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. Last Updated: 07/27/2016

Analysts Reassure After Surgut Share Sale

Oil group Surgut Holding's move to raise its stake in its Surgutneftegaz unit underlines the struggle for shareholder control in some Russian firms but need not scare off investors, analysts said Monday.


Surgut Holding said last Thursday that it had acquired an entire new issue of 500 million ordinary shares and 34.02 million preferred shares in OAO Surgutneftegaz, raising its stake to 43.5 percent from 38 percent.


"This reminds us that there is still a serious struggle for control going on among even some of the most actively traded stocks on the market," said Deutsche Morgan Grenfell equity analyst Jim Nail.


Surgut Holding said the issue was made in accordance with the company's charter, approved by shareholders in June, and was intended to strengthen control over the subsidiary.


But analysts said that while the issue appeared legal, it showed a lack of concern for investors.


"It is more a question of shareholders' interests rather than shareholders' rights," said Renaissance Capital energy analyst James Bunch.


He said shareholders would have been best protected if the sale had been announced and if it had been made competitive.


Renaissance said the shares were bought for a combined $0.18 each, compared with $0.42 for the common stocks and $0.23 for the preferred stocks at Thursday's close.


But some shareholders in another subsidiary -- oil refiner Kirishinefteorgsintez -- complained earlier this year that they were offered unrealistically low prices under a plan to convert their shares into those of the holding or main production unit.


"Surgut has been known for a long time as a company run in a relatively high-handed way. The really bad part about this is that from a financial point of view, Surgut is one of my favorite Russian oil companies," said Nail.


"This just reminds you why it trades at such a major discount to LUKoil."


LUKoil is widely regarded as having one of the most open, investor-friendly managements in Russia.


Renaissance downgraded Surgutneftegaz to short- and long-term "hold" from "buy" but maintained short- and long-term "buy" recommendations for Surgut Holding on the grounds it was seeking to retain control and value at the holding company level.


Surgutneftegaz shares have tumbled since the issue was announced. Ordinary shares stood at $0.394 on Monday afternoon, down from $0.396 on Friday and $0.462 on Wednesday.


Russia's stock market has been rocked by scandals involving secret share issues and abuses of share registers.





Surgutneftegaz, Russia's second biggest oil company by sales, was one of the strongest performers on the Russian market in the surge before July's presidential election and since then.


"Even though the decline was greater than the dilution, I think it was fully justified," said Nail. "It has created a gloomy mood for the whole market which is probably not justified because not all the companies have this attitude," he added.