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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.


Yukos Oil


Yukos Oil (YUK:IL) 2005-08-01

Headquartered in Moscow,  YUKOS is one of  Russia's largest publicly traded fully integrated petroleum companies. The Company is involved in just about every aspect of the oil industry, from the well head to the filling station.
Yukos, once Russia's largest oil producer, is now fighting to stay afloat whilst its assets remain blocked amid ongoing efforts by Russian tax authorities to claim billions in back taxes.

Its founder, Mikhail Khodorkovsky, one of the Russian oligarchs, is serving an eight-year sentence in a Siberian prison colony after being convicted on tax evasion and fraud charges.
Observers say the legal campaign was Kremlin punishment for Khodorkovsky's funding opposition parties and a drive to recapture state influence in the strategic oil sector.

The Group's principal activities are production, exploration and refining & marketing of oil and gas resources and products. The Group is the second largest oil exploration company in Russia. The oil reserves are massive, estimated to amount to 1.3 billion tons. The gas reserves are sizeable to, estimated at 71 billion cubic meters.

YUKOS' principal production assets are located in the Khanty-Mansiysk Autonomous District and Tomsk Region of Western Siberia and the Samara Region along the Volga river in European Russia.  Acquisitions expanded the Company's reach into Eastern Siberia and the Yamal Nenetsk Autonomous District in Russia's Far North.

The history of how Yukos was formed makes interesting reading:
In the early 1990s, after the collapse of the Soviet Union , the Russian oil industry consisted of hundreds of stand-alone state-owned entities, each with a narrow area of specialization, limited geographic reach, and specific economic interests. Many of these were inefficient, unprofitable, and overstaffed, and survived only by virtue of continued state support. The Russian government set out to fundamentally restructure the sector to make it viable in a global market environment by combining groups of existing entities and corporatizing them to create vertically integrated oil companies. Thus it was that YUKOS was founded on  April 15,1993 by Decree No. 354 of the Russian government.
The acronym "YUKOS" chosen as the name for the new Company was derived from the two original Soviet-era companies from which it was formed: Yuganskneftegas - one of Russia's largest oil producers, located in the Tyumen Region of Western Siberia; and Kuibyshevnefteorgsintez - a major refining and petrochemicals concern based in and around the city of Samara (formerly called Kuibyshev) on the Volga River. YUganskneftegas + KuibyshevnefteOrgSintez = YUKOS
The Company was also allocated controlling interest and management of eight distribution companies, located in the Samara, Penza, Voronezh, Orel, Bryansk, Tambov, Lipetsk and Ulyanovsk Regions of Central Russia. Although it was now a separate legal entity, the newly-created YUKOS remained entirely state-owned.
The first few years were very difficult for YUKOS. The Company had been pieced together out of separate enterprises, each with its own history, corporate culture, and approach to business. YUKOS' first efforts to fuse these disparate units into one were hampered by lack of management experience, the mounting debts of the individual operating units, and the overall economic decline in the country. By the end of 1995, YUKOS was experiencing a sharp decline in output, mounting salary arrears, and the technical bankruptcy of its main production unit, Yuganskneftegas. Its debts to the government alone had swelled to more than $3.5 billion!
The Russian government decided to take the struggling company off its books by selling its stake in YUKOS to private investors. Through a series of tenders and auctions held in 1995-1996, YUKOS became Russia's first fully privatized oil company. The major purchaser was a group of Russian investors with experience at turning around troubled industrial companies.  The main players were Mikhail Khodorkovsky and Platon Lebedev.
Within a few years these two had turned an ailing giant of a company into a go ahead modern & profitable company & the biggest Oil producer in Russia.
Things were looking very rosy at Yukos Oil company, back then.

This company’s shares used to trade above US$65 before Khodorkovsky was investigated and jailed. The shares nose dived to below $2 after his imprisonment. The company is still struggling to stay afloat and tens of millions of dollars tied to Yukos are still frozen in Swiss bank accounts by the legal action.

The Kremlin's involvement in Russian investigations dates back to March 2004, when police carried out simultaneous raids on companies across the country; searching homes, seizing documents and interrogating individuals in  Zurich and Geneva , as well as in two central Swiss cantons.

Prosecutors were provided with information on $5 billion in Yukos-linked shares and cash that was subsequently frozen in  the largest ever freeze in Russia. Russian officials alleged the money came from illegal fertilizer, oil and oil product deals, but Yukos' Swiss lawyers claimed the money was earned from legitimate transactions.

In June 2004, Russia's supreme court ordered the release of most of the assets, ruling that the prosecutor's office had acted on insufficient evidence from Russian authorities.
A report by the Strasbourg , based Council of Europe on the motives and procedures for Russia's arrest of Khodorkovsky and other leading Yukos executives also makes interesting reading:  Last year, the continent's top rights watchdog slammed Russia over the arrests, calling them an attempt to silence opposition in the country.
It said Russia must provide translated copies of court proceedings concerning Khodorkovsky as well as his jailed colleague Platon Lebedev before it can allow the transfer of any more documents from Yukos.

This is an interesting turnaround. There is no question that Yukos has a long way to go yet to claw its way back, but it still sits on large Oil & gas reserves, while the price of both commodities continues to rise.
Its share price has moved up from its lows and we see a glimmer of hope here. As a purely speculative play, it may be worth having a tiny stake in Yukos at its current share price. The upside potential is massive. Even if the shares were to regain $10, we could double our money. If Putin takes a more lenient attitude to Yukos, then the sky’s the limit.

Yukos Shares are publicly traded on the Russian Trading System (RTS) and Moscow Interbank Currency Exchange (MICEX)

For foreign investors, the best way to gain exposure is to buy Level 1 ADRs traded OTC on the following international platforms: Frankfurt , Munich , Stuttgart and Berlin Stock Exchanges, London Stock Exchange International Order Book.

Buy Yukos Oil (YUK:IL) up to US $5 via the London stock exchange International order book. 

NOTE: Only take a very small stake in Yukos (less than 5% of your portfolio) & be prepared to get out quick if the political environment for Yukos turns ugly.


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.