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. Last Updated: 07/27/2016

Surgut Shareholders Want Change Delay

Alarmed that oil major Surgutneftegaz's consolidation plans will end up diluting their holdings, a group of minority shareholders has asked Russia's second largest oil producer to put off the scheme to allow for greater consultation.

"The effect on all outside shareholders of your proposed restructuring appears negative," the letter to Surgut chief executive Vladimir Bogdanov reads. The Moscow Times obtained a copy of the letter Thursday.

The letter, signed by 15 firms, asked management to postpone or cancel the extraordinary meeting scheduled for Feb. 10 that would authorize new shares and give up preemptive acquisition rights. Among the letter writers are Russian lender Alfa Bank, Moscow brokerage firms Troika Dialog and NIKoil, and such foreign shareholders as the hedge fund NCH Advisers, the Leucadia International Corp., Regent Fund Management and the Heritage Fund.

Surgutneftegaz management has yet to issue an official reaction to the letter, a company spokesman, Alexei Sukhaduyev, said Thursday.

Investors' fears may well be fueled by memories of Surgutneftegaz's notorious share issue of October 1996. Back then, Surgutneftegaz Holding increased its control over the AO Surgutneftegaz subsidiary by snapping up a huge issue of new shares at a price about 30 percent below market levels, diluting the holdings of minority shareholders, many of them foreigners.

Few details have emerged regarding the current consolidation plan, but shareholders have been expressing fears that the share consolidation will enable management to gain a 75 percent stake that would give minority investors no practical say in the running of the firm.

Minority investors currently hold about 31 percent of AO Surgutneftegaz, with the remainder held by management-dominated firm Surgutneftegaz Holding Co., or Surgutneftegaz NK.

The restructuring scheme calls for the issuance of 12 billion common shares in AO Surgutneftegaz in order to enable a swap for Surgutneftegaz NK shares, leaving only the daughter company's shares (AO Surgutneftegaz) on the market. The Kirishi Oil Refinery and seven marketing and distribution companies would also be folded into the consolidated holding firm.

Finally, Surgutneftegaz is asking investors to waive their rights to first purchase of freshly issued shares for one year.

Concerns regarding the fairness of Surgutneftegaz's offer have driven the firm's share price down by 25 percent since early January.

Steven Dashevsky, oil analyst at Aton brokerage, said that the deal looked set to harm shareholders in both Surgutneftegaz NK and AO Surgutneftegaz.

It is important for Surgutneftegaz to offer more details on the share swap as well as give investors enough time to make a decision, said William Browder, manager of the $400 million Heritage Fund. "This is impossible to do before Feb. 10," he added.

He also warned that the restructuring plan is likely to affect not only the perception of Surgutneftegaz, but Russia in general.

Surgutneftegaz, considered by many to be Russia's best operated oil major, was expected to produce 37.6 million tons of oil in 1999, while Surgutneftegaz's prized Kirishi refinery's throughput reached the level of 17.3 million tons, according to a recent report by the Aton brokerage.

Surgutneftegaz's operating success has made its stock so popular that just about every substantial foreign investor in Russia owns a piece of the oil major.

Whatever the end result of the current consolidation moves, Surgutneftegaz shares are likely to remain fragile for several months, Dashevsky said.

Ironically, several brokerage reports last year said that the company's unconsolidated structure was one of Surgutneftegaz's few remaining weaknesses. Indeed, Dashevsky said the firm's shares would likely trade at a premium over shares in LUKoil, should the consolidation be successfully completed.