Research Notes

Orsknefteorgsintez: Growth and Stability

As the Russian refining industry sees rising demand for its products, Orksnefteorgsintez appears to be one of the most undervalued and most promising companies in the sector. A marked improvement in operational and financial performance, consistent upgrading programs and the roll out of new facilities will, in our opinion, make it possible for Orsknefteorgsintez to compete on an equal footing with the Russian industry leaders in the long run.

Primary oil processing surged 5.7% y-o-y in Russia in 2006 and stood at 219.5 mln tons. Furthermore, Russia's expanding automobile and aircraft fleet, as well as a government policy aimed at phasing out export tariffs for oil products and soaring crude export tariffs worked as incentives last year for oil companies to establish refining facilities of their own. Gasoline output rose to 34.37 mln tons, up 7.4% y-o-y, diesel fuel to 64.22 mln tons (up 7% y-o-y) and heating oil to 59.28 mln tons (up 4.5% y-o-y).

Shortly after Russneft acquired Orsknefteorgsintez in late 2005 it launched the upgrade of existing facilities and moved to erect new ones which would help to lift the producer's utilization rate and improve the quality of its products, which, in turn, could push up sales and margins.

Orsknefteorgsintez ramped up its primary oil proecssing by 30% y-o-y in 2006 and plans to raise the figure by another 20%.

The refiner posted a significant y-o-y increase in headline financials in M906. Its net profit surged 5-fold y-o-y, revenues jumped 56.4% y-o-y and operating margin climbed more than 3-fold.

Russneft, which supplies feedstock and handles Orsknefteorgsintez's sales, has been a major driving force behind its smooth operations. Therefore, the refinery is protected against a number of risks, such as disruptions in supplies, declining prices, sluggish demand, etc.

Orsknefteorgsintez has worked out an upgrade and development program up until 2013 which envisages the roll-out of an advanced oil processing facility which will achieve 92% depth of processing, in full compliance with international standards.

According to our estimates based on Orsknegteorgsintez's multiples, the fair prices of the company's common and preferred shares are $81.20 and $60.10, respectively, which means that, based on current stock valuations, these securities hold 149.1% and 79.4% upside potential. We assign a Buy recommendation to Orsknegteorgsintez's stock.

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Michael Frolov

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Sector: Chemicals & Petrochemicals, Oil and Gas Refining
Company: Orsknefteorgsintez

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