Why I Chose to Invest in Surgutneftegaz PAO – Preferred Shares (SNGSP.MOEX)
While Surgutneftegaz might not be a familiar name to the average investor, or even to those with a focus on the oil and gas industry, it remains one of Russia’s largest vertically integrated oil companies. It integrates a range of operations, from research and design to exploration, drilling, and production units, as well as oil refining, gas processing, and marketing subsidiaries.
Surgutneftegaz is likely the third-largest oil producer in Russia, falling behind Rosneft and Lukoil, but outpacing both Gazprom Neft and Tatneft. The company’s operations span three of Russia’s oil and gas provinces — Western Siberia, Eastern Siberia, and Timan-Pechora. Its oil is refined by the Limited Liability Company Kirishinefteorgsintez (LLC KINEF), one of the largest refineries in Russia and the sole one in the North-Western region.
Upon examining the company’s financials, I was immediately struck by the enormous volume of Cash and Equivalents listed on their Balance Sheet, nearly equivalent to the company’s total market value. I also observed that preferred shareholders received substantially higher annual dividends. As a result, I had decided to add the company’s preferred shares to my watchlist, in anticipation of a potential future purchasing opportunity.
Disclaimer: This is not financial advice. Always conduct thorough due diligence before making any investment decisions.
Financial Data Analysis
The following financial data were relevant when I made my initial investment in Surgutneftegaz’s shares (further details about my trading activity is provided below). The calculated “Key Metrics” provide a window into my approach to valuation. For a deeper understanding of this approach, as well as comprehensive explanations on what these revealing ratios truly signify, I encourage you to read the following article.
For my due diligence, I primarily focus on the most recent annual Cash Flow and Income Statements to gauge the company’s performance relative to the previous years. However, when reviewing the Balance Sheet, I always refer to the most recent quarterly statements. This allows me to accurately understand the present state of the company’s assets and liabilities, essentially giving me a snapshot of what I’m investing in at that moment.
|Selected Quarterly Balance Sheet Data as of June 30, 2021||Key Metrics|
|Total Inventory||96,537.00||Current Ratio||1,796,048.00 / 375,489.00 = 4.78|
|Total Current Assets||1,796,048.00||Quick Ratio||(1,796,048.00 – 96,537.00) / 375,489.00 = 4.53|
|Total Goodwill||N/A||Book Value per Share||5,236,737.00 / (35,725.35 + 7,702.00) = 120.59|
|Total Intangibles||9,747.00||Tangible Book Value per Share||(5,236,737.00 – 9,747.00) / (35,725.35 + 7,702.00) = 120.36|
|Total Assets||6,103,230.00||Price to Book Value||32.11 / 120.59 = 0.27|
|Total Current Liabilities||375,489.00||Price to Tangible Book Value||32.11 / 120.36 = 0.27|
|Total Equity||5,236,737.00||Total Equity / Total Assets||5,236,737.00 / 6,103,230.00 = 0.86|
|Total Common Shares Outstanding||35,725.35||Total Tangible Equity / Total Tangible Assets||(5,236,737.00 – 9,747.00) / (6,103,230.00 – 9,747.00) = 0.86|
|Total Preferred Shares Outstanding||7,702.00|
|Selected Annual Income Statement Data as of December 31, 2020||Key Metrics|
|Diluted Net Income||691,114.00||Diluted Normalized EPS||691,114.00 / (35,725.35 + 7,702.00) = 15.91|
|Diluted Weighted Average Shares||35,724.99||Price to Earnings Ratio||32.11 / 15.91 = 2.02|
|Selected Annual Cash Flow Data as of December 31, 2020||Key Metrics|
|Total Cash Dividends Paid||30,648.00||Dividend per Share||30,648.00 / (35,725.35 + 7,702.00) = 0.71|
|Dividend Yield||0.71 / 32.11 * 100% = 2.21%|
Note: Although the company distributed RUB 30,648.00 in dividends during the 2020 fiscal year, the preferred shareholders received a dividend of RUB 6.72 per share in 2021, based on the full year 2020 earnings. This translates to an impressive yield of 20.93%, calculated as (6.72 / 32.11 * 100%).
