- Net result for the period was USD -556.39 mln (January 1, 2007–December 31, 2007: 282.77). Earnings per share was USD -12.09 (6.14). Net result for the quarter was USD -260.23 mln (October 1, 2007–December 31, 2007: 178.87). Earnings per share for the quarter was USD -5.65 (3.89).
- The net asset value of the company was USD 247.89 mln (Dec 31, 2007: 803.95) on December 31, 2008, corresponding to USD 5.39 (17.47) per share. Given a SEK/USD exchange rate of 7.8644, the corresponding values were SEK 1,949.53 mln and SEK 42.36, respectively. As per the end of the period, 40% of the portfolio were unlisted investments.
- The group’s net asset value (NAV) per share in USD decreased by 69.39% over the period January 1, 2008–December 31, 2008. During the same period the RTS index decreased by 72.41% in USD terms. Over the period October 1, 2008–December 31, 2008, the Group’s NAV per share decreased by 51.09% (RTS-index -47.86%).
- The number of outstanding shares at the end of the period was 46,020,901.
- The net asset value per share of Vostok Nafta as of January 30, 2009, was USD 4.66 (SEK 38.88). Net debt as of January 30, 2009, amounted to USD 51.93 mln.
Subsequent events:
Vostok Nafta recently completed a rights issue, which provided the Company with SEK 552 million (approximately USD 67 million at a USD/SEK exchange rate of 8.23). Each holder of a Swedish Depository Receipt (“SDR”) of Vostok Nafta was entitled to subscribe to one (1) newly issued SDR for a consideration of SEK 12. The rights issue was oversubscribed by 30 percent and the proceeds will be used to pay off part of Vostok Nafta’s debt, as well as to invest into new and existing parts of the Company’s portfolio.
The company will host a telephone conference with an interactive presentation at 16.00 CET (10.00 am EST) today, Wednesday, February 11. For call-in details, see separate press release issued Monday, November 9, at www.vostoknafta.com.
Background
Vostok Nafta Investment Ltd was incorporated in Bermuda on April 5, 2007 with corporate identity number 39861.
As at December 31, 2008 the Group consists of one Bermudian parent company, one wholly owned Bermudian subsidiary, one wholly owned Cypriot subsidiary, two wholly owned Russian subsidiaries and one wholly owned Swedish subsidiary. The Swedish Depository Receipts of Vostok Nafta (SDB) are listed on the OMX Nordic Exchange Stockholm (previously the Stockholm Stock Exchange), Mid Cap segment, with the ticker VNIL SDB.
The financial year is January 1–December 31.
Group – results for the period and net asset value
During the period, the result from financial assets at fair value through profit or loss amounted to USD -363.26 (157.58) mln. Result from investments in associated companies was USD -180.56 (124.52) mln. Dividend income was USD 9.65 (10.09) mln. Result from loan receivables was USD -6.01 (-) mln, which is mainly a foreign exchange loss when revaluating the loan receivables denominated in Russian Roubles into US dollars.
Operating costs were USD -8.68 (–5.71) mln.
Net financial items were USD -6.60 (–2.16) mln.
Net result for the period was USD -556.39 (282.77) mln.
Total shareholders’ equity amounted to USD 247.89 (803.95) mln on December 31, 2008.
Vostok Nafta has in accordance with IAS 36 performed impairment tests of the carrying value of the Company’s major unlisted investments; Tinkoff Credit Systems (TCS), Rusforest Ltd, and Vosvik/Kontakt East. The fair value has been appraised in order to assure that the investments are carried at no more than the recoverable amount. Vostok Nafta’s assessment of the fair value of the equity held in TCS and Vosvik/Kontakt East has resulted in impairments of USD 8.15 mln and USD 18.53 mln, respectively. Vostok Nafta’s assessment of the fair value of RusForest has resulted in that no reasonable changes in key assumptions will lead to the estimated recoverable amount being lower than the carrying amount.
Vostok Nafta’s assessment of its other unlisted investments is that the current carrying amount at acquisition cost represents fair value. Given the current environment no reasonable changes in key assumptions will lead to the estimated recoverable amount being lower than the carrying amount.
