TNK-BP Holding Company. Review. P r o s p e c t I n v e s t m e n t C o m p a n y. January 21, 2005

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1 Review P r o s p e c t I n v e s t m e n t C o m p a n y

2 TNK-BP Holding Company Details of restructuring TNK-BP and consolidation of its assets were released at the press conference held on January 14, As a result of the proposed restructuring the 3d largest oil company by crude oil production will be established in Russia. Shares of the new company are supposed to enter the market by the end of Revenue ($ mln) Profit ($ mln) Oil Production/ mln tons/ year TNK-BP Е P/S P/E Capitalization ($ mln) Estimated Capitalization ($ mln) 18,600 22,218 Share prices of three largest subsidiaries determined by TNK-BP are close to the fair levels and are pari passu with the proposed shares exchange ratios, given the capitalization of the new company of USD 18.6 billion (the accepted value of TNK-BP for the merger in 2003). The minority shareholders have an option either to sell their shares at the offered buy out prices or to exchange them into shares in the new holding company. TNK-ВР Group Structure TNK-BP ОАО TNK-BP Holding 98% 96% 98% ОАО ONAKO ОАО TNK ОАО Sidanko We believe that the fair value of the new holding company exceeds USD 20 billion. If capitalization of the new holding company equals to its fair value after it is listed in the stock exchanges, the minority shareholders of some TNK-BP subsidiaries who had exchanged their shares into the shares in the new holding company may get more profit than from the sale of their shares at the buy out prices. Upstream and Joint Ventures Refining Marketing and Joint Ventures TNK-ВР Group Structure after restructuring We have reconsidered the valuation of TNK- BP holding and determined the fair value of some TNK-BP subsidiaries and affiliated companies based on the published exchange ratios. TNK-BP OAO TNK BP Holding Upstream and Joint Ventures Refining Marketing and Joint Ventures 2

3 At the press conference held on Friday, January 14, 2005, TNK-BP officials announced details of the proposed company restructuring in the form of accession to OAO TNK-BP Holding which was registered recently in Tyumen Oblast. According to the management plan, at the initial stage TNK, ONAKO and Sidanko should join the new holding company. Extraordinary meetings of shareholders of all three companies are scheduled to be held on March 1, 2005 at which the shareholders will be required to approve the proposed accession. Those shareholders voting against may request a buy out of their existing shares by the acceding companies. The buy out prices are as follows: TNK - $3.3 per share; ONAKO - $2.34 per share; Sidanko - $29.1 per share. Alternatively, the shareholders may exchange their shares for the shares in the new holding company at the following exchange ratios: 1 TNK share = 2.66 shares in the new holding company; 1 ONAKO share = 1.89 shares in the new holding company; 1 Sidanko share = shares in the new holding company. The exchange is expected to be completed in the second half of At that time the next stage of restructuring should commence during which subsidiaries of TNK, ONAKO and Sidanko should join the holding company. TNK-BP has published the exchange ratios for 14 subsidiaries which are planned to join the new holding company. 1 share in ОАО Orenburgneft = shares in the new holding company; 1 share in ОАО Udmurtneft = shares in the new holding company; 1 share in ОАО Saratovneftegaz = shares in the new holding company; 1 share in ОАО Varyeganneftegaz = shares in the new holding company; 1 share in OAO Orenburggeologiya = 1.64 shares in the new holding company; 1 share in OAO Saratovsky Refinary = shares in the new holding company; 1 share in OAO Neftemaslozavod = shares in the new holding company; 1 share in OAO Ryazansky Zavod Neftekhimproduktov = shares in the new holding company; 1 share in OAO Ryazannefteprodkt = 1.17 shares in the new holding company; 1 share in OAO Saratovnefteprodukt = shares in the new holding company; 1 share in OAO Rostovnefteprodukt = 2.53 shares in the new holding company; 1 share in OAO Kaluganefteprodukt = shares in the new holding company; 1 share in OAO Tulanefteprodukt = shares in the new holding company; 1 share in OAO Orenburgnefteprodukt = shares in the new holding company. The exchange is expected to be carried out after the first stage of restructuring has entered the final phase, that is not earlier than in the 3d quarter of this year. For accession of 14 subsidiaries listed above the meetings of their shareholders are planned to be held, and in accordance with the applicable laws the shareholders who do not accept restructuring will be entitled to sell their shares. The main question arising out with regard to the proposed restructuring is whether to accept the offer and to sell shares in TNK-BP subsidiaries or to exchange them for the shares in the new holding company. According to our estimates, the buy out prices are fair and are pari passu with the exchange ratios, given the holding company capitalization is USD 18.6 billion (the value at the moment of TNK-BP merger in 2003). However if the holding company capitalization exceeds this amount after the company is listed in the stock exchanges, the minority shareholders who had exchanged their shares for those in the new holding company may get more profit than they would get from sale of their shares at the buy out prices. We have determined the fair value of TNK-BP Holding and, based on the published exchange ratios, set up the target prices for some TNK-BP subsidiaries and affiliated companies. We did not consider shares in Tulanefteproduct, Kaluganefteproduct and Neftemaslozavod as these companies have not been listed in the stock exchange. Besides, we did not consider shares in Ryazansky Zavod Neftekhimproduktov as it has not been listed either. Please note that Ryazansky Zavod Neftekhimproduktov and Ryazansky NPZ are different legal entities and exchange ratios offered by TNK-BP are valid for Ryazansky Zavod Neftekhimproduktov only. Ryazansky NPZ was not given an exchange ratio. The possible reason for that is that the assets have been disposed of by the company. 3

