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. Last Updated: 07/27/2016

Obscure Pension Fund Snaps Up Surgut Shares

A 40 percent stake in Surgutneftegaz was awarded Tuesday to a previously unknown pension fund for a price just over the minimum required bid, a move reminiscent of earlier privatization auctions dominated by insiders.


Surgutfondinvest won the stake in Russia's second largest oil concern with a bid of 415 billion rubles ($73.5 million) -- 5 billion rubles more than the starting price.


The investor is reportedly a pension fund manager, but it was not immediately clear whether it is Surgut's own fund or of independent origin.


Reuters reported that only one other bidder, who remained unnamed, took part in the tender.


The tender was reminiscent of a raft of auctions conducted in the government's 1995 loans-for-shares scheme: an oft-criticized process in which banks overseeing the auctions regularly won controlling stakes.


Industry watchers weren't surprised that the winner of a 40.12 percent stake in Surgut Holding sounded like an insider.


"The conditions of the tender were so difficult that if Surgutfondinvest turns out not to be related [to the company], I'd be very surprised," said Gavin Rankin, head of research at the Troika-Dialog brokerage.


The winner is required to shell out an additional 1.2 trillion rubles in investment, and transfer 5 percent of Surgut Holding's main operating company, AO Surgutneftegaz, to the holding company NK Surgutneftegaz.


Surgutneftegaz was the first among the 1995 loans-for-shares deals, and sparked criticism of the program under which investors won the right to manage state-owned stakes in partly privatized companies in return for loans to the government.


In effect, the oil company bought itself by lending the government 400 billion rubles ($88 million at 1995 exchange rates) in return for a 40 percent stake in the company -- one of a dozen vertically-integrated Russian oil groups created in recent years.


Surgut's pension fund has held the stake in trust since the 1995 auction, although the official seller of the Surgut stake is the Federal Property Fund, which last month laid out the terms of the auction.


Tuesday's sale was largely viewed as payback -- with interest -- for Surgut Holding's loan to the Russian government.


Other auctions that have been sharply criticized for insider involvement include the purchase oil major Yukos by the influential Russian bank Menatep, and the purchase of Sidanko oil company by Uneximbank.


If Surgutfondinvest does prove closely-allied to the oil company, "it would be the same scheme as Menatep with Yukos," said an analyst with Rye Man & Gore brokerage firm.


Despite the hallmarks of an inside job, analysts contend that Surgut is fundamentally a rising star. Since Jan. 1, Surgut stock has risen 49.7 percent in keeping with the pace of the new year's market rally, according to the Skate financial information services.


But the going has been suspect at times.


"There have been a few steps forward and backward," said Troika's Rankin, referring to a dilutive share issue by the company late last year that angered shareholders and federal securities regulators.


On the positive side for investors, the company announced in January that it would pursue a Level-1 American Depositary Receipt program as well as a program of greater transparency than has been shown by many oil majors.


"We have yet to see proper accounting, proper reserves auditing and a whole range of fairly standard housekeeping done by peer companies such as LUKoil," Rankin said."And that's not very helpful or shareholder-friendly behavior from management."