Research Notes

A favorable oil market environment has sparked an improvement in Sibneft's financial performance. However, the oil producer's operating performance is negative, since oil output is in decline. According to our calculations, the fair price of Sibneft shares is $5.32. Given the limited upside potential of SIBN stocks and the lack of clear-cut plans at Gazprom to expand its oil business, we assign a Hold recommendation to Sibneft shares.

Sibneft is one of Russia's biggest vertically integrated oil firms, which specializes in tapping oil and gas fields, extracting, processing and marketing crude and gas. The company also owns a 49.57% stake in Slavneft.

Like all other oil producers, Sibneft has seen marked improvements in its financial results driven by skyrocketing oil prices. The refining and marketing segment allows the oil major to generate extra profits from both oil product exports and domestic sales.

Sibneft used to be one of the most dynamically expanding oil companies in Russia. This translated not only into high incremental production rates and strong financial results, but also high corporate governance standards and generous dividend payouts. But starting 2004 Sibneft, which ramped out oil extraction by 20% a year and more in previous years, Sibneft began to report a slowdown in output rates. Incremental oil production was only 8% (below the industry average) in 2004 against the annual target of 17-20%. Last year the oil major reported a 2.9% decline in oil output.

Meanwhile, Gazprom has emerged as a new majority shareholder which controls 75.68% of Sibneft. Meanwhile, Gazprom executives do not rule out seeing the gas holding gobble up another 20% in the oil firm which is currently held by Yukos.

The ownership shakeup at Sibneft could result in a revision of its strategy which will now be focused to a larger extent on long-term targets and forming reserves for future oil increment. However, there are risks associated with a reduction in dividend payouts and that Gazprom could decide to consolidate Sibneft into its corporate structure and offer unimpressive stock buyout terms to its minority shareholders.

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Timur Hayrullin

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