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TNK-BP Holding: classical definition of a cash cow

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RESEARCH DEPARTMENT

OIL & GAS

Alexander Nazarov

+7 (495) 980 43 81

[email protected]

EQUITY RESEARCH: OIL AND GAS

2 Copyright © 2003-2012. Gazprombank (Open Joint-Stock Company)

Alexander Nazarov +7 (495) 980 4381 [email protected]

TNBP OVERWEIGHT Target price, $ 4.06 Closing price, $ (Mar 14, 2012) 3.19 Upside potential 27%

TNBPP OVERWEIGHT Target price, $ 3.71 Closing price, $ (Mar 14, 2012) 2.88 Upside potential 29%

Stock price performance YTD

0.7

0.9

1.1

1.3

Jan

11

Mar 1

1

May

11

Jul 11

Sep

11

Nov 1

1

Jan

12

Mar 1

2

TNBP RX Equity TNBPP RX EquityINDEXCF Index

Source: Bloomberg, Gazprombank estimates

Russian oil majors 2010 Free cash flow, $ per bbl

7.6

4.1

8.1

0.9

5.2

7.1

5.5

0 2 4 6 8 10

TNK-BP

Rosneft

LUKOIL

Tatneft*

Gazprom Neft

Bashneft

Average

Source: Bloomberg, Gazprombank estimates *- Tatneft FCF estimate includes TANCEO construction

Russian oil majors dividend yield 2011E, %

7.6%8.6%

1.1%4.2%4.4%

7.7%3.6%

8.6%11.0%

6.3%

0% 2% 4% 6% 8% 10% 12%

TNK-BPTNK-BP pref

RosneftLUKOILTatneft

Tatneft prefGazprom Neft

BashneftBashneft pref

Average

Source: companies, Gazprombank estimates

We initiate coverage of TNK-BP Holding with OVERWEIGHT rating and DCF-based TP of $4.06 per common share, implying a 27% upside. We also calculate the fair discount of 8.7% for TNK-BP preferred shares over ordinary shares, assuming TP of $3.71 per share, which corresponds to 29% upside. We assign OVERWEIGHT rating to preferred shares of TNK-BP.

We point out the high ability to generate free cash flow, which is almost 100% distributable as dividends, providing the largest ROI among Russian oil and gas majors. We highlight the lack of short-term drivers and high dependence of share price performance on dividends.

Russia’s third largest oil producer with good crude production outlook. TNK-BP is the third largest Russian oil producer with output of 74 mln tonnes of crude oil in 2010. Also, it is probably the only Russian oil major with the outlook to increase its crude oil production by at least 1% a year over the next 5 years.

Decent free cash flow generation ability. While on EBITDA per bbl TNK-BP is behind Rosneft, Lukoil, Gazprom neft and Bashneft, on FCF per bbl TNK-BP is one of the best Russian oil companies. We estimate its EBITDA per bbl in 6M11 at $24, 15% lower than the industry majors’ average, while FCF per bbl net of working capital changes was $11 per bbl, or just 3% below the industry average. FCF per bbl for 2010 was 38% higher than the industry average.

One of the best dividends plays on the Russian market. The structure of TNK-BP Holding also suggests that the most appropriate way for shareholders to get benefits from the company is to pay out large dividends. We note that over the last 3 years, TNK-BP Holding’s dividend yield was higher than 15% for ordinary shares and 17% for preferred shares. Moreover, TNK-BP pays out interim dividends, a pretty rare case for Russian oil and gas industry.

Unique shareholders structure positions the company among the most efficient in the Russian oil and gas industry. TNK-BP is co-owned by international oil major BP and Russian shareholders consortium AAR. The combination of technical and financial expertise of international managers and local shareholders lobbying power provide TNK-BP with unique opportunities. The company is one of the most efficient in the Russian oil and gas industry in terms of capex per bbl and operating expenses per bbl, and at the same time, it has a remote risk of major unfriendly actions from Russian authorities.

