RusEnergy

January 25, 2007 Moscow News - Simon Shuster - A report that Surgutneftegaz managers covertly hold 72 percent of the secretive oil firm sparked a flurry of speculation among banks Wednesday and led Deutsche UFG to conclude that the firm's shares had been widely diluted. Managers control the firm through a tangle of puppet organizations set up over the last five years, Vedomosti reported Wednesday. Deutsche UFG, which had held off longer than some banks on marking down Surgut stock, slashed its target price for the company's shares by 40 percent Wednesday to $1.03, and downgraded the stock from "buy" to "sell." "For three or even four years, this stock was traded on a false assumption of the number of shares," Deutsche UFG analyst Pavel Kushnir said. UFG had raised its estimated number of outstanding shares from just less than 26 billion to the "market consensus" of 43 billion, he said. This implies a 40 percent dilution in the value of the stock. Surgut fell 2.24 percent Wednesday. Citing the national company registry, Vedomosti followed the paper trails of 23 noncommercial entities and their assets to the management board of Surgut. Surgut general director Vladimir Bogdanov reportedly headed nine of these organizations, which had been established by two direct Surgut subsidiaries: Invest Zashita and Riel. Though these nine companies were each founded with 11,000 rubles ($420) in early 2002, by 2003 their joint assets had grown to more than $10 billion, and by the end of 2005 to about $19 billion, the paper reported. This growth closely mirrored that of Surgut, the paper said. Vedomosti also reported a more intricate chain of ownership, in which a bizarre Surgut-connected "ring" of seven companies owned 14 other organizations, which in turn owned four more organizations, whose combined assets had grown at nearly the same rate as Surgut to reach more than $7 billion in 2005. The four firms at the end of this chain had the same telephone number listed in the national registry, which was answered by a receptionist at Surgutneftegaz, the daily reported. Last week, Vedomosti reported that 37 percent of Surgut's stock looked to have been transferred from a subsidiary to the company's pension fund. Alfa Bank downgraded the stock to "sell," and marked Surgut down to $1.13. Renaissance Capital, which reserved judgment last week and advised investors to "buy," said its new outlook on Surgut would come out Thursday. MDM Bank remained optimistic with a target of $1.25 for common shares and a "buy" status for preferred shares. MDM analyst Nadya Kazakova said the bank was counting on a state buyout, either directly or through Rosneft. Aton's Steven Dashevsky said that although he doubted a buyout, the management could be replaced next month when a planned labor strike is set to take place. "But nothing is obvious. [Surgut] still remains as murky as it was," he added. Aton told investors to "hold" and set a target price of $1.24. Alfa Bank chief strategist Chris Weafer dismissed the takeover theories, however. "Bogdanov is considered to be very close to the Kremlin," he said. "We know for sure ... that he fiercely guards his independence."