Phnc Unaf Update June 7 2010

8/4/2019 Phnc Unaf Update June 7 2010

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UKRNAFTA:Milking the Cash Cow

Serhiy Petrenko | [email protected]

E Q U I T Y

R E S E A R C H

Oil & Gas

June 7, 2010


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2

Company Update

June 07, 2010

Ukrnafta: Milking the Cash Cow

Ukrnaftas oil prices rise. In the state Budget Law for 2010, passed

in late April, Ukraine pegged domestic oil prices for state-owned

companies to those of imported crude. We estimate that higher oil prices

will not only off-set the negative impact from higher royalties, but also

increase Ukrnaftas revenues and strengthen margins. We also believe

the government will be able to sustain the pegging procedure in the

future since Ukraines President, Parliament and government are

currently acting in concert and pursuing the same agenda.

Affordable increase in oil royalties. In the same state Budget Law for

2010, Ukraine raised oil royalties to boost state budget revenues.

According to the law, oil royalties will rise 79% Y-o-Y in 2010. However,

we estimate that the increase in royalties will be much milder

(26% M-o-M in May) as world oil prices declined from above $80/bbl to

slightly above $70/bbl.

All-in-all positive. The overall impact of all value drivers is positive for

the company, we estimate. Lower production output will be off-set by

revenues from resumed sales of natural gas, while growing world oil

prices will support the companys overall economics, enabling

stakeholders to continue milking the Ukrnafta Cash Cow. The

government will collect significant revenues from royalties and other

taxes, while private shareholders will continue to enjoy high margins and

tangible dividends (See Figure 1 to the right).

Rated with BUY. We use a DCF valuation, as latest developments,

pegged oil prices in particular, significantly reduce future uncertainty and

enable us to produce reliable forecasts. We therefore update our target

price from $58.6 to $60.8 and retain a BUY rating for the stock.Upside potential of up to 96%. According to our DCF model, the

company has an upside potential of up to 96%. As outlined in our previous

report Ukrnafta: two catalysts remaining, higher oil prices and resumed

gas sales are the key value drivers of the companys stock. At the same

time, we also assessed the negative impact of a heavier royalty regime

(See figure below).

Figure 2. Breakdown of Ukrnaftas value, $mln

Source: Phoenix Capital estimates

2,876

169309

275

320

186

3,797

1,600

2,040

2,480

2,920

3,360

3,800

Status Quo Higher Royalty

Pegged OilPrices

Gas atUAH945

Gas atUAH1857

Compens. forPast Gas

Total

Current M.Cap of $1,680mln

Target M.Cap of $3,291mln

Potential Upside of 96%

Status Quo represents TP before increase in royalties and other items

Current M.Cap of $1,680mln

Potential Upside of 96%

Status Quo represents TP before increase in royalties and other items

Figure 1. Natural gas prices to rise

Source: Source: Energobusiness, Phoenix Capital

0.0

7.3

14.5

21.8

29.0

36.3

43.6

50.8

-

20

40

60

80

100

120

140

2Q2009 3Q2009 4Q2009 1Q2010

EBITDA, $ mln (LHS)Oil realisation average price, $/bbl (RHS)

Ticker UNAF

Current Price, $ 31

Target Price, $ 60.8

Potential Upside, % 96%

M.Cap, $mln 1,679

EV, $mln 1,685

Net Debt, $mln -5

Shares out, mln 54Free float, $mln 87.352 week low, $ 14.852 week high, $ 38.9

Avg. D. Trading volume 6M, $ ths 485 ADR / GDR ratio 1:6

Web: www.ukrnafta.com

Source: Bloomberg, Phoenix Capital estimates

Figure 3. Ukrnafta stock perfomance

Source: Bloomber, Phoenix Capital estimates

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31

35

39

55

70

85

100

115

130

145

9-Mar-10 6-Apr-10 4-May-10 1-Jun-10

UX Rebased , (LHS)

UNAF, $ (RHS), % (LHS)


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3

Company Update

June 7, 2010

Valuation SummaryWe believe that the following series of events now provide a good basis

for DCF valuation:

Ukraine introduced a new law requiring Ukrnafta to sell oil at

auction at market prices (effectively pegging it to Urals).