4 TNK-BP Holding Opportunities Participation of foreign shareholders High production growth (+14% output in 2004) Stable position in the industry (Russia 3d largest company by oil production ) Large dividends are expected. According to the management, about 40% of the net income will be paid as dividends TNK-BP Risks Decrease in profitability due to toughening of the Russian tax legislation from next year Risk of the governmental pressure inherent to virtually all large private companies in Russia, though to lesser extent to TNK-BP Holding due to participation of foreign shareholders in the company). Dependence on oil prices in the world markets. High share liquidity (If the minority shareholders refuse to sell their shares in TNK-BP subsidiaries, TNK- BP Holding free float will be 7% of the equity, which is equal to $1.3 billion based on capitalization of $18.6 billion). For our estimations we used 2 different methods: Discounted Cash Flow (DCF) method and comparative multiples method. For calculation of the company value according to comparative multiples method we used such ratios as P/Output, P/Reserves, P/Revenue, P/Net profit. For calculation of cash flows we used the TNK-BP consolidated financial statements excluding, where possible, data of the companies which will not participate in the restructuring at this stage: Slavneft, RusiaPetroleum, STBP Holdings (BP-branded Moscow retail), etc. Being aware that this method gives a pretty rough result we have assigned a weigh of 0.2 against 0.8 for the comparative multiples method. (for more details see Appendix, p.2)) According to the comparative multiples method, TNK-BP Holding estimated value is USD 19.9 billion. According to DCF method, TNK-BP Holding estimated value is USD 27.4 billion. Our final valuation is: USD 22.2 billion For calculation of the new holding company share target price we applied a discount of 46% of the price of preferred share to ordinary share, as such discount is average for the whole market. TNK-BP Holding ordinary share price: USD 1.5 TNK-BP Holding preferred share price: USD: 0.96 Based on the estimated price of the holding company share and applying the exchange ratios, we have calculated target prices of shares in subsidiaries. We also assumed that an exchange ratio for preferred and ordinary shares will be the same. 4

5 Target prices for shares in TNK-ВР subsidiaries Ticker Current price, $ Exchange Ratio Fair value based on TNK-BP Holding share price, $ Buy out price, $ Growth potential from current price Growth potential from buy out price TNK tnko % 19.96% ONAKO onak % 20.42% Sidanko sdnk % % Saratovsky NPZ Orenburggeologiya Orenburgneft Orenburgnefteprodukt Rostovnefteprodukt Ryazannefteprodukt Saratovnefteprodukt Udmurtneft Veryeganneftegaz Saratovneftegaz KRKN % KRKNP % ogge % oggep % ORNB % ORNBP % orne % ornep % rnpr % rnprp % ryaz % ryazp % sarn % sarnp % UDMN % UDMNP % VJGZ % vjgzp % snfg % snfgp % 5

6 According to comparative multiples method TNK-ВР (based on capitalization of $18,6 billion) Appendix Company Value Calculation P/Output ($/tons) P/Reserves ($/tons) P/S P/E Industry Average According to DCF method TNK-ВР Holding value based on these multiples ($ mln) 24, , Weight in final valuation Estimated value according to comparative multiples method ($, mln) 19, Mln $ Current Assets Debt Revenue Net Income * Capital Investments Depreciation Cash Flow Discount Rate 8.95%** Estimated value * Decrease in net income will result from changes in Russia s taxes and customs duties rates (Tax on production of natural resources, export duties, etc.) effective in and will be faced not only by TNK-BP but by the whole industry. ** Low discount rate is due to low risk exposure of the company, given that a 50%-share in the company is controlled by BP, the largest European oil company. The discount rate is calculated as an average of discount rates for TNK and BP PLC. Final Estimations Estimated value of the company according to comparative multiples method, mln $ Estimated value of the company according to DCF method, mln $ Weight in final valuation Comparison method 19, , DCF method Final estimation, mln $ 22, Number of ordinary shares Number of preferred shares 14, 550 mln 450 mln Estimated ordinary share price ($) 1.50 Estimated preferred share price ($)

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