Refinery Costs Eat at Sibneft's Bottom Line

Sibneft, the country's fastest-growing oil producer, reported a 26 percent drop in net profit in the first half of 2002 on Wednesday, blaming the slide on costly output growth and expanded refining interests.

"The hike in costs is connected to output growth, with oil purchases for the Moscow refinery and payments for processing," deputy finance director Olga Pokrovskaya said at a news conference.

Sibneft said increased fees for natural resource use and exports had cut into profits. Disappointed analysts said the company needed to keep a tighter hold on its purse strings.

"This an alarming development, and thanks to this the company's EBITDA was $786 million, which is 10 percent down year on year," said Timurbulat Karimov, an analyst at Aton.

Sibneft shares closed off 1.95 percent in Moscow at $1.96 after rising earlier in the day.

The company reported a widely expected 19 percent sales increase, credited to booming oil output and exports.

A fall in net profit had been predicted due to weaker oil prices, but the announced drop was deeper than expected. Net profit fell to $457.5 million in the six months to the end of June from $615.8 million in the same period of 2001. Analysts on average had expected net profit of $536 million.

Sales rose to $1.984 billion from $1.663 billion.

Production costs rose to $479.9 million from $302.4 million. Selling, general and administrative expenses rose to $312.3 million from $176.1 million in the first half of 2001.

Earnings before interest, taxes, depreciation and amortization fell to $786.1 million from $870.5 million.

Sibneft rejected claims that its costs were out of control and said its net profit, EBITDA and sales ratio to production of crude was still the highest in the industry.

Kaha Kiknavelidze, an analyst at Troika Dialog, said the company's attempt to increase market share in Moscow via a recently acquired foothold in the Moscow refinery had hit its finances.

"This business at the Moscow refinery is not profitable, but the company says it is strategically important for next year, when output will grow," he said.

Oil output rose 28 percent year on year in the first half to 490,000 barrels per day. Oil exports to lucrative Western markets rose 49 percent to 200,000 bpd and refined product exports increased by 47 percent to 70,000 bpd.

"We will keep implementing our strategy based on healthy oil production growth, expansion into new markets and new assets acquisition in all areas of the oil business," Sibneft president Eugene Shvidler said in the statement.

Sibneft said it had also advanced $68 million to a 50 percent-owned affiliate for the purchase of a "major Russian utility company."

It added it had made a $313 million advance payment to a third party to acquire a "significant share stake in a Russian oil and gas company on behalf of Sibneft."

Company officials declined to comment on these payments and said the deals were not closed.

Analysts suggested the $313 million was connected to Sibneft's plan to bid for a 75 percent state stake in the 320,000-bpd producer Slavneft, the auction of which is due to be closed before the end of 2002.