The company complied with the law and started selling its oil at

market prices ($67/bbl on May 31, 2010).

Major shareholders of the company signed the Agreement on

Understanding and Cooperation (AUC) to ensure efficient and

predictable cooperation in the future.

The above mentioned events reduce uncertainty surrounding the oil

pricing issue and enable us to forecast the companys cash flow with in a

reasonable margin of error.

We therefore use the DCF valuation to fine-tune our view and update our

target price to $60.8 (from $56.9) - retaining a BUY recommendation for

the stock.

The figure below shows share price sensitivity with the most important

value drivers, oil and gas prices:

Figure 4. Share price sensitivity, $

Base Oil Price in 2010, $/bbl

GasPrice,

$/mcm

44 54 64 74 84

20 47.6 51.7 55.7 59.7 63.8

70 50.2 54.2 58.3 62.3 66.3

120 52.7 56.8 60.8 64.8 68.9

170 55.3 59.3 63.4 67.4 71.4

220 57.8 61.9 65.9 70.0 74.0

Source: Phoenix Capital

Finite reserves, finite forecasting period. In our DCF model we take a

conservative approach and assume finite reserves along with a finite

forecasting period of 21 years which takes into consideration the current

Reserves-to-Production ratio of 19 and insignificant additions to the

companys 2P Reserves going forward.

We also note that the assumed forecasting period of 21 years does not

account for possible production from less efficient deposits (20 out of 98)

which were not included in the 2P reserves of 695mmboe.


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4

Company Update

June 7, 2010

The figure below outlines our DCF model with a breakdown of the

forecasting period into 2010-2018 and 2019-2030.

Figure 5. DCF valuation summary, $ mln

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

Net revenue 1,855 2,180 2,387 2,502 2,602 2,666 2,681 2,699 2,714

EBITDA 583 658 720 753 779 796 801 807 812

EBIT 500 565 619 649 675 691 695 700 704Income tax expense (121) (136) (150) (163) (176) (187) (195) (205) (216)

Tax adjusted EBIT 379 429 469 486 499 505 500 494 487

D&A 83 93 101 104 104 105 106 108 108

CapEx (105) (112) (113) (111) (108) (106) (107) (106) (106)

Change in working capital (29.1) (25.1) (18.5) (35.0) (37.3) (43.4) 0.4 25.2 3.9

Unleveraged free cash flow 328 385 439 443 457 459 500 522 494

WACC, % 13.5% 13.5% 13.5% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6%

Present value of free cash flow 304 314 316 280 254 225 215 198 165

PV from 2010-2018 2,270

Terminal growth rate n/a

PV from 2019-2030 1,021

Terminal WACC n/aEnterprise value 3,291

Net debt -5

Equity value 3,296

Target price, $ 60.8

Current share price, $ 31.03

Upside to the fair share price, % 96%

We used a weighted average cost of capital of 13.5%. Our WACC is

based on an equity risk premium of 5%, a yield of 3.5% for 10-year US

Treasury bills, a sovereign bond spread of 5% and specific for the industry

beta (adjusted for the company risks) of 1.

Explanation of selected assumptions

We assumed that starting from 2012 the company will be paying out

dividends at a 30% payout ratio, as required by Ukrainian legislature.

While we expect a dip in production this year (12.2% for natural gas and

11% for oil and gas condensate), we assumed that starting from 2011,

production of hydrocarbons will decline at 2.5% p.a. a natural decline

rate.


