Russian Oil Producer Surgut’s $36 Billion Cash Pile Is Both Blessing and Curse

By Halia Pavliva  

Recent history has shown that Russian leaders aren’t afraid to help themselves to companies they covet. And with the country’s cash squeeze growing, stock investors are worrying about which one could fall next.
OAO Surgutneftegas is a name that many keep coming back to. The oil producer is sitting on $36 billion, a cash hoard that would go a long way to alleviating the financing squeeze at state-run energy company OAO Rosneft. Locked out of U.S. and European capital markets by international sanctions tied to the Ukraine conflict, Rosneft needs to pay back $19.5 billion of debt maturing this year.
Surgut is hovering near a record low, having sunk 33 percent in New York trading since crude prices began plunging in June. Analysts at BCS Financial Group and UralSib Financial Corp. cite President Vladimir Putin’s past takeovers as a key cause for concern. Putin moved to nationalize oil producer OAO Bashneft last year, a decade after Rosneft bought most of Yukos Oil Co. in
a series of forced sales after the arrest of its billionaire owner.
“Surgut stands out as a potential target,” Vladimir Tikhomirov, chief economist at BCS in Moscow, said in a Jan. 15 phone interview in which he described the company’s cash position as “huge.” The Bashneft and Yukos cases mean “I can’t rule out anything, although it’s hard to forecast what kind of tactics could be used to target the company,” he said.
Aliya Samigullina, a spokeswoman for Russian Deputy Prime Minister Arkady Dvorkovich, declined to comment on whether Rosneft is interested in taking over Surgut. Surgut officials didn’t return e-mail and phone messages.

‘Obvious Target’

Surgut’s ordinary shares sell for 3.6 times 12-month estimated earnings in Moscow, near a record low reached in December. The benchmark Micex Index trades at a multiple of 5.1, the cheapest among emerging-market equity benchmarks. Surgut gained 1.3 percent to 28.75 rubles as of 10:57 a.m. in Moscow today.
Goldman Sachs Group Inc. and Renaissance Capital Ltd. cut their recommendations on Surgut’s preferred shares this month.
The company’s cash and deposits increased to about $36 billion as of June 30 from $33 billion at the end of 2013, according to Bloomberg calculations based on a company statement.
“Surgut’s cash, which is way above $30 billion, makes it a unique case in Russia and an obvious target,” Slava Smolyaninov, the chief strategist at UralSib in Moscow, said by phone on Jan. 14. “Investors are concerned that a lack of foreign financing may encourage state companies to turn to those smaller, often privately-owned rivals that have cash.”
He called an alliance between Surgut and Rosneft “one of the most obvious choices” the government could make.

Bashneft Seizure

Russia seized the stake held by Vladimir Evtushenkov’s AFK Sistema (SSA) in Bashneft, a regional oil producer, through the courts last year. Russian prosecutors said every transaction in the shares since their privatization more than a decade ago was illegitimate. Sistema spent $2.6 billion from 2005 to 2009 to gain control of the oil-producing and refining assets.
Evtushenkov, who was kept under house arrest for three months, is the richest Russian to face criminal charges since Mikhail Khodorkovsky, the former owner of Yukos, once the country’s largest oil producer, who was detained more than 10 years ago on tax evasion, money-laundering and fraud charges.
Khodorkovsky, who was freed in December 2013, said Evtushenkov’s arrest was motivated by Rosneft’s need for money. He said the charges he himself faced were retaliation for his financing of opposition parties. The Kremlin denies the claim. In July, the European Court of Human Rights in Strasbourg, France, ordered Russia to pay 1.87 billion euros ($2.17 billion) for the seizure of Yukos.

Olive Branch

Putin has recently made conciliatory moves toward business, freeing Evtushenkov as investigators dropped money-laundering charges against him. Surgut might be a tougher target than Bashneft, Tikhomirov said.
“Unlike Bashneft, Surgut has been around for a long time, making any potential attempt to take over the company harder,” he said.
Rosneft, the world’s largest publicly traded oil company, said last month that it has repaid $7 billion of debt and was generating enough dollars to meet its obligations. It has denied an interest in acquiring Bashneft.

‘Who’s Next?’

Goldman analysts cut Surgut to neutral from buy this month as they reduced Russian oil companies’ combined earnings 30 percent this year. RenCap also cut Surgut to hold from buy last week. Surgut’s market capitalization was $19.8 billion as of Wednesday, a little more than half the value of its cash pile.
Rosneft, which tumbled 54 percent in London last year, is run by Igor Sechin, a close Putin ally who was specifically targeted by the international sanctions linked to the Ukraine conflict. President Petro Poroshenko said Ukraine is in “grave danger” of an escalation in its conflict against pro-Russian separatists as diplomats restarted peace talks and NATO accused Russia of involvement in the fighting. The Kremlin denies helping the rebels.
“The question many people ask after Bashneft’s nationalization is: ‘Who’s next?’” Masha Lipman, a Moscow-based political analyst and visiting fellow at the European Council on Foreign Relations, said in a phone interview. “Rosneft is the Kremlin’s favorite. If it targets something, it ends up getting it. Surgutneftegas is a unique company with a huge cash pile.”