The lack of short-term drivers is compensated with excellent fundamentals. TNK-BP has a small free-float and is listed on a Russian stock exchange only. While back in 2009, TNK-BP shareholders were talking about the possibility of an IPO, we do not think it is an option, at least for the next 12 months. Due to the size of the company we do not expect any acquisitions, which may lead to the company’s revaluation by the market. As for Slavneft’s assets, which are jointly owned by TNK-BP and Gazprom neft, their division between two shareholders is also unlikely, in our view. As a result, we see lack of strong short-term drivers for the stock. However, large dividend yield and strong fundamentals provide investors a strong defensive play with high ROI.

Dividend Discount Model (DDM) assumes TNK-BP share fair value at $4.06, supporting our DCF-based target price. We have also performed DDM valuation for TNK-BP shares, which results in DDM-based fair value of $4.24 per both ordinary and preferred share, assuming 31% and 45% respective upsides for ordinary and preferred shares, supporting our DCF-based target price.

Key financial indicators, $ mln 2010 2011E 2012E 2013E 2014E 2015E 2016E Revenue 41,113 50,539 53,323 55,383 58,133 60,162 62,618EBITDA 9,944 12,235 12,822 12,169 12,294 12,340 13,573EBITDA margin 24% 24% 24% 22% 21% 21% 22%Net income 6,384 7,493 7,301 6,257 5,798 5,263 5,710NI margin 16% 15% 14% 11% 10% 9% 9%EV/EBITDA 5.4 4.4 4.2 4.4 4.3 4.3 3.9P/E 7.5 6.4 6.5 7.6 8.2 9.1 8.4

Source: company, Gazprombank estimates


19.03.2012

Research Department +7 (495) 988 2344

3


CONTENTS

Investment summary 4

Investors’ F.A.Q. to TNK-BP – Gazprombank answers 5

Risks 6

Oil price may fall 6

Oil taxation system may be changed in a adversely affect Russian oil majors 7

Shareholders may go on with conflicts 7

Valuation 8

Company overview 9

Corporate structure 9

Upstream 10

Downstream 13

Preferred shares valuation 15

Dividend Discount Model (DDM) valuation 15

TNK-BP share market 16

Peer group valuation. TNK-BP seems fairly valued compared to Russian peers 17

Financial outlook 18

Income statement 18

Capex and free cash flow 20

Appendices 21

19.03.2012


4


TNBP OVERWEIGHT Target price, $ 4.06

Closing price, $ (Feb 22, 2011) 3.19

Upside potential 27%

TNBPP OVERWEIGHT Target price, $ 3.71

Closing price, $ (Jun 22, 2011) 2.88

Upside potential 29%

General information

Closing price, $ (Mar 14, 2011) 3.19

# of shares outstanding, mln 14,997

Free float 4%

Market Cap, $ mln 47,791

Net debt (cash), $ mln 4,422

Minority Interest, $ mln 1,199

EV, $ mln 53,413

52-week high 3.42

52-week low 1.99 Source: Bloomberg, company, Gazprombank estimates

In 2010 TNK-BP was among the best free cash flow generators in the industry – we estimate it was $7.6 per bbl net of working capital. In 2012-2015 may pay out about $23 bln as dividends, or 50% of its market cap.

Investment summary

We initiate coverage of TNK-BP with OVERWEIGHT rating and TP of $4.06 per ordinary share implying 27% upside to the current price level.

We also assign OVERWEIGHT rating to TNK-BP preferred shares with TP of $3.71 per

share, assuming 29% upside. We calculate the fair discount of 8.7% to ordinary shares, resulting in our target price. An alternative valuation using DDM approach yields TP of

$4.24 per both ordinary and preferred share.

Russia’s No. 3 oil company. TNK-BP Holding is the third largest Russian company in

terms of crude oil output. In 2011, TNK-BP Holding produced 74 mln tonnes of

crude oil. It is also the fourth largest refiner in Russia, with 23 mln tonnes of refined

volumes in 2011. In terms of revenues we estimate TNK-BP as also the third largest

Russian company - we estimate its 2011 revenues at $53 bln.

Good upstream profile could provide growth over the next 5 years. TNK-BP holds

an attractive profile of greenfield licenses. We note that TBH production portfolio

assumes crude oil production not only in the medium term, but also in the long

term. TBH owns or may purchase at least 5 significant prospective fields (some of

them are currently owned by the parent company), which may start production in

2016-2019. These fields contain total 3P+3C reserves of about 6 bln bbl, and could

account for up to 25% of total TNK-BP crude oil production by 2020.

