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TOMSKNEFT-EOC

Tomskneft forms part of Eastern Oil Company (EOC), a vertically-integrated oil company, which received 38% of Tomskneft’s federally-owned shares in accordance with the Russian government’s Resolution of May 20, 1994 №499. The company’s Articles of Association specify exploration and development of oil and gas fields, oil and gas production, transportation and sale as its main activities.

Tomskneft comprises departments, which perform a complete cycle of oil production and disposal, including planning, surveying and preliminary works. Special departments are responsible for maintenance of wells and enhanced recovery measures, for repairing roads and trans-portation network, for housing construction.

Tomskneft’s equity capital is 5,629,014 thnd. rubles. It is divided into 45,032,112 shares with the face value of 125 rubles each. 33,774,080 common shares and 11,258,032 preferred shares make up 75% and 25% of the company’s equity capital, respectively. As of May 23, 1997, when the annual general shareholders’ meeting was held, the company had 25,925 shareholders. More that 5% of the company’s voting shares are owned by Eastern Oil Company (51%) and CS First Boston (14.8%).

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In 1995, when Russia’s oil complex was split into vertically integrated companies, Tomskneft received not very large fields in the Tomsk and Tiumen regions (the Khanty-Mansiisk National Autonomous Area). The deposits are situated at large distances one from another (up to 400 km). The transportation network between the deposits is not too well developed.

Tomskneft pursues the policy of stepping up exploration. As a result, in 1996, the company’s oil reserves of ABC1 categories increased by 8.8 mln. tons, as compared to 1.7 mln. tons in 1994. In 1997, it is planned to increase the company’s reserves by 11.3 mln. tons.

  Source: Russia’s Federal Property Fund

As of January 1, 1997, Tomskneft’s oil reserves of ABC1 categories amounted to over 400 mln. tons, i.e. accounted for the bulk of reserves of Eastern Oil Company’s subsidiaries. Tomskneft currently has 20 fields in production - 16 oil fields and 4 oil and gas condensate fields. Also, it is being issued licenses to utilize natural resources of 8 fields in the Tomsk region with the oil reserves of about 20 mln. tons, the right to develop which the company received in a tender. About 85% of residual oil reserves are accounted for by seven largest deposits, 40-70% of whose reserves have already been recovered. Over 70% of hydrocarbons produced at these fields belongs to the category of reserves, which are difficult to recover.

  

 
Source: Russia’s Federal Property Fund

As a result of seismic exploration carried out by Eastern Oil Company from 1994 through 1997, promising fields, which will be included in the 1999 geological exploration program, were found in the north-west of the Tomsk region. Development of these fields will increase recoverable reserves by approximately 40 mln. tons. The plan is that these reserves will be developed by Tomskneft and will be added to the company’s reserves. By various estimates, for a number of years, the company will be able to renew its reserves to the extent of recovery at fields which are currently in production.

Pursuing its policy of stepping up exploration, the company actively introduces such methods as hydraulic fracturing and construction of horizontal wells. From 1994 through 1997, Tomskneft performed over 600 hydraulic fracturings. This additionally brought the company 5.3 mln. tons of oil, including 1.6 mln. tons in 1996. 13 horizontal wells were built and produced a total of 300 thnd. tons of oil.
 

 
Source: the State Statistics Committee

Tomskneft annually produces about 10 mln. tons of oil, accounting for more than 90% of overall oil production by all companies included in Eastern Oil Company, or 3.2% of Russia’s oil production. Approximately 60% of the produced crude are refined at the Achinsk Refinery, about 30% are exported and about 10% are sold on the internal market.

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Tomskneft’s financial reports are made in accordance with the Russian accounting standards. The key indices of the company’s financial performance are supplied in the table. The table shows that in 1996 the ratio between market capitalization and book value (MC/BV) was extremely low, at 7% (for comparison: during the same period, this index equaled 80% for LUKoil and 50% for Gazprom). Capitalization per ton of proved oil reserves was fairly low and, at the end of 1996, amounted $0.5 (for western oil companies this index averages $30).

