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Don't Be Afraid To Invest In Surgutneftegas

Summary

One of the best statistical strategies is investing stocks ranked on a mix of value factors, such as low EV/EBIT, low P/E, low Price/Free cash flow etc.

Therefore I rank stocks on such a mix twice a month.

A stock with one of the best rankings is Russion oil produces and refiner Surgutneftegaz.

I invest based on statistics. I try to find the cheapest stocks in a state of maximum pessimism. On average such stocks have very high returns. I invest using many small positions to decrease overall portfolio risk.

See also my free overview article for more information on quantitative deep value investing or take a free trial here.

Such a stock is Surgutneftegas OAO (OTCPK:SGTPY, OTCPK:SGTZY). This stock is very cheap based on a mix of value factors. In particular the stock is cheap based on EV/EBIT and Price/Retained Earnings. Both metrics are know to predict future returns well. In addition there are signs of quality. The Piotroski score is high at 9 and multi-year numbers suggest capital allocation at the core business has been pretty efficient.

In the rest of this article I share some basic findings and data. For a start see the table below. Data is in millions of dollars except for the share price (of the preferred ADS with ticker SGTPY) and the multiples.

Piotroski score

Share Price

Market cap

EV/EBIT

EV/Revenue

P/Tan B

9

5.01

21100

1.56

0.38

0.36

Yield

%

EBIT, ttm

until mrq

Cash flow

from ops

Free cash

flow

P/FCF

P/Ret Earn

1.0

4385

5733

3154

7.6

0.48

Surgutneftegas or Surgutneftegaz produces oil and gas in Russia, mostly in East and West Siberia. This is about 2/3 of the revenue. The company also owns a big refinery and gas stations. The refinery accounts for almost all other revenue but is much less profitable than oil production.

An internet search on the company name and keyword “fraud” revealed interesting links. See for example this article accusing the alleged owner and CEO of hiding money for Putin via the company. In 2013 treasury shares with a value of 15 billion USD suddenly disappeared from the balance sheet, without any explanation. The CEO and another director are on the US sanction list but the company is not, see here.

There are 2 types of shares: ordinary shares and preferred shares. The latter do not have voting rights but in practice have the same economic value and offer a higher dividend. At the moment they trade about 8% above the commons. Ticker SGTPY are certificates for 10 preferred shares. One share of SGTZY corresponds to 10 commons.

Dividends over 2017 will be approved at the end of June, 2018. Based on last year’s profit I think the dividend on the prefs over 2017 will be similar to the dividend over 2016: around 0.1 USD per ADS. If prices return to 90 USD per barrel preferred dividends will be over 1 USD per ADS.

The stock is close to its 5-year low of 4.47 USD, despite oil prices going up. For this oil company it makes sense to use the USD, though the company reports in RUB. BTW, the RUB is massively undervalued. That lowers production costs in USD much.

Multi-year numbers suggest durable competitive advantages. The 7-year average of Gross/Profit(Total Assets -excess cash) is high and has increased much. Of course an oil company cannot really have competitive advantages. Instead this growing ratio suggests management has executed upon growing gross profits very well. Gross profit increased by almost a factor 4 while (Total Assets -excess cash) increased by a factor 2.5 (all measured in USD). The decline in the Russian ruble might also have helped the ratio.

The balance sheet is very strong with hardly any leverage and about 16 billion USD of cash against 3 billion USD of short-term debt.

Retained earnings are about 45 billion USD. Therefore Market cap/Retained Earnings = 0.48.

Substantial shareholders: Russian ruling kleptocrats probably control this company. They probably use many stakes of just below 5% to stay under the reporting threshold. It may be a problem for the company to use its cash to buy back shares since then some stakes will increase above the filing threshold.

Become a statistical investor

Investing is mostly a game of luck. Therefore it is dangerous to invest based on conviction with large positions. But investing with many small positions in undervalued stocks with statistically great returns works just as well. So that is what I do.

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