Decent free cash flow generator,... In 2010, TNK-BP was among the best free cash

flow generators in the industry – we estimate it at $7.6 per bbl, net of working

capital. In our view, only Lukoil had higher FCF per bbl - $8. Moreover, in 1H11

TNK-BP’s FCF per bbl was up 45% YoY at $11 per bbl, which was still one of the

highest numbers in industry.

Russian oil majors FCF net of working capital and acquisitions, $ per bbl of crude oil output

7.6

4.1

8.1

0.9

5.2

7.1

11.0

5.7

14.1

6.7

11.2

13.6

0

2

4

6

8

10

12

14

16

TNK-BP

Rosn

eft

Luko

il

Tatneft

Gazprom

neft

Bashne

ft

2010 2011


...and free cash flow is distributed through dividends. Unlike most of other oil majors,

TNK-BP distributes almost all of its FCF as dividends. We estimate that in 2007-

1Н11, TNK-BP distributed 91% of its FCF net of working capital as dividends and

paid off more than $17 bln, or 37% of its current market capitalization. Moreover,

we estimate that in 2012-2015 TNK-BP may pay out about $23 bln as dividends, or

50% of its market cap.

19.03.2012


5


TNK-BP shares are likely to be driven by news on dividends payments.

TNK-BP FCF net of working capital and dividends paid 2007-1H11, $ mln

67% 65%

125%138%

58%

91%

38% 40%

80%90%

40%

58%

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

1000

2000

3000

4000

5000

6000

7000

2007 2008 2009 2010 1H 2011 Average

FCF net of WC Dividends % of FCF Payout ratio


Lack of speculative short-term drivers, but strong fundamentals. We do not expect

TNK-BP shares to be driven by any major corporate event in 2012. We note that

listing of TNK-BP shares at foreign stock exchange or changes in the shareholder

structure could drive the shares, but we do not expect these events to occur in

2012. Moreover we would see such changes in the shareholder structure as illogical

and so we do not expect them to change at all. As a result we think that TNK-BP

shares are likely to be driven by news on dividends payments and its performance

would not largely differ from the average market. We underline that we consider

TNK-BP as a defensive play on the back of excellent fundamentals – good crude oil

productions growth, low capex per bbl and decent gas production prospects.

TNK-BP Holding is by approximately 95% owned by TNK-BP International, which is a dividend payer to major shareholders, BP and AAR. TNK-BP International is one of the highest-quality Russian borrowers and cost of debt raised could be probably one of the lowest among Russian corporates.

Investors’ F.A.Q. to TNK-BP – Gazprombank answers

Investor’s Question. Dividends are forever?

Gazprombank’s Answer. Yes, because it is the way of cash transfer to TNK-BP

International and we do not expect major changes in corporate structure.

TNK-BP Holding is approximately 95%-owned by TNK-BP International, which is a

dividend payer to major shareholders, BP and AAR. Dividends payment is the most

appropriate cash transfer way from TNK-BP Holding to major shareholders through

TNK-BP International, and minorities enjoy this way, as well.

Dividend policy for TNK-BP International envisages distribution of minimum 40% of

net income. There is no formal dividend policy for TNK-BP Holding – however

distribution of dividends from TNK-BP Holding is an important funding source for

TNK-BP International. It shall be noted that actual dividend flows normally do not

match each other as the dividends from TNK-BP International are paid on a

quarterly basis and from TNK-BP Holding are normally declared twice a year.

Q. TNK-BP shares are illiquid, do you expect IPO?

A. No, we do not see any logical reason behind IPO of TNK-BP and do not expect in

the nearest future.

We use a straight-forward logic approach to IPO issue for TNK-BP. We argue the

main goal of IPO is fund-raising. We see no point in fund-raising for the company

which pays out several billion dollars annually. Furthermore, TNK-BP International is

one of the highest-quality Russian borrowers and cost of debt raised could be

probably one of the lowest among Russian corporates.

We admit liquidity issue for TNK-BP shares and unfortunately we are not looking for

any substantial improvement in the nearest future for TNK-BP shares liquidity.

19.03.2012


6


TNK-BP is an extremely important asset both for BP and AAR. The shareholder conflicts between BP and AAR, both in 2009 and 2011, did not change anything in the shareholder structure of TNK-BP and did not materially affect operational and financial performance of the company.

