Research Notes

YaroslavNefteorgsintez (YaNOS) is one of Russia's leading and fastest growing oil refining companies in Russia. YaNOS is a trailblazer in its own way right as it was the first Russian company to launch production of petrochemicals in compliance with international standards. The refiner is making sizable investments in upgrading its production facilities, which makes it possible to retain its leadership positions and catch up with developed market peers in the mid-term.

YaNOS is at the forefront of the highly competitive Russian petrochemical industry. Refining companies are currently enhancing their competitive advantage by cutting costs and improving the quality of their products. YaNOS has effectively responded to these challenges by launching a large-scale upgrade program which will make it possible to roll out new products. YaNOS completed construction of an advanced oil processing facility in 2006, which helped the company to lift one of its headline production indicators, depth of processing, by 10% in absolute terms that year. The company plans to continue its upgrade program and will soon roll out new saecondary processing units which will help YaNOS to significantly ramp up output and bolster its position among the Russian industry leaders.

A favorable location is a separate advantaged enjoyed by YaroslavNefteorgsintez's . The company, which is based in the Central Federal District, enjoys easy access to the Moscow market, which accounts for the larger part of Russia's petroleum consumption, and flexible transport infrastructure to reach various destinations, including export routes..

YaNOS' weaknesses are largely attributable to possible disruptions in feedstock supplies. Like any other refining company employing the client-owned feedstock scheme, YaNOS is extremely dependent on its suppliers. Be that as it may, YaroslavNefteorgsintez's two major feedstock suppliers, TNK-BP and GazpromNeft (which together own over 90% in YaNOS), have so far kept their supplies to the company running smoothly. YaNOS' output has been on a steady rise in recent years.

According to our estimates, the fair price of YaroslavNefteorgsintez's common and preferred shares is $1.45 (18% upside potential) and $1.02 (64% upside potential), respectively. We assign a Buy recommendation to the company's shares.

Clients of Finam Investment Company may receive full versions of analytical research reports translated into English by sending requests to the International Trading Department.

Timur Khabitsov

* Short overviews of equity research reports and sector reports are posted on the website http://www.finamrus.com with a 1-day delay after their full versions are emailed to the company’s clients. To get overviews on the day of their release, please contact your manager at Finam to sign up for full versions of research reports.