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Rosneft oil company has fully met its business targets for 2005. It produced 74.6 million tons of oil and oil condensate and 13.1 billion cubic meters of natural gas. Its net profit was RUR 146.6 billion, and debts stood at RUR 10.8 billion (this does not include YUKOS’s claims against Yuganskneftegaz).

Analysts say these figures do not compare well to the company’s results for the previous years as the 2005 report also includes Yuganskneftegaz, accounting for the largest part of Rosneft’s production. Yet, the announced figures look not bad, given that Rosneft had to solve a number of problems in the passing year, including integration and modernization of Yugansk and settling debt problems, not least caused by the expensive acquisition of the former YUKOS key production unit in December 2004.

Now, the company has to confirm these results, prepared under Russian accounting standards, with US GAAP figures, which will take a few months to calculate.

“If we compare Rosneft’s financial performance with other companies of the oil sector, the result seems to be impressive indeed,” says Anton Rubtsov, analyst at Rye, Man & Gor. “Management is working to increase the company’s value before the planned IPO, and Rosneft is set to be the oil sector’s favorite, at least in terms of business effectiveness,” he told RBC Daily.

Rosneft accounts for more than 18 percent of oil production in Russia. Its authorized capital of RUR 90.92174 million is divided into 90.92174 million ordinary shares with a face value of RUR 1 each. Rosneft is fully controlled by the government, through Rosneftegaz OJSC. The company reported a revenue of $9.9 billion under US GAAP in the first half of this year, and a net profit of $2.4 billion.

“Two factors – the acquisition of Yuganskneftegaz and very high oil prices over the past two years - determined Rosneft’s comparatively successful performance,” said Konstantin Batunin at Alfa Bank. “Besides, the status of a state-owned company has its strong points in terms of settling debt problems. It is US GAAP report for the first half of this year, Rosneft said confidently that Yugansk’s debt will be reduced. However, in the light of the forthcoming IPOs, these factors alone won’t be enough to achieve the desired level of capitalization, and Rosneft is bending over backwards to show its best face,” he said.

“Rosneft’s GAAP report for the first six months of this year showed that the company was able to control its expenses quite effectively. I think its margins are not lower than those reported by other oil companies. The company achieved these results despite the fact that Yugansk was in a rather poor condition when it was purchased by Rosneft, and required significant investment. Alongside high oil prices, Rosneft was able to meet its targets thanks to its reputation as a reliable borrower, which means it can borrow at reasonable rates,” says Alexander Razuvayev.

As for Rosneft’s debt, experts say it dropped compared with last spring, when it stood at $20 billion. But it remains uncertain whether the debt reduction was due to debt payment, and what if Yugansk’s alleged debts to YUKOS are added to Roneft’s debt burden. Mikhail Zak, chief analyst at Veles Capital investment consultants, believes that such a significant decrease in Rosneft’s debt could not have been achieved without write-offs. “Reports under Russian accounting standards don’t reflect this, but I hope GAAP figures will show the details,” he noted.

Meanwhile, analysts are more concerned about Rosneft’s future. The oil group plans an IPO in the second half of next year.

“The 2005 net profit announced by Rosneft look neutral compared with the figures it reported for the first half of this year. In our estimation, given an increase in oil prices in the third quarter of this year and keeping margins at Rosnft’s ability to keep margins at 30 percent, its net profit should be about RUR 155 million. In any case, we expect margins to fall to between 23 and 25 percent after the IPO,” Rye, Man & Gor’s Rubtsov said.

Analytical department of RIA RosBusinessConsulting