Surgut Retreats as Goldman Says Sell on Dividend as Ruble Gains

OAO Surgutneftegas dropped for a fourth day in Moscow as Goldman Sachs Group Inc. recommended selling the preferred shares, saying a stronger ruble may make it difficult for the oil producer to maintain high dividend payments.

The stock has rallied 56 percent this year as investors bet the company would make big a larger-than-normal dividend payout for 2014 after a 46 percent plunge in the ruble boosted the value of its dollar-denominated cash pile. Goldman Sachs was the latest bank to turn bearish on the shares, forecasting a sustainable long-term dividend yield of 6 percent, versus its historical average of 10 percent, as the currency stabilizes.

Five of 19 analysts surveyed by Bloomberg recommend selling the stock, while seven advise holding it and seven rate it buy. The preferred shares had no bearish ratings at the start of this year. Goldman Sachs’s downgrade comes after Alfa-Bank and HSBC Holdings Plc also lowered their ratings to sell this week.

“The rout in the ruble was a huge upside for the company and the 2014 dividend will be unusually high, but this will be a one-off,” Alexander Kornilov, senior oil and gas analyst at Alfa-Bank, said by phone from Moscow Wednesday. “The stock is rallying on the dividend outlook for 2014, but the appreciation of the ruble is not factored in yet. It’s only a matter of time before the market recognizes this downside.”

Kornilov projects the company’s 2015 dividend on preferred shares at around 2 rubles per share if the ruble trades at around 60 per dollar. If Russia’s currency continues to strengthen, the company might post a foreign-exchange loss in the first half of this year, he said.

Dollar Cash

Most of the $30 billion of cash held by Surgut, based in the Russian city of the same name, is in dollars, which is boosting the potential for increased shareholder payouts as the ruble plunged last year. The currency has rebounded 13 percent this year.

The preferred shares slid 0.2 percent to 45.89 rubles, or $0.86, in Moscow Wednesday, pushing the four-day drop to 3.5 percent. The American depositary receipts were little changed at $6.80 as a Bloomberg gauge of the most-traded Russian stocks in the U.S. jumped 0.9 percent to the highest level this year.

Goldman Sachs, which in January cut its projection on the company’s preferred shares to hold from buy, said there is a risk that 2014 dividends won’t be as high as expected since the payout would be close to total free cash flow. The bank’s target price of 36.6 rubles per preferred share implies a 20 percent downside from its current price of 45.9 rubles per share. Goldman Sachs’s Geydar Mamedov doesn’t expect the ruble to drop as much as it fell last year, he said in the report.

Profit Surge

The ruble tumbled last year as Brent crude, the oil grade traders use to price Russia’s main export blend, sank 48 percent.

Surgut said last month that its 2014 profit to Russian accounting standards, the measure used to calculate the dividend, tripled to 892 billion rubles ($15.5 billion). The surge in earnings came as the company revalued its cash pile, which is denominated mostly in dollars. Analysts surveyed by Bloomberg project a 2014 dividend of 8 rubles 24 kopecks per preferred share, three and a half times the payout for the prior year.

“Surgutneftegas’s dividend yield is one of the most attractive in the Russian market, and though the ruble appreciation might lead to lower dividend payouts going forward, the dividends will still be decent,” Alexey Kozlov, chief analyst at UFS Investments Co. in Moscow, said by phone Wednesday. UFS Investments has a hold projection on the stock. “Surgut has a huge dollar-denominated cash pile, which serves as a safety cushion if oil prices decline.”

Dividend Outlook

A Bloomberg gauge of the most-traded Russian stocks in the U.S. gained 0.9 percent to 63.43, while the dollar-denominated RTS index rose 1.8 percent. The Market Vectors Russia ETF added 1.2 percent to the highest level this year.

“Under the current ruble price, Surgut’s dividends for 2015 can be close to zero,” Kirill Tachennikov, analyst at BCS Financial Group in Moscow who has a sell projection on the stock, said by phone on Tuesday. “The preferred shares currently don’t have a growth driver that will give it an incentive to grow.”

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