 
Source: the State Statistics Committee, AK&M.

The company’s investment goals are to boost efficiency of hydrocarbon production and to develop new fields with good economic outlook. Eastern Oil Company controls implementation of all investment projects.

Tomskneft currently implements the following projects:
 

• Development of the Myldzhinsky fields jointly with Gazprom. Explored reserves of the region’s 19 fields are 300-350 bln. cu m of gas and about 37 mln. tons of gas condensate. Development of these fields will allow to annually produce 5.5 bln. cu m of gas and about 1 mln. tons of condensate for 15 years. In accordance with the project plan, a pipeline connecting the fields with a gas main will be constructed to transport gas and condensate. To supply condensate to the Tomsk Petrochemical Factory a 550 km long Luginetskoye-Tomsk pipeline will be built. About $200 mln. have already been invested in the construction. Construction of the Luginetsky Compressor Station using the EBRD’s $250 mln. long-term credit will commence in the near future. The compressor station will be put into operation in early 1999 and will allow to annually recover 1.5 bln. cu m of gas and 300 thnd. tons of oil.

• Construction of mini-refineries, with the annual capacity of 100-200 thnd. tons of oil products, in the town of Strezhnevoy and near the Luginetsky field. These mini-refineries will produce aviation kerosene and automobile gasoline. When this project is completed, Tomskneft’s expenses on supplying its working teams with fuel and lubricants will decrease significantly.

• Development of the Krapivinsky field, which is expected to recoup itself in 6 years time. The field’s explored (ABC1 categories) and projected reserves amount to 5 mln. tons and 24 mln. tons, respectively.

Currently, 30-35% of common and preferred shares issued by Tomskneft are in free circulation.

Trading in Tomskneft’s shares on the OTC market began in 1994. The first trade with these shares on the OTC market was officially registered on September 14, 1994, at the price of 33.75 thnd. rubles. The all-time low price of Tomskneft’s stock of 10.89 thnd. rubles was seen on March 19, 1996, the all-time high price of 133.7 thnd. rubles was observed on August 8, 1997. After Tomskneft’s common shares were included in the RTS listing on November 1, 1996, trading in these securities shifted to the "organized" stock market. The minimum price of Tomskneft’s common shares on the RTS of $4.2 was registered on December 3, 1996 and the maximum of $22.6 on October 11, 1997. Trading in Tomskneft’s shares was the most active in July and October 1997, when the demand for the company’s shares was noticeably up due to information about auctions for shares of the holding Eastern Oil Company. This was evidenced by an increase in the volume of deals with Tomskneft’s common shares in July and October to $11.3 mln. and $20.5 mln., respectively, as well as by a significant narrowing of the spread between the bid/ask prices (which during these months did not exceed 25%).

The company’s preferred shares were included in the RTS 1 listing on April 1, 1997. The first trade with these shares was officially made on the same day, at the price of $12.5. During the year, prices of preferred shares were closely tied to prices of common stocks. The discount on preferred shares relative to common shares averaged 30-60%.

During 1997, the direction of the local trend in Tomskneft’s share prices coincided with the direction of the oil and gas index. Movement of Tomskneft’s share prices, however, was to a greater extent than other oil stocks influenced by general market trends. Therefore, short-term speculations with the company’s shares are fairly attractive. Short-term investments in Tomskneft’s shares, however, are highly risky due to their low liquidity: in 1996-1997, trades with Tomskneft’s shares were not made too regularly. Annual turnover (in 1997) in common and preferred shares on the RTS was merely $80 mln. (about 0.5% of the trading system’s overall turnover). In the course of 14 months, the key liquidity indicator - the spread between the bid/ask prices on the RTS varied from 3 to 63%.

During the general stock market downturn in late October-December 1997, Tomskneft’s shares were not traded. In 1997, return on the company’s stock was positive for common shares (+179% per year in USD) and negative for preferred shares (-62% per year in USD). On December 29, 1997, prices of Tomskneft’s common and preferred shares were $13.15 and $4.18, respectively.