Q. If not IPO, maybe one of major shareholders would like to sell its share?

A. No, we do not believe in sale of its TNK-BP share neither by BP nor by AAR.

BP in its 4Q11 report said that in 2011 its reserve replacement ratio was 103%.

Without TNK-BP it would be just 83%. Also, in 2012 BP production excluding TNK-

BP is expected to be broadly flat compared with 2011. We think share in TNK-BP is

one the most important BP assets, currently the only source of growth for BP

production and reserves, as well as a good cash source. BP is not in position to sell

TNK-BP stake.

AAR public position was also pretty clear – it was ready to sell its share, assuming

the total TNK-BP cost of $70 bln, about 46% premium to the current market price.

First, we doubt that anybody would pay such a premium for a non-control stake.

And second, we do not see any asset which would be comparable with TNK-BP for

AAR in terms of size and return to shareholders. We do not see the logic in AAR

sale of its TNK-BP stake, as well.

Q. Do you expect any major shareholders’ conflict in the future

A. It does not matter. We see conflicts do not really hurt TNK-BP.

When none of shareholders have control conflicts are hard to avoid. We cannot

forecast with high level of certainty both absence of conflict between BP and AAR in

the future and its presence. At the same time we recap that both conflicts of 2009

and 2011 between BP and AAR did not change anything in the shareholder

structure of TNK-BP, did minor changes into corporate structure of the group and

did not materially affect operational and financial performance of the company. We

are not looking for any further shareholders’ conflict would be a major driver for

TNK-BP shares.

Risks

Oil price may fall

TNK-BP has one of the lowest refining capacities as a 32% of total crude oil output

among Russian oil majors, not accounting for YANOS and LINIK

Russian oil companies refining capacity, as a % of total crude oil output, 2011E

0.00.20.40.60.81.01.21.41.61.82.0

Bashne

ft

Gazprom

Neft

Rosn

eft

LUKO

IL

TNK-BP

Surgutne

ftega

s

Tatneft

Averag

e Ru

ssian

top-7

Total Ru

ssia

* - TNK-BP refining capacity does not include YANOS and LINIK


19.03.2012


7


In our estimates, each $10 incremental decrease in our oil price forecast would lower our TP for TBH shares by $0.25, or by 6%. Any further changes of Russian oil taxation system could potentially adversely influence on Russian oil companies revenues and margins. TNK-BP is one of the largest investments both BP and AAR, providing extremely attractive cash returns.

As a result, crude oil export accounted for about 45% of the total revenue of TBH

for 1H11, one of the largest shares in Russian oil and gas.

Crude oil export, as a % of total revenues, 1H11

0%

10%

20%

30%

40%

50%

60%

70%

80%

Tatneft

Surgutne

fteg

as TNK-BP

Rosn

eft

Gazprom

Neft

LUKO

IL

Bashne

ft

Averag

e


Although the share of crude oil exported is flexible and may be a subject for

significant change, we still point out TNK-BP revenues is one of the most dependent

among Russian oil companies’ revenues to the oil price changes. We estimate each

$10 decrease in our oil price forecast would decrease our TP for TBH shares by

$0.25, or by 6%. We have to underline that our current Urals oil price forecast is

$104.4 per bbl, thus we currently see rather upside risk to TNK-BP financial

projections than downside risk.

Oil taxation system may be changed in a adversely affect Russian oil majors

Starting 1 January 2012 the base oil MET rate will be increased from current RUB

419 to RUB 446, or by 6.4% YoY, and further to RUB 470, or by 5.4% YoY starting

1 January 2013. That would effectively increase our projected 2012 crude oil MET

rate from RUB 4,409 per ton ($20 per bbl) to RUB 4,693 per ton ($21 per bbl).

Also excise taxes for gasoline and petrol would significantly increase in 2012, we

estimate in average by more than 50% YoY. We note the risk that any further

changes of Russian oil taxation system could potentially adversely influence on

Russian oil companies revenues and margins.

At the same time we estimate effect of these changes to TNK-BP EBITDA is

positive, we estimate it at least at 1% of additional EBITDA for TNK-BP, mainly as a

result of crude oil export duty rate decrease.