Group – results for the quarter
During the quarter, the result from financial assets at fair value through profit or loss amounted to USD -205.81 (118.02) mln. Result from investments in associated companies was USD -43.04 (64.02) mln. Dividend income was USD 4.98 (0.54) mln. Result from loan receivables was USD -10.96 (-) mln, which is mainly a foreign exchange loss when revaluating the loan receivables denominated in Russian Roubles into US dollars.
Operating costs were USD -3.96 (–2.39) mln.
Net financial items were USD -0.36 (–0.50) mln.
Net result for the quarter was USD -260.23 (178.87) mln.
During October and November 2008, the Company raised USD 15.25 million in debt. The debts, which carry an interest rate of 18%, are subordinated to the loans which the Company’s subsidiary Vostok Komi (Cyprus) Limited has undertaken and have a time to maturity of 12 months.
Furthermore, on December 16, 2008 the Company raised a short-term bond loan of EUR 10.0 million. The bond loan, which carries an interest rate of 20%, matures on April 15, 2009. In conjunction with the raising of the bond loan, USD 2.0 million was repaid on the loans raised in October and November 2008. On December 23, 2008, USD 100 million was repaid on the loan issued by Deutsche Bank.
Subsequent events
Vostok Nafta recently completed a rights issue, which provided the Company with SEK 552 million (approximately USD 67 million at a USD/SEK exchange rate of 8.23). Each holder of a Swedish Depository Receipt (“SDR”) of Vostok Nafta was entitled to subscribe to one (1) newly issued SDR for a consideration of SEK 12. The rights issue was oversubscribed by 30 percent and the proceeds will be used to pay off part of Vostok Nafta’s debt, as well as to invest into new and existing parts of the Company’s portfolio.
The Company’s assessment is that the majority of the net proceeds from the rights issue will be used for repayment of the Company’s existing debt. It is also the Company’s assessment that, following the rights issue, the Company will have sufficient working capital to meet present working capital needs.
Parent company
The parent company finances the Cypriot subsidiary's operations on market terms. Interest income recognized during the period was USD 14.32 mln.
By the end of the period the Company has impaired the value of the shares in its subsidiary Vostok Komi (Cyprus) Ltd. The write down amounts to USD 288.69 mln. Net result for the period was USD 279.84 mln.
Liquid assets
The liquid assets of the group, defined as cash and bank deposits adjusted for concluded but not yet settled share transactions, amounted to USD 29.20 (30.70) mln on December 31, 2008.
Vostok Nafta net debt as at January 30, 2009 (USD)
Gross Debt 77,097,667
Cash 25,163,274
Net debt 51,934,393
Following the recently completed rights issue, the amount of cash held by the Company exceeds the value of outstanding liabilities.
Management report
Rouble, credit markets and the real economy
The short to medium term trigger for the revaluation of Russian asset prices is for the rouble to find its right value. When commodities prices collapsed during the course of the autumn the Russian currency became overvalued and the subsequent pressure on the rouble to devalue intense. The uncertainty over where the rouble would find stability and the process by which it would get there led to a deep freeze for rouble credit markets. A global liquidity draught obviously has not helped. Frozen credit markets have had a very clear impact on the Russian real economy. Fourth quarter GDP contracted by 1.1% on a quarter-on-quarter basis. In Russia the stand still in the economy is further accentuated by the willingness of the corporate sector to play the rouble market. Whereas the banking sectors’ activity within the forex market is relatively easy for the Central Bank to monitor and stop, the Russian corporate sector has a wider set of opportunities here. This has meant that the bulk of the short rouble trade actually comes from the corporate sector. Companies have ramped up their working capital (stopped paying suppliers etc) to maximize the capital they can put to use in effectively shorting the rouble, which clearly doesn’t help the real economy.
The good thing is that the Central Bank has carried out a series of 20 steps of widening the trading band versus the euro and USD. The final step allowed for a larger widening of another 10% which all in all has allowed for a 36% devaluation of the rouble versus the USD since its peak in mid-summer 2008. Most people agree that at this oil price the rouble is at fair value and perhaps even relatively cheap at least in terms of getting a balanced current account. Rouble credit markets are slowly coming back to life but will need more certainty on the oil price to really kick off. However with the oil price having held steady at around the USD 40 per barrel level for nearly two months now, we would expect the rouble to find stability in the short-to-medium term. Stability means that the corporate sector pulls back their capital from the crowded short rouble trade and investing it back into their real businesses (which in the meantime have in general become more profitable with a lower rouble cost base).