Catalysts for Future Revaluation
In May 2023, the company declared its intent to distribute an annual dividend of a mere 0.80 RUB per share for both ordinary and preferred shares, with an anticipated ex-dividend date of July 19, 2023. This yields a dividend rate of only 2.49%, calculated as (0.80 / 32.11 * 100%). The market did not respond positively to this announcement. Nonetheless, the final dividend payment is subject to approval by the company’s shareholders at the annual general meeting, scheduled for June 30, 2023. Given the substantial cash reserves that the company has amassed over time, it wouldn’t be surprising if the shareholders advocate for a higher payout. If the dividend payout does not increase in 2023, I firmly believe it will in the subsequent years. Consequently, should the dividend yield increase, I anticipate a corresponding rise in the share price.
Furthermore, Surgutneftegaz has the potential to leverage its extensive Cash and Equivalents reserves for additional income and profit generation. Given its sizable unused cash reserves, coupled with a profitable business and long-lived reserves, Surgutneftegaz could also emerge as a prime acquisition target in the event of consolidation within the Russian oil and gas sector.
It’s worth mentioning, however, that discussing catalysts is arguably futile as long as the current sanctions persist. Consequently, I plan to update this section in the future, once the prevailing circumstances have normalized.
Surgutneftegaz PAO, formerly Surgutneftegaz OAO, (Surgutneftegaz OJSC) is an oil company. The Company is engaged in the exploration, production, processing and sale of oil and gas, as well as sale of oil and gas products. Its other financial and business activities include banking and insurance activities, and provision of other goods, works and services. The Company’s segments include Exploration and production, which is engaged in the exploration, evaluation, production of oil and gas, and oil sale; Refining and sale, which is engaged in oil and gas processing, sale of refined products and the activity of the Company’s subsidiaries involved in refining and refined products sale, and Other activity, which includes all other segments having no similar economic performance, and represents subsidiaries of the Company engaged in banking operations, insurance and production of other goods, jobs and services.
Company Website: https://www.surgutneftegas.ru/en/
Company Website (LLC KINEF): https://en.kinef.ru/index.html
Trading Activity – When I Bought These Shares
- February 22, 2022 – RUB 32.11
Due to imposed sanctions in relation to the Ukraine “conflict”, I am not allowed to buy or sell these Russian holdings for as long as the imposed sanctions last.
Dividend Activity – When I Received Any Dividends
- Ex-dividend date: July 19, 2022 – RUB 4.73 (Full Year Dividend for 2021).
- Ex-dividend date: July 19, 2023 – RUB 0.80 (Full Year Dividend for 2022).
Should I ultimately receive the dividend announced, my dividend yield would surge to 14.73% (calculated as 4.73 / 32.11 * 100%).
Due to imposed sanctions in relation to the Ukraine “conflict”, I am not allowed to collect any dividends on these Russian holdings for as long as the imposed sanctions last.
Trading Activity – When I Sold These Shares
- Not Applicable Yet
Recommended Resources to Start Conducting Your Own Research
Please note that the preferred shares (SNGSP.MM) do not have a separate dedicated page on Reuters.
Due to sanctions related to the Ukraine “conflict”, accessing information about Russian companies through western media resources is limited. This limitation also applies to the Reuters link mentioned above. Alternatively, you can use the Russian search engine Yandex.com to find better search results concerning Russian companies, including Surgutneftegaz.
Note: Although I have provided the following price chart for Surgutneftegaz from Stockdio.com, prices haven’t been recently updated. This discrepancy, I believe, may be attributable to the ongoing sanctions. Meanwhile, you can stay informed about the ongoing stock price by utilizing the Reuters link provided above.