Sakhaneftgaz/Yakutgazprom

Transcription

1 Sakhaneftgaz/Yakutgazprom Sakhaneftgaz is a holding company which controls the Sakha republic s oil and gas assets. Sakhaneftgaz The RTS Index vs. Sakhaneftgaz Common Stock Financial Perfomance Yakutgazprom is the primary subsidiary of Sakhaneftgaz. Upon obtaining the controlling stake in Alrosa, the majority shareholder of Sakhaneftgaz, the ownership structure of the republic s oil and gas assets could be changed. Ticker SANG Share price $4.00 Number of Shares 24.21m MCap $96.82m Target Price $27.57 Upside Potential 587.5% Recommendation Buy for Speculative Purposes Ownership Structure Both companies are drastically undervalued by fundamentals. The main risk in investing in Sakhaneftgaz equities is the chance that the company s shares in Yakutgazprom may be diluted. Yakutgazprom RTS Index vs. Yakutgazprom s Financial Perfomance Yakutgazprom s minority shareholder predominantly risks a compulsory share buyback at undervalued prices. Assuming events unfold optimistically, the oil and gas companies shares may be converted to Alrosa s, should the latter consolidate. With additional issue Ticker YAKG Share Price $0.25 Number of Shares m MCap Target Price Upside Potential 1 804% 455% Recommendation Buy for Speculative Purposes Operational Indicators $, Millions 2004 Reserve Volume, bn. м 3 142,7 Upstream Volume, bn м 3 4,0 Ownership Structure

2 Sakhaneftgaz, a holding company whose major asset is its stake in Yakutgazprom an upstream gas company with gas reserves approximately billion cubic meters. Presently, both companies have been showing losses. Company Profile The National Oil and Gas Company, Sakhaneftgaz, is a public company which develops large oilfields in the gas-rich Leno-Viliuskiy province. The company was founded in 1992 and was transformed into a public company in Sakhaneftgaz represents the Sakha Republic s interests in all facets of the upstream and downstream sectors. In line with the Presidential decree and the Sakha Republic s government orders, Sakhaneftgaz has the exclusive right to conduct business with foreign enterprises in the oil and gas industry. However, once Surgutneftgaz began developing the Talakan oil field, these acts lost some of their importance. We would also like to point out that, Sakhaneftgaz activities basically involve supplying Yakutia with hydrocarbons and, odds are that since Sakhaneftgaz has been granted these exclusive rights, together with its subsidiaries, it shoulders the added social responsibility of actively delivering goods by the Northern Supply program. Sakhaneftgaz and its subsidiary s upstream volume are modest, with yearly totals of approximately 300,000 tonnes of oil and 4bn cubic meters of gas, and while Lenaneftgaz handles oil upstream, Yakutgazprom handles gas production. Likewise, Lenaneftgaz, presently, produces oil in the Talakan oil field under contract with Surgutneftgaz, who possesses the license to operate there. However, this year Lenaneftgaz s assets are supposed to be sold to Surgutneftgaz and the company will cease production. This means that plug would virtually be pulled on Lenaneftgaz. Sakhaneftgaz s chief production asset is Yakutgazprom, which possess production licenses for 3 gas condensation fields in the republic, containing total gas reserves in category ABC bn m3. It also has an annual upstream that comes to approximately 4bn cubic meters. Financials Presently, Sakhaneftgaz has been reporting financial losses. According to 3rd quarter results, the company s net loss amounted to less than $1m in light of the fact that the company s revenue was nearly $8m. Low financial figures like these prove that the company doesn t handle its own activities and has nothing but a holding company structure. As for Sakhaneftgaz, it has not produced any consolidated financial statements. Another fact that should be mentioned is that Sakhaneftgaz has got a high amount of liabilities; it s net debt amounts to $38 million, while the company s assets are valued at about $115 million. Yakutgazprom has also been reporting losses. For the past three quarters its losses have totaled $65 million while its revenue totaled $36 million. These enormous expenses cannot be explained since the company is practically non-transparent. Having debt totaling approximately $100m, the company s net debt is close to $70m, while its net asset value comes to roughly $46 m. 2

3 Ownership Structure Additional Issues, Possible Risks and Investment Prospects Holding Structure SAKHANEFTGAZ Ownership structure: 51% Alrosa 32% Yakutia Government YAKUTGAZPROM Ownership structure: 92% (?) Sakhaneftgaz Production licenses for 3 gas fields АВС1 142, 7 bn. м 3 LENANEFTGAZ Ownership structure: 85% Sakhaneftgaz Not in possession of a production license for the Talakan field. Contract authorizing the sales of its assets to Surgutneftgaz should be signed this summer. Geological, Pipeline and Sales Companies Mini-Oil Refineries and Gas Production plants The Risk of additional issue of shares may be a negative factor for Sakhaneftgaz s minority shareholders. This February, Alrosa bought the controlling interest in Sakhaneftgaz from BIN-Bank affiliates, who had previously purchased it from Yukos. The government of Yakutia is also included among the major shareholders in Sakhaneftgaz. Sakhaneftgaz is basically a holding company that manages its subsidiaries shares, its primary one Yakutgazprom. This spring, Yakutgazprom conducted an additional share issue and, according to media reports, it diluted Sakhaneftgaz s block of shares from 92% down to 24%. However, last week the FFMS (the Federal Financial Markets Service), put a stop to it, by handing down a decision to suspend any further additional issues. We would like to clarify that this additional issue had been initiated as far back as 2005, when Alrosa did not own Sakhaneftgaz and under these circumstances, Yakutgazprom could have fallen into the hands of outside investors. It is more than likely, given the situation, that these events may be linked to the Government s interest in Alrosa. After currently surrendering control of the diamond mining sector, the Government of Yakutia would not like to yield control of the republic s gas business. Thus, we anticipate federal authorities will act on Alrosa s behalf by fighting for their interests and Sakhaneftgaz s stake in Yakutgazprom, and making sure that it won t be diluted. We have to take a look at several real risks here. First and foremost, the additional shares in Yakutgazprom were issued with Sakhaneftgaz s approval. This issuance was done in Alrosa s favor but strangely enough, instead of being registered in Alrosa s account, these shares ended up in the accounts of firms whose operations had nothing to do with the diamond industry. Consequently, a new additional share issuance may be conducted, intent on directly handing over control of Sakhaneftgaz s capital assets to Alrosa, its principal owner. This would result in depriving Sakhaneftgaz of its assets. Nevertheless, we believe this sort of interference is pointless now, since ownership structure has practically taken shape. Risks are lower for potential investors in Yakutgazprom. Even in the event of an issue, they are supposed to get the right to redeem shares, proportionally to their stake in the company. Having built up its stake in Yakutgazprom, Alrosa is supposed to be making buy-back offers, though the quotation price may be too low. Additionally, in complying with the new law on open joint stock companies coming this July, those that have consolidated more than 95 % of Yakutgazprom s shares may face Alrosa buying back the minority stake, against their wishes, at a price determined by an independent appraiser which could be marked down. However, under the stock consolidation process, upon consolidating more than 95%, assuming the buyback is 3% or more than a third of the free float, this may well lead to a significant rise in price during this period. 3

