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With this research we start highlighting one of the largest oil companies in Russia – Tatneft. The company takes the 6thplace, according to extraction volume in RF and 21st place in the world, on volume of proven oil reserves.

Company’s extraction activities are conducted in Tatarstan, where Tatneft holds the major part of licenses for exploration and development of deposits. The primary deposits of the company are deeply exhausted, limiting the extraction growth rates for next several years. Tatneft has continued expanding its resource base and it will start to develop the high-viscosity oil deposits. We associate company’s future activities with these trends.

We think that the current and the most negative factor of Tatneft’s business is the lack of own refineries. However, the company will finish the construction of refinery and a petrochemical complex in the nearest future, allowing Tatneft to increase its efficiency by +3-4%. Thus, to late 2009, the company will launch TANEKO, a refinery complex with the output of 10.5 mn tons per year. Now, the company has to buy oil products for further sale at its own gas station chain and the major part of non-export oil is retailed at Russian market, which is not always profitable for Tatneft’s business.

From our point of view, Tatneft is successfully using the concessional taxation at the deposits, while decreasing extraction rates. Tatneft has 5 deposits under graduated tax rate with 80% oil reserves depletion and total extraction rate of less than 16 mn tons of oil per year, forming 62% of total extraction volume. In 2007, the company managed to save 5 bn RUR, thanks to MET rate (mineral extraction tax) and it plans to achieve 8 bn RUR in 2008.

We have prepared Tatneft’s forecasted model, on the basis of development strategy, expectations of company’s management towards each branch, the latest financial results and the current development of oil market in Russia. We also have discovered a sound growth potential of company’s income capitalization, which will have a positive influence on company’s stocks.

According to our estimation, the fair price of company’s shares, at late 2008, could form 8.69 USD per common share and 4.45 USD per preferred share, whereas the potential growth will form 52.41% and 46.33% respectively. We confirm “BUY” recommendation on Tatneft’s securities.

Tatneft: Refining + natural bitumen extraction = growth - September 22, 2008 (PDF Report)

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