Shareholders may go on with conflicts

The share capital of TNK-BP Limited, which is the top holding company of TNK-BP,

is owned 50% by AAR and 50% by BP. After the first shareholders’ conflict, BP and

AAR have entered into a shareholders’ agreement dated 9 January 2009 which

contains a number of provisions regarding the management of TNK-BP.

Nevertheless, in 2010 shareholders started a new conflict regarding the possible BP

participation in joint venture with Rosneft on Russian Arctic offshore. This conflict

still goes on through several court claims, which we do not expect to influence

TNK-BP operations. We note that risk that TNK-BP shareholders may go on with

conflict which pressure TNK-BP share price in the future.

At the same time TNK-BP is one of the largest investments both BP and AAR,

providing extremely attractive cash returns. We don’t see an investment of

comparable size and quality which could provide for BP and AAR the same returns.

That is the main reason why we do not believe in any significant change in TNK-BP

shareholders structure.

19.03.2012


8


We do not expect TNK-BP to perform an additional shares placement in the nearest future and do not see an IPO as a driver for TNK-BP shares. The DCF valuation approach yields the target price of $4.06 per one ordinary share of TNK-BP Holding, which implies a 27% upside to the current price. In our DCF valuation, we use WACC of 11.0%. Our terminal growth rate assumption is 0.5%.

Moreover, for the same reasons we do not expect TNK-BP to perform an

additional shares placement in the nearest future and do not see an IPO as a driver

for TNK-BP shares. We estimate TNK-BP is able to generate enough cash both to

finance its own capex requirements and to pay out large dividends.

Valuation

We use DCF valuation and arrive at a target price of $4.06 per ordinary TNK-BP

Holding share, which implies a 27% upside to the current price. We assign

OVERWEIGHT recommendation to TNK-BP ordinary shares. We also set a target

price of $3.71 per preferred TNK-BP share, which implies a 29% upside. We assign

OVERWEIGHT recommendation to TNK-BP Holding preferred shares, as well.

WACC calculation

For the purposes of DCF valuation of TNK-BP Holding we use WACC of 11.1%.

We calculate TBH cost of equity as a sum of risk-free rate, which we define as a

yield of UST 10 of 2.61%, and Russian-equity specific risk premium of 8% as a

combined 5% equity beta and Russia country-specific premium of 3%. We estimate

after-tax rate for TBH Eurobonds at 4.6%.

TNK-BP Holding WACC calculation Risk-free rate: 10-year US Treasury yield, 1M average 2.6% Russian country-specific risk premium 8.0% Company-specific premium 1.5% Cost of equity 12.1% After-tax cost of debt 4.6% Weight of equity 86.5% Weight of debt 13.5% WACC 11.1%


DCF valuation

We use the terminal growth rate of 0.5% for TNK-BP, accounting for the short

reserve life and large size of the company, which makes us conservative in terms of

long-term growth rate forecast.

TBH DCF valuation model summary, $ mln 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Revenues 41,113 50,539 53,323 55,383 58,133 60,162 62,618 64,943 Operating costs (incl. purchases, excl. DD&A) (31,169) (38,305) (40,501) (43,213) (45,839) (47,822) (49,045) (50,402) EBITDA 9,944 12,235 12,822 12,169 12,294 12,340 13,573 14,541 EBIT 8,132 9,898 9,907 8,594 8,035 7,391 7,947 8,249 - Profit tax (1,530) (1,796) (1,944) (1,666) (1,544) (1,402) (1,521) (1,590) - CAPEX, incl. acquisitions (3,721) (5,344) (5,795) (5,915) (6,065) (6,132) (6,305) (6,470) - Changes in working capital 234 (24) (463) (90) (334) (261) (749) (420) + DD&A 1,812 2,337 2,915 3,576 4,259 4,949 5,625 6,292 - Interest expense - (121) (186) (263) (316) (383) (344) (299) Free cash flows 5,125 4,951 4,434 4,236 4,035 4,163 4,654 5,762

Source: Gazprombank estimates

TBH DCF valuation model summary, $ mln

NPV 35,008 Perpetual growth rate 0.5% Terminal value 31,448 Net debt 6,833 Target value 59,623 Common shares in circulation, mln 14,997 Target price, $ 4.06 Upside 27%


19.03.2012


9


TNK-BP Holding is the third-largest oil producer in Russia with the crude oil output of 74 mln tons of crude oil and about 11.5 bcm of gas in 2010. In 2010, the revenue of TNK-BP Holding was 85% of the total revenue of TNK-BP, in 1H11 - about 92%.