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5

Company Update

June 7, 2010

Figure 6. Model Assumptions

Units 2007 2008 2009 2010E 2011E 2012E

Production

Oil

annual mmboe 20.9 20.0 18.4 16.4 16.0 15.6

average daily boepd 57,214 54,862 50,464 44,913 43,790 42,695

Gas

annual bcf 114 112 104 91 89 87

average daily mmcfpd 313 306 285 250 244 238

Gas Condensate

annual mmboe 2.46 2.57 2.47 2.41 2.35 2.29

average daily boepd 6,732 7,039 6,777 6,608 6,442 6,281

Total annual production mmboe 42.4 41.2 38.3 34.0 33.2 32.4

Realizations

Oil mmboe 19.7 18.4 17.6 15.7 15.3 14.9

Gas bcf 28 0 86 76 74 72

Gas Condensate mmboe 0.52 0.48 0.46 0.44 0.43 0.42

Prices

Oil $/bbl 57.3 72.8 25.2 64.1 73.7 81.1

Gas $/mcf 1.79 - 1.05 0.69 3.39 3.92

Gas $/mcm 63.1 - 37.2 24.5 119.6 138.3

Reserves mmboe 787 755 724 696 662 628

Macroeconomic assumptions

UAH / USD exchange rate, period avg. UAH/USD 5.05 5.35 8.11 7.90 7.65 7.55

UAH / USD exchange rate, eop UAH/USD 5.05 7.70 8.00 7.80 7.50 7.60

Ukrainian CPI % 16.6 22.3 12.3 10.1 15.0 12.0

Source: Company, Phoenix Capital estimates


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6

Company Update

June 7, 2010

Value driversBelow we detail key value drivers used in the DCF model and provide

rationale behind our assumptions.

Ukrnafta oil prices converge with Urals

In past years, Ukrnafta was selling its oil at a discount to market prices.

However, we are confident that the company will now be selling its oil at

market prices (Urals) for the following reasons.

Because the law says so. The government introduced legislative

changes that require state-owned oil and gas companies, Ukrnafta in

particular, to peg its oil prices to those of imported crude oil. The pegging

was stipulated in the State Budget Law for 2010 and some other

legislative acts. In essence, the pegging is enforced via a somewhat

complicated legislative procedure of setting the starting price for oil.

However, the starting price is in essence set at a weighted average priceof Urals plus a premium, both calculated by state authorities.

Below we detail several important aspects of the pegging procedure:

I. Oil and gas condensate of state-owned companies must be sold

at auctions.

II. Starting price for oil and gas condensate is determined by the

State Customs Service of Ukraine (SCSU) as a weightedaverage customs price of imported crude (Urals) for the 15-day

period preceding the date of application for the auction. A

premium for oil quality (as determined by the government,

currently $2.32/bbl) will be included in the starting price.

III. Oil may not be sold below the starting price, which is determined

by CSU (see p. ii).

IV. Selling at below market prices entails a penalty (to the state

budget), which is equal to the difference between the starting

price and factual price.

V. The terms of supplies must be EXW at the producers facility,

which means that access to third party facilities (previously a

serious hurdle for buyers) will not be needed.

The state has an incentive to ensure market prices . We believe that

the government has several incentives to ensure market prices. For one,

the government is eager to patch up its budget with additional VAT

revenues from higher oil prices. Secondly, since the new government

seeks a better relationship with Russia, the pegging procedure is needed

to protect Russian oil companies, which were previously at a disadvantage

as Ukrainian private companies bought cheap Ukrnafta oil.

Ukrainian legislature requires Ukrnafta oil bepegged to Urals

Weighted average

customs price of

Urals

Premium

for

Quality

Starting

Auction

Price


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7

Company Update

June 7, 2010

Latest oil auction confirms the notion of higher oil prices. Ukrnafta oil

was sold at market prices ranging from $67/bbl (starting price) to $68/bbl

in an auction that took place on May 31, 2010. The average realization

price rose by almost $20 (40%) from $48/bbl in April to $67/bbl in May

(see Figure 7 below).

Figure 7. Ukrnafta oil is sold at market prices

Source: Bloomberg, UICE, UKRSE, Phoenix Capital estimates

Risks are minor. Based on historical evidence, oil auctions can be

cancelled, rescheduled and oil price reduced. However, we believe these

risks are minor or short-lived. With strong support from both the President

and Parliament, the current government is more than capable of ensuring

Ukrnafta oil is sold at market prices.

