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What?s The Faith Of Surgut?

Surgut Neftegaz is the fourth largest oil company in Russia. Its activities include prospecting, gas- and oil field construction and development, as well as oil, gas and petrochemical production. Until now, Surgut has succeeded in shielding itself from all developments in the corporate world of the Russian oil giants.

What?s The Faith Of Surgut?

Surgut Neftegaz is the fourth largest oil company in Russia. Its activities include prospecting, gas- and oil field construction and development, as well as oil, gas and petrochemical production.

Until now, Surgut has succeeded in shielding itself from all developments in the corporate world of the Russian oil giants. The company is almost completely indifferent to corporate governance, uninterested in minority shareholders and has the worst record among its competitors when it comes to paying dividends. Surgut has for years being criticized for not having a meaningful development strategy. Consequently, it is sitting on over $ 5 billion and refuses to announce its future strategic plans.

It has furthermore stick to an ownership structure that has become rapidly unfashionable among Russian companies, who have finally understood the value of transparency and the importance of minority shareholders. Therefore, its ownership structure seems to be challengeable under the current Russian corporate law

The recent dividend announcement was only a confirmation of the trend of neglecting shareholder?s interest. Surgut recommended a dividend of $0.001 per ordinary share and $0.003 per privileged share, three times more than in 2001 but still far behind the investors? expectations. Under Russian legislation, firms have to pay a dividend of at least 10 per cent of their annual net profit to holders of preferred stocks. As a comparison, most of Surgut?s competitors have raised the ceiling voluntarily to 15 or 20 per cent. The problem however is, that the legislation does not specify how net profits have to be calculated and Surgut, using all possible accounting options, was able to artificially lower the dividend payments.

Recently, Surgut stocks have started rising. Just in April, they surged over 66 per cent, adding more than $4 billion to its market capitalization. Simultaneously, the trade volume has also been surging, indicating that big cash-rich investors might bring themselves in a position to launch an unfriendly takeover. It is said that TNK would be interested.

Basically, the management of Surgut controls 65.9 percent of the company via a complex scheme in which it has direct control of 19.2 percent of the company's shares, while 42.2 percent of the remaining 46.7 percent is cross-owned via an affiliated bank. The rest is traded on Russian markets.

In its accounts, Surgut has controversially called its 42.2 percent stake ?treasury stock?. However, Russian accounting standards define this term aas stocks that are owned by the company to resale or retirement without any voting or dividend rights. But Surgut refers to those shares as "long term investments in dependent companies", which means management can collect dividends and, most important, use the stake to wield voting control over the company.

It seems that the whole construction won?t stand a court ruling and that a well-connected financial group could succeed overtaking the company and replacing the management. Therefore, the days of Bogdanov, as the head of Surgut, seem to be outnumbered.

It is however feared, that the management is using the company?s idle money to increase the share price or to buy further stakes for itself, although such actions might be actionable.

Today, the company announced an extraordinary shareholder meeting to further complicate the company?s legal structure in order to fight off hostile takeovers. This only shows how fierce the struggle for a majority stake in the company is. Surgut was the best production unit during the Soviet times and changes of corporate policies will free tremendous values for its shareholders.


Author: Andreas Wild