Investors’ memories are notoriously short but a 1,000% increase in the share price of Yukos, Russia’s second largest oil company and its most notorious shareholder rights abuser, seems to denote nothing less than mass amnesia.
Yukos has been on a charm offensive since the start of the year and investors are beginning to buy. What is changing attitudes is not so much the hype as the company’s performance. To encourage investors’ confidence that the company intends to put its money where its mouth is, it paid out $100 million in dividends in September: a rare event in Russia.
“It is now clear that management are going to develop this company,” says Eric Wigertz, an analyst with Brunswick Warburg in Moscow, “and I believe that now they are interested in realizing shareholder value.”
Management is thought to hold between 65% and 85% of the stock. Currently trading at about one and half times earnings, Yukos could be worth a lot more than it is presently.
Yukos reported $1.4 billion profit in 1999 and this year issued for the First time three years of international standard (GAAP) accounts. The lack of transparent accounting has long been a big complaint of foreigners investing in Russia.
Like all the Russian oil companies, Yukos has been doing well on the back of oil prices at record highs. But Yukos is doing something unusual for a Russian company: it is investing in itself and Finally trying to tackle the thorny problem of Russia’s legendary industrial inefficiency.
Yukos plans to invest $800 million this year in improving production, which is in line with the rest of the industry (and is about equal to the amount the entire sector spent in 1999). But the production increases already achieved have put it at the head of Russia’s oil production league table. The total of 42 million tonnes extracted was a 9.2% year-on-year increase over the First eight months of this year compared with a 5% sector average increase.
According to company spokesman Hugo Erikssen the cost of producing a barrel of oil at the wellhead has been slashed to as little as $1.70 per barrel – the lowest of all the Russian companies – whereas pre-crisis costs were in double digits in some cases.
Foreigners have been brought in at every level to improve the running of the company. Yukos tied up with foreign technical companies Schlumberger and Kvaerner to improve the technological side of operations. And back at the massive brown building that houses its headquarters in central Moscow you are as likely to hear English or French spoken as Russian since the company has hired foreign managers to many key posts.
To maintain the momentum, Yukos announced an ambitious development plan in September that will increase crude production by 70% to 80% to 75 million to 80 million tonnes over the next Five years. It is investing in upstream and downstream production as part of a plan to build a seamlessly integrated oil company. It also plans to double oil exports to 47 million tonnes by 2005, from the 21 million tonnes it hopes to sell overseas by the end of this year.
All this expansion is going to need money and analysts believe this is the main reason why Yukos has changed its ways as it gets ready for a downturn in the price of oil and a return to the international capital markets.
However, some believe that there are political motives too. Over the past few months the Kremlin has become increasingly tough with Russia’s biggest business: the most obvious example is the government’s use of Gazprom to effectively bankrupt Media-MOST, owned by president Vladimir Putin’s most outspoken critic, oligarch Vladimir Gusinsky.
“The oligarchs are amazingly sensitive bellwethers,” says Dominic Gualtieri, head of equity trading at Alfa Bank (itself run by oligarch Mikhail Fridman). “In the past they always saw the changes in the wind and moved from business to business always at the right time to make money. Now they are afraid and so have shaped up their act – hence all the talk about improved corporate governance in Russia. What they are doing now is to make their companies “investable” as with foreign investors on board it will be much harder for the Kremlin to take them out.”
But getting more investment will be hard as the free Float of traded shares is still very small – about 10% of the company – and management is unwilling to sell more at what they consider rock-bottom prices.
Investors are not completely blind to Yuko’s black past either.
“Don’t get me wrong,” says Wigertz. “I still have grave reservations about this management, but it still remains a very good punt at the moment. With the good 1999 results, its plans for next year and all the noise they are creating, it is too cheap to ignore.”