Rouble stability bringing credit markets from a deep freeze will take some time to affect the economy though. 2009 will likely see negative growth to the order of 1–2%. The budget deficit may grow to around 10% as the State supports the economy. This looks like the right thing to do. If not spend the savings from the good years now then when do you? The challenge lies in if the oil price doesn’t stabilise or recover beyond 2009. Then further fiscal stimulus will have to be financed by borrowing. Our view though would be that the risk on the oil price is on the upside as supply issues are serious beyond the current situation of uncertainly over the scale of demand destruction from the non-growing global economy.
Corporate governance
Another common worry concerning the Russian equity market are political and corporate governance risks. The recent period has not augmented political risk in any meaningful way. The odd protest over for example higher duties on foreign cars has had very little impact on the incumbent administration’s ratings in opinion polls.
On the corporate governance front there have been a number of rather high profile cases of abuse most notably in OGK 3 and Sibir Energy. These are both a result of the major owner scrambling for cash during a time of very tight liquidity. There is also a worry that there is another Yukos style bankruptcy in the cards as the potential claims against the potash producer Uralkali over damages concerning a flood in one of its mines could outweigh the assets in its balance sheet. Fines will likely be charged and paid but unlikely to any different scale than would be the practice in most other countries.
While Russia is far from a place where corporate governance risk is low we would not put the recent activities as signs of a general slippage on this front. Many individual cases involve abuse and care will need to be taken when pricing assets with the same owners going forward. Over the broader equity market even improvements could be expected. We would argue that as in the years post the 1998 crisis many companies will improve their corporate governance standards and impose checks and balances in order to be able to efficiently raise money.
Valuations
In the meantime valuations are low. There is an obvious need to be humble about the timing of the market turning up in a sustained way but in our view the valuations are worth the wait e.g. 2009P/E of 5 (which is a 50% discount to GEMs), Gazprom’s 10 year bond at 12%, TNK-BP’s Eurobond at 20%, implied equity risk premium at historically high levels of 18%++ (depending on where you have the oil price).
Ukraine
Ukraine continued to stay in focus of the analysts and media recently. However, this was due to the wrong set of reasons: mainly because of a reignited gas conflict with Russia. This theme had overshadowed the real struggle of the Ukrainian authorities to keep the local currency, hryvnia, under control, the banking sector up and running (although slowly) and the economy still moving. Ukraine proved to be one of the countries having the most trouble in weathering the global economic storm – yet this statement does not provide enough information about the successes of the government and the National bank of Ukraine (NBU) to alleviate the pain.
Ukraine's industrial production dropped 3.1% in 2008, following a monthly decline of 26.6% MoM in December – the largest drop in Europe. In 2008, output in the metallurgical sector fell 10.6% YoY, in chemicals 6.2% YoY and in mining by 2.4% YoY. The end-of-year decline was even more dramatic, with the metallurgical sector still being on average 50% down YoY, after some revival in the early 2009. However, the global downturn would have been more damaging to the country had it not been for the depreciation of the hryvnia. After a roller coaster ride in December, the Ukrainian hryvnia became relatively stable in January, fluctuating around 8.75 UAH/USD and ending at 7.85 UAH/USD by month’s end. The FX market calmed down somewhat, supported by tighter monetary and fiscal policies, lower gas imports and regular central bank interventions. Still, the hryvnia’s stabilization may prove to be only a temporary relief, as the political environment remains uncertain, with an increased possibility of monetary and fiscal loosening, especially in the run-up to the presidential elections in December 2009.
A weaker hryvnia has added to the inflation pressures, bringing end-2008 CPI to 22.3% YoY. As much of the exchange rate pass-through has already happened, the consumer inflation should slow to 14% YoY by end-2009.
Vostok Nafta’s portfolio development
Vostok Nafta's net asset value/share decreased by 69.39% during January 1, 2008 and December 31, 2008 compared to the RTS index decrease of 72.41% in USD terms.
