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Wall St. Warms to Siberia as Largest Cash Hoard Beckons: Energy

While Surgutneftegas produces over 1.2 million barrels of oil a day, more than the U.K., a lack of financial transparency has suppressed the share price. Photographer: Sasha Mordovets/Getty Images
While Surgutneftegas produces over 1.2 million barrels of oil a day, more than the U.K., a lack of financial transparency has suppressed the share price. Photographer: Sasha Mordovets/Getty Images

April 18 (Bloomberg) -- OAO Surgutneftegas, Russia’s third-largest oil producer with a $31 billion market value, for years has refused to disclose its cash position under international reporting standards or whether it holds its own shares.

That’s no problem for Wall Street. FMR LLC’s Fidelity Investments, Swiss manager Pictet & Cie, and BNP Paribas SA’s assets management arm -- the three biggest foreign holders of the company’s preferred stock -- all added shares, filings made by the funds in the last three months show.

They’re counting on the Siberian oil driller to prove its financial strength this month when it publishes its first accounts under International Financial Reporting Standards. The Surgut, Russia-based company will reveal it holds $28 billion in cash, according to the median estimate of a Bloomberg survey of 13 analysts. That’s more than any of the world’s largest oil companies. Chevron Corp. had $21 billion at Dec. 31.

“The company is cheap, with a cash balance almost equal to its market cap,” said Tim McCarthy, the head of asset management at Valartis Bank, which has more than $1 billion invested in emerging markets and doesn’t own Surgut shares. “Better disclosure could send this stock up sharply.”

While Surgutneftegas produces over 1.2 million barrels of oil a day, more than the U.K., a lack of financial transparency has suppressed the share price. The cash reserves were built under the leadership of Director General Vladimir Bogdanov, who’s run the company since the Soviet era.

Russian Competitors

Surgutneftegas’s shares have outperformed larger Russian competitors this year. The ordinary shares are up 0.4 percent versus a 5.7 percent decline for OAO Lukoil and a 21 percent drop for OAO Rosneft, the largest producer.

Surgutneftegas gained 1.91 percent to close at 26.95 rubles today, outperforming Moscow’s benchmark Micex index, which was little changed. The preferred shares gained 2.7 percent.

Under Russian accounting standards, the size of Surgutneftegas’s cash holdings hasn’t been clear. Investors are confident that it has become a cash machine based on its aversion to acquisitions, limited capital spending, and a conservative dividend policy -- about 10 percent of profit is distributed to shareholders, compared with an industry average of 36 percent.

“I expect that cash will be there,” said Ivan Mazalov a Surgut stockholder who helps manage $4 billion at Prosperity Capital Management in Moscow. “It will be positive for the market as there may be doubts with other investors.”

The switch in accounting standards by the end of April is mandated by a law passed last year to bring companies trading in Moscow in line with international competitors. Surgutneftegas will report results “soon,” Bogdanov said on April 10 while visiting an oil field in eastern Siberia.

Balance Sheet

“The most important thing is that IFRS gives Surgut’s financials the credibility which they don’t have now,” said Bruce Bower, a partner at Verno Capital, which manages about $200 million in Moscow. “On matters like the amount of cash on the balance sheet, people need a lot more reassurance.”

Surgutneftegas spokesman Alexey Artemnenko declined to comment on the exact date on which Surgut would release earnings, or the size of the cash holding.

The oil producer will not reveal any significant holding of its own shares, according to 10 of the 13 analysts polled.

The last time Surgut reported under IFRS standards the company showed 40 percent of the company’s shares held in treasury. In 2005, a spokeswoman said the company had no treasury stock.

“Seeing any of the treasury stock would also be a positive surprise,” McCarthy said.

Banks polled included UBS AG, Citigroup Inc., Uralsib Financial Corp., Renaissance Capital, Otkritie Financial Corp., BCS Financial Corp., Alfa Bank, Arbat Capital, HSBC, Deutsche Bank, OAO Gazprombank and VTB Capital.

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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