Furthermore, as opposed to a previously challenged governmental

resolution (which imposed pegging of oil prices), the current pegging

procedure is introduced via the budget law, a legislative act with much

more clout. Therefore, we expect Ukrnafta will not challenge the pegging

procedure and will comply with the law by selling its oil at market prices.

Legislative loopholes will be patched. The pegging procedure currently

has no means to mitigate the risk of overstated oil prices, that is, the risk

of starting oil prices not being attractive to the market. Since the period to

estimate starting oil prices precedes the auction, oil can potentially be

offered at prices above the declining market (as it actually happened on

May 26 when oil was offered at $81/bbl while Urals already corrected and

traded at below $70/bbl). In this case, no bidder will be interested in

buying oil above the market.

Subsequently, if oil is not sold at the first and additional auctions in the

same month, state-owned Naftogaz must act as a buyer of last resort

purchasing unrealized volumes at the starting price of an additional

auction. Although the procedure has not been tested in practice, we

believe that Naftogaz will be reluctant to absorb losses associated with

overstated starting prices.

Therefore, we expect that the government has noted the issue of the failed

May 26 auction and will patch up the procedure to mitigate this risk of

overstated auction prices.

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80

90

May-09 Jun-09 Aug-09 Sep-09 Oct-09 Dec-09 Jan-10 Feb-10 Apr-10 May-10

UralsUkrnafta crude oil price

$/bbl

May 31 - $67/bbl

$48/bbl

40% increase


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Company Update

June 7, 2010

Natural gas issue will be fixed

In the last several years, the company has been supplying natural gas

with off-take flowing to Naftogaz without getting paid for most of the

output. To rectify the problem, Ukrnafta initiated a series of legal actions

and made headway in what would lead to compensation for past supplies

at reasonable prices. The Ukrainian regulator has already raised the priceof natural gas for the company, but only by a mere 5% to UAH 210/mcm.

Ukrnafta is currently undertaking necessary actions to renegotiate gas

price and compensation for past supplies. Should the company succeed in

this endeavor, incremental payments for gas supplies from previous years

will add from $186 mln to $1.6 bln in value to shareholders.

Below we detail the essence of the natural gas issue, as we see it:

I. Ukrainian law requires that state-owned oil and gas producers

(with a state stake of 50% or above) supply their natural gas to

Naftogaz of Ukraine for the final use of residential consumers.

II. Residential users consumed 16.6 bcm in 2009, while state-owned Naftogaz produced 19.3 bcm. Of the latter volumes,

Ukrnafta produced 2.9 bcm with most of domestic gas (16.4 bcm)

coming from Ukrgasdobycha and Chernomorneftegaz, which are

both 100% state-owned. Therefore, it appears that only marginal

volumes of natural gas produced by Ukrnafta are required to

close the gap between production of fully state-owned companies

and residential consumers.

III. Prices for natural gas produced by state-owned oil and gas

producers, including Ukrnafta, are set by the National Electricity

Regulatory Commission (NERC) and capped by a regulated retail

tariff for residential users.

IV. Starting from January 2008, the tariff for Ukrnaftas gas was set

at the rock bottom level of UAH 199/mcm. In May 2010, NERC

marginally increased Ukrnaftas tariff to UAH 210/mcm.

Residential tariffs range from UAH 495/mcm to UAH 1,795/mcm.

V. According to the company, low regulatory gas tariffs do not cover

relevant costs, which we estimate at UAH 820 or slightly above

$100/mcm (See Figure 8).

Ukrnafta gas tariffs to rise. We believe that the company will succeed in

renegotiating higher gas prices with state authorities for the following two

reasons:

First, the State Budget Law for 2010 stipulates that state-ownedcompanies, Ukrnafta in particular, sell their gas to Naftogaz of Ukraine at a

price that covers substantiated costs and profit. Since todays regulated

gas price does not cover substantiated costs (see Figure 8), the company

will be able to use the law to its advantage and achieve a higher gas price.

