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. Last Updated: 07/27/2016

Sibneft Output, Profit to Drop

SibneftSibneft will increase investment, but that means it must halve its dividend.
Oil firm Sibneft said its profits, dividends and production would fall this year, while owner Gazprom has hired Western consultants to decide what to do with its $13 billion acquisition.

However, even after slashing its dividend from the 100 percent payout level in place under its former owners, Sibneft will still pay far more than most other Russian companies.

"The net profit will, unfortunately, decrease compared with last year's," Sibneft president Alexander Ryazanov told a news conference on Thursday after the board's first strategic review of the firm since the takeover.

"We plan to get a net profit of $2.3 billion, which is a bit lower than last year. Our own production will be around 32 million tons [652,000 barrels per day], which is 1 million tons less than last year's."

Gazprom bought Sibneft last year from a private investment firm headed by billionaire Roman Abramovich, who benefited from payouts close to Sibneft's entire net profit.

Analysts have warned that the takeover by Gazprom, a vast bureaucracy descended from the Soviet Union's Gas Ministry, will soon tarnish Sibneft's reputation for efficiency and profitability.

But analysts say production already has suffered due to underinvestment by Abramovich ahead of the sale.

Ryazanov said the company had failed to meet its production targets for several years.

"The comments from management confirm that the growth that Sibneft showed in the past has now stopped, although there is of course potential in the company," said Kaha Kiknavelidze of UBS. "Basically, we don't think investors will have great hopes for Sibneft's prospects."

To remedy the fall in output, Sibneft will increase capital investment to $1.76 billion in 2006 from last year's $1.21 billion, "to start to put the brakes on the production slowdown," Ryazanov said.

But the extra investment and lower profits mean the firm will halve its dividend payout this year from last year's $2.3 billion, the largest ever in Russia, which analysts said was a last cash clearout by Abramovich before he sold Sibneft.

"We will be ready to pay to shareholders no less than $1 billion -- and probably $1.2 billion to $1.3 billion -- in dividends if we don't buy new deposits," Ryazanov said.

He said the slashed dividend represented the optimum trade-off between returning cash to shareholders and halting the decline in production, which he said would have been five times worse this year without the hike in investment.

"If you're asking if we should reinvest all our profits, I'm all for it. But I don't think our shareholders would understand," Ryazanov said.

Net profit and dividends may be $300 million higher if lucrative domestic oil product prices stay at current highs, since Sibneft uses a price of $45 per barrel of Urals crude blend in its forecasts, compared with the current $57.

Ryazanov said Gazprom had still not decided whether to consolidate Sibneft but would reach a decision later this year on the basis of a study by bankers and consultants from Citigroup and McKinsey, who will report to the board in April or May.

The choice is between consolidating Sibneft or leaving it as a stand-alone oil firm owned by Gazprom.

"It's one or the other," he said. "My personal opinion is that it is better if the oil business develops separately."