OREANDA-NEWS. May 18, 2010. Surgutneftegaz released its RAS financials for 2009 and 1Q10. As follows from the 1Q10 accounts, the major reason behind a visible YoY earnings drop (USD0.28bn in 1Q10 versus USD 2.00bn in 1Q09) was a large RUB21.7bn (USD 0.73bn) forex loss posted by the company in 1Q10. The 1Q10 earnings figure itself (USD 0.28bn) was not new, since the company reported it a few weeks ago as its ‘material event’, reported the press-centre of OTKRITIE Financial Corporation.

That said, it remains unclear why the company posted such a substantial forex loss in 1Q10, given that the RUB/USD exchange rate was much less volatile (it changed from RUB30.24/USD  on 31/12/09 to RUB29.36/USD as of 31/03/10). The only plausible explanation we find is that the majority of Surgut’s investments were predominantly in dollar- and/or euro-based instruments. Meanwhile, on our estimates the company’s total cash and long-term investments rose from USD 21.4bn at the end of 2009 to USD 22.3bn at the end of 1Q10 (+USD 0.9bn), although the structure and the liquidity of Surgut’s investments remain unclear. 

View: The large YoY earnings drop does not bode well for Surgut’s dividends for 2010, although we hope that forex losses in the rest of 2010 will not be as significant as in 1Q10. Meanwhile, production volume growth of Surgutneftegaz is still negative and the company’s transparency remains suboptimal even in the context of the Russian oil and gas sector. 

Valuation and Action: We maintain our SELL rating on the stock, with a target price of USD 0.80/share (USD 8.00/ADR).