Second, the requirement to sell natural gas at regulated tariffs to Naftogaz

will be lifted for all gas producers according to the Program for Economic

Development for 2010-2014 proclaimed by President Viktor Yanukovych.

Therefore, we assume that Ukrnaftas realized prices for natural gas will

rise to $120/mcm (to cover costs and provide a reasonable return of 15%)

in 2011 and will be CPI adjusted going forward.

Figure 8. Natural gas prices to rise

Source: Source: NERC, Company, Phoenix Capital

0

20

40

60

80

100

120

2007 2008 2009 2010A

Regulated tariffs for Ukrnafta, $/mcmRetail tariff for residential users, $/mcm

Total Ukrnafta Production Costs, $/mcm


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Company Update

June 7, 2010

Compensation for past gas supplies. We estimate that compensation

for unpaid gas supplies may range from $186 mln to $1.6 bln, depending

on the price assumed. However, we conservatively assume that

compensation will do no more but offset cash outflow to pay out dividends

in the amount of UAH 5 bln for the period 2006-2008. In other words,

possibility of compensation for the past gas supplies at market prices - left

outside of our model as a potential upside to our valuation (See Figure 2on the first page of this report).

Royalties

Royalties, also known as production-based taxes, amount to a large

portion of total production costs and therefore have a direct impact on the

companys value. Oil royalty paid by Ukrnafta in 1Q2010 accounted for

approximately 35% of oil price of around $49/bbl (see Appendix 1).

In the State Budget Law for 2010, passed in late April, Ukraine also raised

oil royalties to increase state budget revenues. According to the law, oil

royalties will rise 79% Y-o-Y in 2010. We acknowledge that the increase in

royalties will have a negative impact on the company, but estimate that the

increase will be much milder due to declining world oil prices to which

royalties are pegged in Ukraine.

The figure below simplifies the royalty setting mechanism in Ukraine.

Royalties are effectively pegged to fluctuations in Urals via an adjustment

coefficient. The coefficient is indicated in the figure below and is estimated

on a monthly basis by the Ministry of Economy of Ukraine based on an

average price of Urals (Urals Northwest Europe Crude Oil Spot and Urals

Mediterranean Crude Oil Spot on the International Petroleum Exchange

as reported by Bloomberg) for any given month.

Figure 9. Royalty setting mechanism in Ukraine


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Company Update

June 7, 2010

Furthermore, higher royalties will be offset with a premium by the increase

in Ukrnafta oil prices. As shown in the figure below, oil royalties are

expected to rise only by $5.6/bbl M-o-M in May, which is rather affordable

compared with the $20/bbl increase in oil prices observed at an auction in

the same month. Further increases in royalties will depend on world oil

prices, Urals in particular, as explained above.

Figure 10. Affordable increase in oil royalties, $/bbl, horizons less than 5km

Source: Ministry of Economy of Ukraine, Company, Phoenix Capital estimates

There is a risk that heavier royalties will affect the economics of selected

wells or production in general. Consequently, fewer new wells may be

coming online while older wells can be choked resulting in lower

production output in the mid to long run.

However, we believe that higher oil prices will support the economics of

Ukrnafta production and offset the increase in royalties with premium left

to shareholders.

19.2 18.6 18.9 20.121.7

27.3

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30

Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10E

All-in-all, this can be another choke in the well


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Company Update

June 7, 2010

Corporate governance

We believe that the risk of reemerging corporate conflict is minor in the

foreseeable future.

First, in February 2010, the two largest shareholders state-owned

Naftogaz and private Privat Group signed an Agreement on

Understanding and Cooperation, whereby resolving outstanding corporate

issues. The state now controls Ukrnaftas Supervisory Board while Privat

Group controls the Board of Directors.

Second, the company is complying with increasingly tougher regulations

by paying higher royalties and other charges to the state and regional

budgets.

