Daily analyst comments

As Sergey Fyodorov, representative of Surgutneftegaz (RTS: SNGS), said, the 2007 investment program will top the year-earlier program 100%, equaling $3 bln, RusEnergy wrote citing Finansmag. The main purpose of increasing capital outlays is to increment hydrocarbon reserves in a bid to achieve higher oil production. In the next few years the main areas of investments at Surgutneftegaz will include a project to tap oilfields in Eastern Siberia and the Nenets Autonomous District, as well as the rollout of the segment to process and increase associated gas utilization.

A total of $750 mln is to be injected into the development of the promising Talakan field in East Siberia in 2007, exceeding 2006 investments more than 3 times. This field is expected to be brought on stream in 2008 and its production capacity will be 1 mln tons and should reach 3 mln tons by 2010. Given the Alenskoye field, the company's oil output in East Siberia is expected to reach 7 mln tons by 2010. The execution of these projects is important to fully utilize the ESPO pipeline, as a result of which the company could receive tax benefits when tapping these fields. As for the oil refining segment, the main target for investments will be Kirishinefteorgsintez, whose revamping program is to be completed by 2009, while second-stage construction works at the refinery are to be finalized before 2012. All in all, Surgutneftegaz's refining capacity will jump from 20 mln to 36 mln tons by 2012.

We read this development as moderately negative and believe that a sharp increase in Surgutneftegaz's investments is a forced measure and will lead to a deterioration in its financial indicators. Earlier the company's executives announced a 40% y-o-y increase in the 2007 investment program. This year, for the first time, Surgutneftegaz reported a decrease in oil extraction volumes at its fields which have been in operation for more than 30 years and have reached a high depletion rate. At the same time, the company has been taking efficient steps to stabilize oil production using its East Siberian projects. If Surgutneftegaz's key producing operations refocus on East Siberia at some point in time, the oil major will be unable to make sufficient oil supplies to Kirishinefteorgsintez, its subsidiary located in Russia's Northwest, which will exert an adverse impact on the operating and financial showings of Surgutneftegaz as a holding.

At present, we have no official recommendation on Surgutneftegaz stocks.