 

The most important event on the market for Tomskneft’s shares in 1997 was their inclusion in the aggregate investment index IFC Investable. This index daily calculated by the IFC and is one of the main indicators, by which international investment companies are guided.

High assessments of Tomskneft’s attractiveness by international investors (Tomskneft was among 31 Russian companies, which were included in the index, in the company of such highly liquid stocks as LUKoil, EES Rossii, Surgutneftegas, etc.) allow to regard long-term investments (of over 1 year) into Tomskneft’s shares as promising. We do not, however, recommend strategic (long- and medium-term) investors to purchase the company’s stocks before restructuring of the holding company (Eastern Oil Company) is completed.

The above mentioned recommendation, in the 1st place, is addressed to strategic investors who wish to receive profits in the form of dividends. The fact that Tomskneft’s resources mainly consist of reserves that are difficult to recover significantly reduces the company’s profits and the size of dividends.

Another circumstance, upon which the recommendation is based, is that now that the controlling stake of the parent Eastern Oil Company has been purchased by Rosprom-YUKOS, behavior of Tomskneft’s share prices will depend on the process of Tomskneft’s integration with the Rosprom-YUKOS group. Therefore, in the long-term context, political and macroeconomic factors could also influence behavior of the company’s share prices.

In the medium-term (6 months-1 year), movement of Tomskneft’s share prices will be determined by the conditions, under which Eastern Oil Company’s stocks will be converted into YUKOS’ shares, and by how the conversion goes. If these conditions infringe the rights of Eastern Oil Company’s shareholders, this could have a negative psychological effect on Tomskneft’s investors. If it is decided to convert Tomskneft’s own shares into shares of the holding company, this could have an even more adverse effect on prices of Tomskneft’s stocks. Though the agreement between the Rosprom-YUKOS group and Eastern Oil Company (and its main oil producing subsidiary Tomskneft) stipulates that they will retain the status of independent companies, its is still quite likely that such a decision would be taken. Consolidation of Tomskneft’s shares with shares of enterprises, which have no resource base, will hamper the company’s attractiveness as an investment, which is due to its direct involvement in development of mineral resources.

In the short-term (up to 6 months), operations with Tomskneft’s securities should also be consi-dered highly risky. Currently, the main investment risk is the low liquidity of Tomskneft’s shares, namely, it not being possible to sell these shares quickly and the wide spread between bid and ask prices.

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• Tomskneft-EOC is a medium-size Russian oil company, which forms part of the vertically integrated holding company Eastern Oil Company. Tomskneft’s Articles of Association specify exploration and development of oil and gas fields, oil and gas production, transportation and sale as the company’s principal activities.

• Oil produced by Tomskneft accounts for more than 90% of overall oil production by all subsidiaries of Eastern Oil Company, or 3.2% of Russia’s oil production. Due to the fact that the bulk of the company’s reserves are difficult to recover, the cost of oil production by Tomskneft exceeds average productions costs in the oil industry. Therefore, a possible increase in the company’s proceeds and an improvement in profitability will be largely tied to implementation of investment programs for development of gas fields and expansion of the oil refining complex.

• Now that a block of shares of the parent Eastern Oil Company has been purchased by the Rosprom-YUKOS group, the strategy of Tomskneft’s industrial and economic development will depend on the process of the company’s integration with this financial and industrial group.

• The company’s good resource base and high attractiveness as an investment allow to make a positive assessment of its current economic status and its future growth potential.

Tomskneft’s relations with the parent company, however, do not allow to count on the company’s high profitability. As of late, the holding company’s and the company’s management have been artificially manipulating prices for hydrocarbons produced by Tomskneft and redistributing the proceeds from their sale in favor of Eastern Oil Company. This is indirectly confirmed by the fact that, in 1996, pre-tax profits of Eastern Oil Company, which carries out practically no production activities, were $240 mln, i.e. more than a double of Tomskneft’s pre-tax profits for the same period. We believe that now that that the controlling block of EOC’s shares is held by Rosprom-YUKOS group, Tomskneft’s situation could become even worse.

Under the circumstances we recommend to sell Tomskneft’s shares.

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