Therefore, there is a low risk of reemerging corporate conflict, in our view.

Based on historical evidence, the company can challenge in court the

procedure of pegging oil prices to those of imports. We regard this risk as

minor since the current Cabinet of Ministers, to the contrary of the

previous Cabinet, enjoys support from both the President and Parliament.Furthermore, as opposed to a previously challenged governmental

resolution, the pegging procedure is now introduced via the budget law, a

legislative act with a much more clout.

Issue at a glance.

Ukrnafta is effectively controlled by the second largest

shareholder (42%), Privat Group, which has a loyal

management in the company. The largest shareholder

(50%), state-owned Naftogaz, has limited control over the

company. Disproportionate (with the holding stakes) power

over the companys business poses a threat of corporate

conflict, should the state wish to gain control in the

company.

Risk of challenging pegging procedure incourts is minor


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Company Update

June 7, 2010

Selected Financial Items

Income Statement, $mln 2006 2007 2008 2009 2010E 2011E 2012E

Net revenue 1,659 976 1,757 1,230 1,855 2,180 2,387

COGS, incl. D&A (808) (502) (1,249) (1,032) (1,206) (1,439) (1,575)

Gross profit 851 475 508 199 649 741 812

Gross margin 51% 49% 29% 16% 35% 34% 34%

EBITDA 748 457 484 164 583 658 720EBITDA margin 45% 47% 28% 13% 31% 30% 30%

D&A (114) (117) (117) (81) (83) (93) (101)

EBIT 634 340 367 83 500 565 619

Financial income (expense) 13 (7) (4) (1) 4 5 6

Profit before tax 630 316 347 68 483 546 599

Income tax expense (152) (71) (77) (21) (121) (136) (150)

Net profit 478 245 269 47 361 408 447

Net margin 29% 25% 15% 4% 19% 19% 19%

Dividends - (0) (0) - (304) (351) (124)

Balance sheet, $mln 2006 2007 2008 2009 2010E 2011E 2012E

Assets

Long-term assets 1,463 1,547 1,020 982 1,028 1,086 1,085

PPE 1,215 1,252 830 813 855 906 907

Intangible assets 1 3 2 3 3 3 3

Other long-term assets 247 292 189 166 170 177 175

Total short-term assets 395 535 656 1,374 1,527 1,352 1,445

Inventories 196 255 274 334 332 326 307

Accounts receivable 109 187 306 897 1,034 859 688

Cash & cash equivalents 75 83 69 102 108 125 410

Total Assets 1,860 2,085 1,680 2,360 2,560 2,442 2,534

Liabilities & Equity

Equity 1,508 1,766 1,347 1,347 1,439 1,554 1,855Share capital 3 3 2 2 2 2 2

Retained earnings 1,243 1,488 1,164 1,168 1,256 1,364 1,667

Reserves & other 263 275 181 177 181 189 186

Liabilities 352 319 333 1,014 1,121 888 679

Long-term liabilities 193 159 5 69 67 66 62

Long-term debt 193 159 0 45 43 41 37

Other long-term liabilities 0 0 5 24 24 25 25

Short-terms liabilities 158 160 328 945 1,053 821 616

Short-term loans 0 0 19 0 0 0 0

Accounts payable 29 16 24 29 35 42 4

Other short term liabilities 129 144 284 916 1,019 780 571

Total liabilities and equity 1,860 2,085 1,680 2,360 2,560 2,442 2,534

Cash flow statement, $mln 2006 2007 2008 2009 2010E 2011E 2012E

Operating cash flow 575 143 37 (302) 415 476 530

Investment cash flow (265) (101) (89) (39) (104) (110) (114)

Financing cash flow (250) (33) 59 370 (307) (355) (127)

