Still Probed, Surgut to Expand ADRs

NK Surgutneftegaz, Russia's third biggest oil producer, announced Monday it was expanding its American Depositary Receipt program to include preferred stock, despite ramifications of an inquiry launched into its controversial share acquisition in a subsidiary last month.


The announcement came on the day separate decisions were expected from U.S. and Russian regulators about the ADR issue and the share dilution respectively. Neither decision came, but Surgut representatives said they were confident of positive outcomes in both cases.


Andrei Serebryakov, acting head of Surgut Holding's securities department, said in an interview that the company's ADR program is on track, adding that the U.S. Securities and Exchange Commission still has another two weeks before it is required to issue an authorization on the ADR issue.


Level 1 ADRs, the type Surgut is planning, give foreign investors access to a company's shares but do not raise new capital.


Stephen O'Sullivan, a London-based oil analyst with MC Securities, said the decision to issue the ADRs based on preferred stock rather than ordinary shares was an attempt to boost the value of the preferred paper, now held mostly by employees and managers.


"It will certainly increase the liquidity of preferred shares," O'Sullivan said.


Surgut's ordinary shares were quoted Monday up 0.48 percent to close at $0.419, while preferred shares slipped 0.68 percent to finish at $0.29 per share. The ADR announcement came near the close of trading.


Surgut said its preferred stock has gained in value more than 15 times since the start of this year, rising from 105 rubles per share in January to 1,600 rubles this month.


This is not the first time a Russian company has moved to convert its preferred stock into ADRs. In October, LUKoil pioneered the issue of Level 1 ADRs based on its preferred stock equivalent to 9.1 percent of the company's total charter capital.


Planning for the ADR comes as Russia's own securities watchdog investigates an additional share issue by Surgutneftegaz that was acquired in its entirety by Surgut Holding. The move took Surgut Holding's stake in the producer to about 43.5 percent from 38 percent, effectively ensuring that management would not lose control.


The commission said it was checking complaints by shareholders that their rights had been violated by the stock dilution and that it had asked the Finance Ministry to suspend the registration of the issue pending the results of the inquiry.


Yury Kotler, spokesman for FSC, said official decision was expected within the next two days.


"The commission always takes seriously matters connected with the rights of shareholders. Everything depends on how gross the violations were," he said, referring to the final ruling, that was widely expected to take place Monday.


Federal Securities Commission head Dmitry Vasiliyev was quoted by the Russian daily Segodnya as saying at an informal meeting with reporters Friday that Surgutneftegaz could face difficulties with its ADR program because of the controversial share issue.


"Why would they need the American [stock] market if they behave like this at home?" he said.


A Moscow broker, however, said he was confident that Surgut was safe after Surgut Holding president Vladimir Bogdanov met with Vasiliyev and provided extensive information to prove the share issuance did not violate the rights of minority shareholders.


"I don't expect [the decision] to be negative," the broker said.


According to a report Monday by investment bank Renaissance Capital, the securities commission was intent on taking Surgutneftegaz down a peg and could recommend that the Finance Ministry not register the share issuance because it was illegal.


Surgut shares should trade up by roughly 10 percent on such a decision, while the price is likely to soften slightly if the commission does not object to the issuance, Renaissance Capital said.


The ADR issue backed by preferred stock is being handled by the international law firm Skadden, Arps, which also is handling legal work for the ADRs backed by ordinary shares.


According to the statement, the Bank of New York, the depositary for the ordinary stock ADRs program, has also "expressed principal interest" in the preferred stock placement.


A meeting of the Surgutneftegaz board of directors last month approved registration form F-6, which was expected to be reviewed by U.S. SEC by Dec. 1.


This is the final legal stage required to place ADRs on the American stock market after Surgutneftegaz was included in August by the SEC in the list of issuers exempted from full financial information disclosure by rule 12g3-2b.