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. Last Updated: 07/27/2016

NEWS ANALYSIS: Surgut: Consolidation To Be Investor-Friendly




Oil major Surgutneftegaz has spelled out many details of a consolidation plan that earlier this year made some of its foreign investors believe the company intended to disadvantage them.


However, control over some 40 percent of Surgutneftegaz is still in question, with management's promises the only assurance it will not be used to hurt minority investors' interests.


The tension between Surgutneftegaz and some of its foreign investors arose from Surgutneftegaz's plan to swap the shares of parent company Surgutneftegaz NK for 12 billion new shares in daughter company AO Surgutneftegaz. As the result, only the daughter company's shares are to remain on the market.


The stock in question is some 13.7 billion shares of AO Surgutneftegaz held by the parent company. After the swap is approved by an emergency shareholders meeting May 6 the fate of the stake is in the hands of management.


Management has said it will use the stock as a strategic reserve for future acquisitions. However, Dmitry Zhdanovich, head of Surgutneftegaz investors' relations department, admitted Russian law has no legal niche for such financial instruments.


At the launch of the consolidation plan at the end of last year, Zhdanovich said several options on how to use the giant stake in the company had been considered.


"Some of those option were not really investor-friendly," Zhdanovich said. However, he said that eventually it was decided to use the 13.7 billion shares as strategic stock.


"We just had to respond to investors' pleas to guarantee that this stake will not be used for anything but expanding the company," he said, adding that the fate of the stake so far is secured by this promise only.


The same promise was spelled out by Surgutneftegaz CEO Vladimir Bogdanov.


"Our strategic reserve capital, and we have said it before, will be used only to pursue large-scale investment projects," Bogdanov told The Moscow Times.


The Surgutneftegaz consolidation plan initially raised a number of questions. Some foreign investors, led by former Federal Securities Commission chief Dmitry Vasilyev, even threatened to take legal action against Surgutneftegaz.


So far, however, the threat remains just that. Management's much-feared achievement of a super majority after consolidation is considered unlikely to take place.


Management, including all affiliated structures, holds 68 percent in the parent company and 67 percent in AO Surgutneftegaz, said Anton Molchanov, head of Surgutneftegaz's securities department. He also insisted Surgutneftegaz management has no means of increasing its influence over the company.


Analysts at United Financial Group estimated management will receive control over 69 percent of the company stock, still a few percentage points short of the 75 percent stake that would give it total control.


In addition, Molchanov said, the emergency shareholders meeting will vote on whether to remove a clause in the company charter that prohibits the conversion of preferred shares into common shares.


Aware that such a swap would be welcomed by many investors since it will erase the issue of how dividends are calculated after the company is consolidated, Molchanov pointed out that even if the clause is removed it could take a few years until such conversions are conducted.


According to Dmitry Avdeyev, oil analyst with UFG, Surgutneftegaz's promises not to mistreat shareholders should be taken seriously.