lack of confidence in the country’s economy. Outsiders view Russia’s companies, however cash-rich, with an incredible degree of skepticism.

Shares in Surgut have fallen in recent weeks to a level where the market value of about $28.5 billion (U.S.) for its common shares on the Russian Micex stock exchange is now lower than the $31.4 billion in cash and liquid assets on its balance sheet, according to Troika Dialog bank in Moscow.

“It’s an illogical valuation,” Chris Weafer, the chief strategist at Troika Dialog brokerage in Moscow, wrote in a research note last week about the company.

The Russian market this spring fell faster than others of the BRIC countries of Brazil, Russia, India and China and since mid-March is down 18.8 per cent. Global oil prices have slumped, reducing expected earnings.

But even taking earnings into account, investors take a dim view of Russian equities. The Russian stock exchange now trades at an average price to estimated earnings ratio of 4.28, compared with the MSCI Emerging-Markets Index average.

It is a glum statistic for Russia, particularly as President Vladimir V. Putin is planning a wide-ranging sale of state assets to raise money for increased military and social spending promised during his campaign. The price-to-earnings ratio comparison means that, statistically, a company that mines gold or pumps oil in Russia is worth less than half as much as a company that extracts the same amount of gold or oil just as efficiently in Brazil or Indonesia.

For all the value in the Russian economy, this wealthy industrial superpower cannot convince investors that it is safe place to put money – even an oil company is a hard sell.

Surgut shares trade in Moscow and on the over-the-counter market in New York. The company has not reported results to international standards since 2002, though a new law intended to make Russia more investor-friendly will require it to do so next year.

The company is so opaque that investors did not even know it had financed the construction of a submarine base in Siberia for the Russian navy.

The disclosure did little to dispel rumors that the company is at least, in part, a slush fund for the Kremlin, though a publicly listed one.

The company declined to make an executive available to discuss the expenditure, or answer written questions.

Putin wrote in an article published during his election campaign that, in 2002, Surgut and another oil company helped retool the Petropavlovsk-Kamchatsky-50 nuclear submarine base for a new class of missile submarines known as the Borei, or North Wind. “We had to ask private companies for help,” Putin wrote in the article published in Rossiiskaya Gazeta, the state newspaper. “I would like to thank them for that.”

It remains unclear how the favor slipped passed investors in the United States and elsewhere who did not know they were financing a Russian strategic nuclear site.

In the company’s annual report, the outlay for the base may have been noted as a “non-operating expense” or “social responsibility expense,” according to a senior accountant at a Big Four firm in Moscow, who did not want to be cited discussing a potential client’s affairs.

Sergei Aleksashenko, a former deputy finance minister, said in an interview that Russian energy companies are routinely subjected to this “system of unofficial requests,” from the Kremlin – for financing everything from presidential palaces to ski resorts to military installations.

“It doesn’t really matter what it is for,” Aleksashenko said. “You receive a request and you cannot refuse.”

More recently, Russia’s leading business newspaper, Vedomosti, revived speculation about another possible reason for Surgut’s low valuation. Citing oil analysts, it said the Kremlin is setting it up for a takeover by the state oil company, Rosneft, which has been bulking up on oil assets during Putin’s time in power. The report came after a powerful aide to Putin, Igor I. Sechin, became chief executive of Rosneft this month.

Based in the Siberian city of the same name, Surgut is a private company but managed by a Soviet-era director who is close to Putin. It sells much of its oil, about $127 million (U.S.) a day based on average prices for Russia’s export blend oil, Ural Crude, last year, to a similarly opaque commodities firm called Gunvor based in the Netherlands and co-owned by Gennady Timchenko, another longtime acquaintance of Putin.

The company has emphasized other measures of success than stock price, including high salaries for employees and a favored statistic of Soviet oil ministers but not modern petroleum analysts: the number of meters of well bore drilled. Surgut has yet to publish its 2011 annual financial report on its website but, in a press statement, it made public that it had drilled 4.75 million meters last year.

The owners of 70 per cent of the company remain a mystery. In conference calls with analysts, the company has said its own executives own a majority of the shares.

One hedge fund that tried to unlock some hidden value was Hermitage Capital. Its chief executive, William F. Browder, sued Surgut in Russian court in 2004 and 2005 to compel the company to adhere to Russian securities law, something that could have led to a disbursement of the cash reserves, which were smaller at the time but still significant, as dividends. In November 2005, authorities revoked Browder’s visa to Russia; a week later, the Russian Supreme Court ruled against him in the Surgut lawsuit.

Browder said in an interview that conflict with either Surgut or Gazprom, the state gas monopoly, led to his expulsion from Russia. And Surgut, he said, is “the most profitable but least valuable company in Russia.” займы на карту без отказа payday loan https://zp-pdl.com/emergency-payday-loans.php https://zp-pdl.com/how-to-get-fast-payday-loan-online.php займ онлайн на карту без отказа