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. Last Updated: 07/27/2016

Surgut Stock Slides Over Share Intrigue

Closely held Surgutneftegaz saw its stock fall 3.6 percent Thursday after it was reported that it controlled 37 percent of its own stock through a controversial circular ownership structure.

Vedomosti reported Thursday that the pension fund of Surgutneftegaz owned Leasing Production, which in turn owned about 42 percent, or some $20 billion, of Surgut's common shares. The oil firm announced Dec. 31 that it no longer owned Leasing Production, a limited liability company, but did not elaborate.

In a note to investors late Thursday, Alfa Bank cut its target price for Surgut by 19 percent and downgraded the shares to "sell," saying that the assets from Leasing Production had most likely been transferred back into Surgut's pension fund. Citibank also downgraded the stock to "hold." Surgut had risen by 1.5 percent earlier Thursday.

Surgut had maintained the circular ownership to hide its treasury shares, analysts said. Treasury shares are shares bought back by the company that issued them. At Surgut, these account for 42 percent of the company's stock, said Alfa bank chief strategist Chris Weafer. Other experts have claimed it was higher.

By law, a Russian company has one year to convert these shares into assets, either by selling them to make cash or using them to make acquisitions. Otherwise, the treasury shares must be canceled and their value divided up among the other shareholders.

For Surgut, "this time period passed some years ago," Weafer said.

Currently, free-floating shares account for 35 percent, or about $17 billion, of Surgut, Alfa Bank said. If the treasury shares are canceled, then the value of free-floating shares will more than double. Control of the company would then be turned over to the minority shareholders, who would own more than 70 percent of the company, pushing the Kremlin-friendly management out.

But moving the assets from Leasing Production to its pension fund would protect the treasury shares from being canceled, Weafer said.

Investor funds Hermitage Capital Management, Prosperity Capital Management and Firebird Management, together with the Russian Investor Protection Association, have been fighting a legal battle since 2004 to have the treasury shares canceled. In early 2005, the Supreme Arbitration Court rejected their appeal, as did the Constitutional Court later that year.

Hermitage CEO William Browder has been denied a Russian visa since November 2005, in what some have seen as a move connected with Hermitage's campaigns for shareholders' rights.

Spokesmen for the three funds and the investor association were either unavailable or declined to comment on the case Thursday. A spokeswoman at Surgut also declined to comment.

Surgut subsidiaries could have owned so much of the company's stock as a way of keeping the management structure opaque and avoiding possible takeovers, analysts said.

State oil firm Rosneft has reportedly been planning a takeover of the company, Deutsche UFG said in a note to investors last month.