4 Should the situation positively unfold, minority shareholders may be able to exchange shares for Alrosa s On a more upbeat note, the chances of Sakhaneftgaz s stake in Yakutgazprom being diluted are slim in the short term. Furthermore, as long as the federal authorities have a vested interest in retaining control of these assets, as a token of compensation, they may buy back the regional government s stake in Sakhaneftgaz at considerably higher prices. The buyback price could serve as a target price on the market with regard to this company. Later on, we can expect to see offers to Sakhaneftgaz s minority shareholders. For the long term, investors should keep a close eye on the federal government s intention to create a large diversified holding using Alrosa as its base, and they may be planning to launch its IPO, at a later date. Should this be the case, based on our experience, it would make sense to consolidate shares in order to increase its value. In short, we can expect to see exchanges of Sakhaneftgaz s or Yakutgazprom s share for Alrosa s shares for the purpose of consolidation. 4

5 Valuation* So far, Sakhaneftgaz, and its subsidiaries, have been reporting losses. Because of this, a valuation was carried out using the comparative multiples method based on operational indicators P/Reserves and P/Output in relation to the two largest Russian public gas companies. For estimation purposes we did not use production indicators for Lenaneftgaz since this company has been operating under contract and does not possess its own reserves. Additionally, its activities may be terminated this year. Estimations were based on the basic upstream indicators of Sakhaneftgaz s subsidiary - Yakutgazprom. Comparative Indicators Reserves (АВС1), m/t oil eq. Output, m/t oil eq./ yr. Sakhaneftgaz/ Yakutgazprom Sakhaneftgaz factoring in additional issued shares in Yakutgazprom In the final estimate, the final results were equally weighed from each of the multiples. Valuation Results According to the Comparative Multiples Method Capitalization Estimate $,m Sakhaneftgaz Sakhaneftgaz factoring in share dilution in Yakutgazprom Yakutgazprom Total Estimated Share Value of Sakhaneftgaz As we mentioned earlier, the FFMS has already suspended the additional issue in Yakutgazprom, Therefore, estimates obtained without factoring in the additional issue may carry more weight. Based on regular practice, the estimates with more weight confer lower figures, and so with that in mind, both figures carry equal weight. Taking into account the low liquidity and small size of the company in comparison with the two others, we apply a 50% discount to the derived figures. The total estimated company value was calculated using the following formula: ((Capitalization Estimate of Sakhaneftgaz without additional shares issue in Yakutgazprom) * 0,5 + (Capitalization Estimate of Sakhaneftgaz without additional shares issue in Yakutgazprom)) * 50% This corresponds to: Reserves (АВС1), m/t oil eq. ( * *0.5)*50% = ($m) Number of Common Shares of Sakhaneftgaz: Output, m/t oil eq./ yr. MCap, $ million P/Reserves ($/t.) P/ Output ($/t oil eq.) Gazprom Novatak Average The target price for one share of common stock amounts to $27.57, which shows the upside potential to the current price of 587.5% Total Estimated Share Value of Yakutgazprom Factoring in the company s low liquidity and possible risks, we apply a 50% discount to the estimated company s capitalization. Target Capitalization- $944.75m Number of Shares: Before Additional Share Issuance m After Additional issue of shares (factored in) m In the event that an additional issue of shares is approved, the target price would be$1.14, Should the additional issue be invalidated, the target price would be$4.76. Even if the additional issue is approved the upside potential of these securities would come to 455%. While conducting Sakhaneftgaz s valuation, the company s preferred shares were not calculated, since their volume only accounts for a mere 0.3% of the equity.

6 Investment Advice In our opinion, we feel that the following chain of events are bound to take place: Alrosa will ultimately try to consolidate oil and gas assets, although its difficult to say whether it will attempt to conduct another additional share issuance in Yakutgazprom or reject the idea fearing possible repeated losses. Taking all these possible risks into consideration, we could not assign a Buy recommendation for the shares of the companies in question. However, factoring in the significant undervaluation of these companies we assign a Buy for speculative purposes recommendation. It should be clarified that upon acquiring these shares, the investor may have to shell out extra expenses to obtain the likely additional issue of shares, in order to maintain his stake in the company. 6

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