Bloomberg News

Surgut Revealed as Best Russian Oil With Sleepy $28 Billion Secret: Energy

March 02, 2012

Russia’s fourth-largest oil producer pumps more crude than the U.K., employs 100,000 people and trades on stock exchanges in Moscow, London and New York. What’s not disclosed is how much cash OAO Surgutneftegas (SNGSP) holds and the identity of its biggest shareholders.

A law to align Russian financial reporting with international standards this year promises to lift the veil on the Siberian driller, run by General Director Vladimir Bogdanov since his Soviet-era appointment in 1984 at the age of 33. Citigroup Inc. estimates the company holds $28 billion in cash, more than double the balance of Exxon Mobil Corp. (XOM)

Opaque accounting has held back the share price, according to Citigroup, which ranks the company as the best Russian oil investment ahead of OAO Lukoil. Even after dividends, Surgutneftegas investors earned a return of 11 percent over the past five years, a period when crude oil more than doubled. Russia, which holds a presidential election this weekend, is pushing transparency as part of a campaign to make Moscow a financial center and broaden the economy.

Greater transparency “is a game changer” at Surgutneftegas, said Ildar Davletshin, an oil and gas analyst at Renaissance Capital. “Something the market has been waiting for the last decade.”

Russian President Dmitry Medvedev, who will step down in May, met executives including Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein and JPMorgan Chase & Co. CEO Jamie Dimon last year for opinions on how Russia might gain a larger role in international finance.

Rosneft Switch

One result was a law that started Jan. 1 requiring publicly traded companies to meet International Financial Reporting Standards. TNK-BP, BP Plc’s Russian venture with a group of billionaires, said this week it will adopt IFRS standards for the first quarter. OAO Rosneft, Russia’s largest oil company, switched yesterday.

Prime Minister Vladimir Putin, favored to win the presidential election, signed the order to create the financial reporting legislation last year.

“Long a sleepy ignored stock, we see changes afoot at Surgutneftegas,” said Ronald Smith, an oil analyst at Citigroup in Moscow. “A material change in transparency and already in law may be accepted by the market as inevitable by year end.”

Bogdanov, whose $3.3 billion fortune ranks 32nd on the Forbes list of Russia’s richest men, quit reporting under U.S. generally accepted accounting principles, or GAAP, after 2002 and has given no indication of a change. He declined to comment on 2012 plans when asked by Bloomberg News on Feb. 9 and wouldn’t be interviewed for this story. The Forbes estimate assumes the general director holds a controlling stake in Surgutneftegaz that isn’t disclosed.

Controlling Shareholders

The new law won’t force Surgutneftegas, which has a market value of about $35 billion, to disclose its controlling shareholders. The company listed ZAO ING Bank Evraziya and Bank of New York nominees as its largest shareholders and the only ones exceeding a 5 percent holding in accounts to Russian standards.

Surgut shares gained 0.3 percent to close 30.60 rubles on Moscow’s Micex exchange today.

Surgutneftegas has pumped oil from a swampy stretch of Siberia near the city of Surgut since the 1964 discovery of the region’s reserves. Even as rivals from billionaire Vagit Alekperov at OAO Lukoil and Mikhail Fridman of TNK over the past decade opened up accounting, Surgutneftegas held firm.

The company produced 1.2 million barrels a day in January, 0.7 percent more than a year earlier, according to data compiled by Bloomberg.

Bogdanov has kept ties to the Kremlin, running Putin’s maiden election campaign in west Siberia in 2000. In a Feb. 20 newspaper article, Putin thanked Bogdanov’s Surgutneftegas personally for funding a Pacific nuclear submarine base in 2002 when the state couldn’t fund it.

Shirked Acquisitions

The company has made only one acquisition, a purchase of MOL Nyrt. shares, allowing an estimated $28 billion to pile up, according to Smith, who extrapolated his figure from the company’s 2002 GAAP results.

“Surgutneftegaz remains among the least transparent companies in Russia,” said Aivaras Abromavicius, a partner at East Capital, which holds a 3.75 percent stake in Surgutneftegas. East Capital, an asset manager specializing in Eastern Europe and China, has overlooked a lack of clarity on ownership and reporting in favor of a “handsome” dividend supported by the company’s strong cash flow and cash position, he said.

Alexander Burgansky, an oil and gas analyst at Otkritie Capital, said reporting to international accounting standards would allow Surgutneftegas to compete for a wider range of investors.

Cash Not Clear

Right now it’s unknown if the cash is there, said Alexander Burgansky, an oil and gas analyst at Otkritie Capital. In Russian accounting, the company listed a total of $28 billion in short-term investments, long-term investments and cash accounts, although details of the investments aren’t made public, he said.

While investors may benefit from improved financial reporting standards -- Citigroup’s Smith said today’s valuation is based mainly on the company’s supposed cash holdings and not the underlying oil-production business -- they won’t unmask the company’s largest shareholders.

“Bogdanov wasn’t so secretive about Surgutneftegas ownership before 2002-2003,” the time when investors speculate he transferred ownership to someone else, said Vladimir Milov, an opposition politician who served as deputy energy minister at the time.

Milov named Gennady Timchenko, founder of oil trader Gunvor International, as the likely buyer of the company, without providing proof. Timchenko denies the claim, and his Volga Resources fund owns less than 0.1 percent of Surgutneftegas shares, said Stuart Leasor, a spokesman for the fund.

Putin Spokesman

Kremlin economic adviser Arkady Dvorkovich declined to comment on whether Surgutneftegas would have to report IFRS under the new law. Putin’s spokesman Dmitry Peskov also declined to comment directly on the issue.

In 2002, GAAP reporting showed that the company held shares in its own treasury, something the company later denied.

Surgutneftegas’s only major acquisition, a surprise purchase of 22 percent in Hungary’s largest refiner MOL Nyrt. from OMV AG, failed because of the lack of clarity in ownership. A Hungarian law prevented Surgutneftegas from being listed among shareholders until it revealed its beneficial shareholder, Peter Csaszar, a securities analyst at KBC said.

Surgutneftegas management may have controlled as much as 72% of the company through 23 non-commercial entities, Russian newspaper Vedomosti reported in 2007. Bogdanov controlled nine of the entities and 47 percent of Surgutneftgas’s voting rights, according to the newspaper.

“The world is changing around Surgut,” said Ivan Mazalov, director of Prosperity Capital Management, which manages about $4 billion in assets including Surgutneftegas shares. “And Surgut will have to adapt to that.”

To contact the reporter on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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