Changes in cash 60 9 7 30 4 12 289

Ratios and analysis 2006 2007 2008 2009 2010E 2011E 2012E

EV/Sales (x) 2.03 x 4.45 x 1.36 x 0.70 x 0.88 x 0.75 x 0.68 x

EV/EBITDA (x) 4.5 x 9.5 x 5.0 x 5.2 x 2.8 x 2.5 x 2.3 x

P/E (x) 6.8 x 17.4 x 8.6 x 19.6 x 4.7 x 4.1 x 3.8 x

P/BV (x) 2.2 x 2.4 x 1.7 x 0.7 x 1.2 x 1.1 x 0.9 x

ROE, % 32% 14% 20% 3% 25% 26% 24%

EPS, $ 8.8 4.5 5.0 0.9 6.7 7.5 8.3

Dividend payout ratio, % 0% 0% 0% 0% 84%* 86%* 28%

* Distribution of dividends for 2006-2008



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13

Company Update

June 7, 2010

Appendix 1. Economics of Ukrnafta oil production


7.1

2.3

17.8

14.0

7.5

Net ProfitNet Income represent an amount which is

calculated as a remainder after subtracting fromnet oil revenues all relevant expenditures

SG&ASG&A include sales, general, administrative andother expenditures from ordinary operatingactivity

Oil royaltiesOil royalties account for about 35% of Ukrnafta selling priceassumed at $49/bbl.

After an increase in royalties to around $28/bbl and an increasein ol price to about $67/bbl royalties will constitute 41%, while

net margin should remain the same

Production Costs

Production costs include materials, energy, laborcosts and depreciation charge

Other taxes, exl. VAT

Other taxes include income tax and various fees andcharges, such as subsurface assets use charge,land fee, exploration charge and other


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Company Update

June 7, 2010

Appendix 2. Regions of Ukrnafta Production Activities


257/8

390/23

508/7

367/68

253/63

190/23

343/16

209/9

102/0

239/22

118/12

170/10

184/33

Sumy

Kharkiv

Kherson

Odessa

Poltava

Lviv

Ivano-Frankivsk

326/17157/5

250/18

368/29

149/30147/22

341/63

229/28

163/12

139/9

159/19

xx (yyy )

Oil-refineries (OR)

Bulk-Oil Terminal

Oil transportation to OR by

tank-wagon

Oil flowdirections

Oil and Gas Production Enterprise

Oil transportation to OR by tank

truck


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Company Update

June 7, 2010

Appendix 3. Valuation Multiples

Share price,$

EV M.Cap EV/Sales EV/EBITDA P/EEV/

2P Reserves,$/boe

Company Ticker Region of operation 2009 2010E 2011E 2009 2010E 2011E 2009 2010E 2011E 2009

UKRAINIAN Oil & Gas Companies

Cadogan Petroleum CAD LN Ukraine 0.28 14 65 3.9 x nm nm neg n/a n/a neg n/a n/a n/m

JKX Oil & Gas JKX LN Ukraine, Russia 3.36 504 579 2.6 x 2.3 x 2.2 x 3.3 x 2.5 x 2.3 x 6.8 x 5.3 x 5.0 x 5.7 x

Regal Petroleum RPT LN Ukraine 0.47 30 149 1.5 x 0.6 x 0.3 x -5.0 x 1.1 x 0.4 x neg 11.8 x 4.5 x 0.2 x

Ukrnafta UNAF UK Ukraine 30.97 1,685 1,680 1.4 x 1.1 x 1.0 x 10.2 x 4.3 x 3.4 x 35.7 x 7.6 x 6.0 x 2.4 x

Average (excl. Cadogan) 2.3 x 1.3 x 1.2 x 2.8 x 2.6 x 2.1 x 21.2 x 8.2 x 5.1 x 2.8 x

(Discount) /premium/ to int'l peers -90% -84% -52% -74% -79% -55% 11% -74% -40% -68%

INTERNATIONAL PEERS

Novatek NVTK RU Russia 6.5 21,278 19,736 7.5 x 22.9 x 4.0 x 17.1 x nm 9.6 x 24.0 x 74.8 x 12.9 x 3.1 x

