Daily analyst comments

Surgutneftegaz (RTS: SNGS) released 9M07 financials. Russian Accounting Standards do not make it possible to perform relevant valuation of the company's financial standing. Furthermore, the report lacks sufficient details and has no breakdown by line items, which does not make it possible to make conclusions about reasons of ongoing changes. Meanwhile, in the event of Surgutneftegaz, around 90% of profit is consolidated on the parent company's balance sheet, which enables us to draw some conclusions about the company's financial standing.

RAS financials, $ mln

Indicator	9M07	9M06	9M07/9M06
Net revenue	17,366	14,264	+21.7%
COGS	13,521	9,071	+49.1%
Selling expenses	898	730	+23.1%
Operating profit	3,720	4,463	-16.6%
Operating profit margin	21%	31%	-9.9%
Other revenue and expenses	627	804	-22.0%
Net profit	2,191	2,714	-19.3%
Net profit margin	13%	19%	-6.4%

Source: Company data, Finam estimates

The company posted earnings growth, which is reasonable, given record high prices for crude and products. The company did not disclose changes in line items, which constitute COGS and only pointed to impact of such factors as higher payrolls, MET, transportation and electricity tariffs, well workover, pipeline maintenance and inflation at the "high, medium and small" scale.

According to the company, higher MET rate produced the strongest impact. Meanwhile, crude prices, which were much lower than in the reporting period, served as a basis for calculation of MET that Surgut paid in 9M07. Meanwhile, the company's gross profit margin strengthened compared to H107. Therefore, it is still too early to speak of lost control over costs. Lower metrics in non-operating line items resulted in stronger net profit margin than operating profit margin.

We expect O&G companies to release strong financials for Q207 and Q307 due to a combination of record high prices for crude and products and relatively low export duties and MET. For this reason, we are downbeat on Surgutneftegaz 9M07 financials.

At present, we have no recommendation on Surgutneftegaz shares.