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16 August 2010 SI NE I RA ET STUDI O/ OBJECTI VELY Company overview Economy Preview Surgutneftegas's preferred shares: take a closer look! In Q2 2010, Surgutneftegas's net income grew 5.7 times. Last week, Surgutneftegas reported net income of RUB 47.7bn in Q2, which is 460% higher than Q2 2009 number and by 470% higher than Q1 2010 net income figure. In our SWOT analysis view, this is mostly attributable to forex gains. Therefore, if ruble keeps it weakening trend further, the company's net income in 2010 may total RUB 142bn, according to our estimates. Timur Khairullin, CFA Deputy Head of Research +7 (495) 2874407 [email protected] Dividend yield of preferred shares may come at 10% in FY2010. According to Surgutneftegas's by-laws, the company’s dividend payout ratio is set at 7.1% of annual net income for the preferred shares. According to our net income forecast of USD 4.7bn for FY 2010, dividend payments on preferred stock could total approximately USD 330mn (USD 0.043 per share), which implies 10% dividend yield for this class of stocks. Dividend yield of Surgutneftegas's preferred stock, % 14% 12% 12% 10% 10% 8% 7% 6% 6% 4% 3% 3% 2005 2006 2% 0% 2007 2008 2009 2010П The discount of Surgutneftegas's preferred stocks to ordinaries is abnormally high now. Currently, the discount of preferred stock to ordinaries equals approximately 55%, while the historical average stands at 38%, almost 1.5 times lower. We think that such discount is not justified due to virtually no real voting rights for the ordinary stocks and highly attractive dividend yield of the preferred shares. COMPANY OVERVIEW – SURGUNEFTEGAS PREFERRED SHARES 16 August, 2010 The discount of Surgutneftegas's preferred shares to ordinaries usually decreases in Q3. As historical data shows, SNGSP to SNGS discount peaks in summer months. It is conventional to think that Surgutneftegas's preferred stock becomes interesting in March only, before the record date. However, in practice, the discount starts narrowing already in autumn. Therefore, by investing now, investors can benefit from the trend. Average historical discount of SNGSP to SNGS* on a monthly basis 45% 40% 35% December November October September August July June May April March Febrary January 30% *Median values for 1999–2009 We think that Surgutneftegas's preferred stock provides an attractive investment opportunity. Due to substantial cash position of more than 20bn (equaling more than 60% of the company's market capitalization), Surgutneftegaz's shares can be considered defensive stocks as the company's market value is less dependent on future cash flows and oil prices. According to our estimates, fair value of the preferred shares is USD 0.71, which implies upside potential of over 60% from the current level. © 2010 Grandis Capital Investment Company, LLC 2 COMPANY OVERVIEW – SURGUNEFTEGAS PREFERRED SHARES 16 August, 2010 Grandis Capital Investment Company LLC 6 Puteisky Tupik, Moscow, 105064 tel.: +7 495 287 44 07, fax: +7 (495) 287 44 07 www.grandiscapital.ru, [email protected] Sales & Trading Mikhail Kozakov Head of the Department [email protected] Sales Research Anton Makarov Deputy Head of the Department Head of Sales [email protected] Denis Barabanov Head of Research [email protected] Dmitry Shatsky Chief Sales Representative [email protected] Timur Khairullin, CFA Deputy Head of Research [email protected] Konstantin Lynov Sales Representative [email protected] Irina Prokopeva Analyst [email protected] Denis Vakhrushev Sales Representative [email protected] Customer Service Ekaterina Kharchenko Head of Customer Service [email protected] Portfolio Investments Trading Dmitry Ivanov Head of Portfolio Investments [email protected] Andrey Tolstousov Portfolio manager [email protected] Maxim Bersenev Head of Trading [email protected] Mikhail Kan Senior Trader [email protected] License for dealing operations of a professional securities market participant Number: 077-11120-010000 (unlimited) Issued by: FSFM of the Russian Federation, Issue date: 01.04.2008 License for securities management of a professional securities market participant Number: 077-11124-001000 (unlimited) Issued by: FSFM of the Russian Federation, Issue date: 01.04.2008 License for brokerage of a professional securities market participant Number: 077-11116-100000 (unlimited) Issued by: FSFM of the Russian Federation, Issue date: 01.04.2008 License for depositary operations of a professional securities market participant Number: 077-11128-000100 (unlimited) Issued by: FSFM of the Russian Federation, Issue date: 01.04.2008 License of a futures and options commission merchant in the exchange trade Number: 1249 (unlimited) Issued by: FSFM of the Russian Federation, Issue date: 04.09.2008 © 2010 Grandis Capital. All rights reserved. Warning: risk of loss. Investments in stock and any other securities may result in losses. Investments in bonds and debt instruments may result in losses due to reduced value of bonds, and unexpected loss, which may arise from full or partial default of the issuer (the enterprise's refusal to service its debts). In case of a default or bankruptcy of the issuer, losses may amount to 100% of the investment. Investments in stock may result in losses due to reduced market value of the stock. Owing to the bankruptcy of the issuer, losses may amount to 100% of the investment. Investments in derivatives (futures or options) may result in losses. Losses may stem from changes in the market value of the underlying asset. Losses may amount to 100% of the investment (margin). Additional information may be requested. This overview was produced for information purposes only and should not be regarded as an incentive to buy or sell securities. To prepare the overview, Grandis Capital used sources assumed to be reliable. However, neither the management, nor personnel can guarantee accuracy of these data and can be held liable for possible losses of investors connected with the information contained herein. Remuneration of analysts does not depend on the advice they provide or opinions they express in analytical reviews. Grandis Capital Investment Company can make transactions with securities mentioned in this review on its own or on behalf of Clients. © 2010 Grandis Capital Investment Company, LLC 3