LUKoil LKOH RX Russia 51.6 53,279 43,916 0.8 x 2.2 x 0.5 x 3.8 x 15.7 x 3.4 x 6.3 x 24.3 x 4.9 x 1.9 x

Rosneft ROSN RX Russia 7.1 94,564 74,985 2.0 x 6.5 x 1.4 x 7.0 x 19.6 x 4.6 x 11.5 x 28.2 x 6.2 x 2.6 x

MOL MOL HB Hungary & EU 74.8 15,479 7,816 1.0 x 4.9 x 0.8 x 9.1 x 24.8 x 5.9 x 13.5 x 44.0 x 8.0 x 23.3 x

OMV OMV AV Austria & EU 30.4 16,342 9,127 0.7 x 2.4 x 0.6 x 4.3 x 16.4 x 3.2 x 11.4 x 26.2 x 5.5 x 13.8 x

Dana Petroleum DNX LN EU & Egypt 15.4 1,654 1,422 2.7 x 4.0 x 2.0 x 6.2 x 7.1 x 3.1 x 40.2 x 19.6 x 8.2 x 7.4 x

Afren AFR LN West Africa 1.3 1,103 1,157 n/a 5.1 x 0.9 x 5.5 x 6.9 x 1.1 x neg 64.3 x 3.6 x 8.4 x

Salamander Energy SMDR LN Indonesia 3.4 647 520 4.1 x 5.4 x 1.9 x 8.6 x 8.2 x 3.3 x neg 17.7 x 11.1 x 10.0 x

Premier Oil PLC PMO LN North Sea/Asia 16.9 2,280 1,964 3.7 x 5.4 x 2.3 x 6.6 x 9.1 x 3.3 x 17.4 x 17.2 x 8.0 x 8.6 x

Soco international SIA LN Asia / Africa 23.3 1,851 1,925 n/a 29.0 x 4.9 x 17.3 x 28.2 x 6.1 x 37.7 x 63.2 x 11.9 x 13.0 x

Petroneft Resources PTR LN Russia 0.5 148 164 290 x 4.3 x 0.8 x neg 11.7 x 2.6 x neg 46.4 x 3.7 x 2.1 x

Tullow Oil TLW lN India/Africa/EU 16.6 15,856 14,727 17 x 33.2 x 8.6 x 32.6 x n/m 10.9 x nm nm 24.3 x 17.7 x

Lundin Petroleum LUPE SS Africa/EU/Asia 4.5 2,016 1,437 2.5 x 2.8 x 2.2 x 5.6 x 8.1 x 3.0 x neg 9.7 x 8.6 x 7.9 x

Melrose Resources MRS LN Egypt/EU/ USA 3.9 923 449 4.1 x 8.7 x 2.6 x 5.5 x 11.0 x 3.4 x neg nm 5.2 x 13.5 xOil&Natural Gas ONGC IN India 25.4 51,106 54,326 2.4 x 2.0 x 2.0 x 5.2 x 4.8 x 4.8 x 13.3 x 10.7 x 10.7 x 9.2 x

Petrom SNP RO EU/Serbia/Mold. 0.1 7,493 4,720 1.4 x 1.7 x 1.6 x 5.4 x 6.7 x 5.5 x 16.7 x 9.2 x 7.8 x 8.8 x

Volga Gas VGAS LN Russia 3.5 246 280 21 x 7.0 x 3.7 x n/m 14.2 x 4.9 x nm 22.7 x 7.5 x 3.6 x

Zhaikmunai LP ZKM LI Kazakhstan 7.8 1,662 1,443 14 x 6.3 x 2.7 x 31.2 x 8.7 x 3.6 x neg 19.2 x 6.1 x 3.2 x

AVG for international peers 24 x 8.5 x 2.4 x 10.7 x 12.6 x 4.6 x 19.2 x 31.1 x 8.6 x 8.8 x

Source: Bloomberg, Companies, Phoenix Capital estimates


16/16

Company Update

June 7, 2010

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Phnc Unaf Update June 7 2010

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