Surgutneftegas: Piggy bank getting bigger… for now (preferred shares stay BUY, GDRs stay HOLD)

In this report, we have updated our valuation of Surgutneftegas’ GDRs and preferred shares following the 9% ytd appreciation of the RUB/USD, as well as the payment of the second-highest dividend in history on the preferred shares (RUB 7.62). Theoretically, Surgutneftegas remains the most undervalued company in our sector (trading at a negative EV of USD 25bn) and its shareholders stand to benefit the most in the case of any significant corporate governance changes. However, despite most other companies in the sector making dramatic progress on this front recently, we see little evidence for any change taking place at Surgutneftegas (at least within the timeframe of a typical investor, which is hardly more than 12 months). As such, Surgutneftegas’ investment case remains nothing more than an attractive hedge against RUB depreciation (for the preferred shares) and a very low probability call on potential changes in capital allocation in the future (for the common shares and GDRs), similar to a deep out-of-the-money call option on a stock. Our new price targets (PTs) for the GDRs and the preferred shares are USD 5.3 and RUB 44, respectively, with our respective HOLD and BUY ratings maintained.