Company overview

TNK-BP Holding is the third-largest oil producer in Russia with the crude oil output

of 74 mln tons of crude oil and about 11.5 bcm of gas in 2010. TNK-BP largest

crude oil production assets are located in Western Siberia, including one of the

largest oil fields in the world – Samotlor field, in Orenburg region, with some

perspective assets in Yamal region and Eastern Siberia.

TNK-BP is historically pretty conservative in terms of reserves appreciation.

According to SEC methodology, TNK-BP proved reserves life is just 15 years, the

shortest among Russian oil majors. But if we will take into account probable

reserves, as well, reserves’ life may triple, as we estimate TNK-BP probable reserves

are close to 25 bboe.

TNK-BP International proved reserves under SEC methodology, bln boe 2008 2009 2010 2011

Total proved reserves, SEC 8,112 8,586 8,794 9,115

Change 6% 2% 4%

Reserves life, years 15 15 16 Source: company, Gazprombank estimates

Corporate structure

TNK-BP has a pretty confusing corporate structure for the first glance. The company

itself, while talking about TNK-BP, usually means TNK-BP International, the holding

company, which consolidates all TNK-BP assets both in Russia and abroad, including

about 95% of TNK-BP Holding, a listed company, covered in this research. The main

differences between the whole TNK-BP and TNK-BP Holding comes from 50%

stake in Slavneft, Ukrainian refinery LINIK, several greenfields in Russia and activities

abroad, including activities in Venezuela (partially), Vietnam and Brazil. At the same

time we note that in 2010 TNK-BP Holding revenues were 85% of TNK-BP total

revenues, in 1H 2011 – about 92%, in our estimates.

TNK-BP corporate structure

TNK-BP International

TNK-BP Holding

(TNBP RU Equity)

About 95%Slavneft (50%)

LINIK

TNK-BP Overseas

AAR

Upstream gas:

- Rospan

Refining and Marketing:

-Ryazan Refinery

- Saratov Refinery

- Retail

Upstream crude oil:

- West Siberian brownfields;

- Orenburg;

- Greenfields;

- Prospective fields

BP Plc.

50% 50%

Source: company, Gazprombank

19.03.2012


10


TNK-BP Holding buys about 3 mln tonnes of crude oil per annum from Slavneft, and refines crude oil at YANOS under processing scheme. In 2010, TNK-BP Holding (TNK-BP) produced 74 mln tonnes of crude oil (1.527 mbpd) and about 11.5 bcm of gas (215,000 boepd). TNK-BP crude oil production can be divided by three main categories:

West Siberian brownfields);

Orenburg brownfields;

New production fields.

TNK-BP assets, not included into the TNK-BP Holding structure, have significant but

not determinative influence to TNK-BP Holding economics, in our view. TNK-BP

Holding buys about 3 mln tonnes of crude oil per annum from Slavneft, and refines

crude oil at YANOS under processing scheme. As we pointed out above, we do

not expect Slavneft assets would be further distributed among its shareholders,

TNK-BP and Gazprom Neft. Foreign assets do not create any synergy in our

estimates. In this report, we concentrate in this research on TNK-BP Holding

operations and results,

We have to highlight only one upside opportunity for TNK-BP Holding from other

TNK-BP group assets, which is the transfer of some Russia-based assets, namely

Suzun, Tagul and Russko-Rechenskoye fields, which may contribute approximately

10% of reserves and production to TNK-BP Holding by 2020. At the same time

upside is limited, as the company stated that assets would be sold for a cash

consideration.

Upstream

In 2010, TNK-BP Holding (TNK-BP) produced 74 mln tonnes of crude oil (1.527

mbpd) and about 11.5 bcm of gas (215,000 boepd). TNK-BP is the third largest

Russian oil company in terms of crude oil production.

TNK-BP crude oil production can be divided by three main categories:

West Siberian brownfields, together accounting for about a half of the

company’s crude output (about 39.5 mln tonnes of crude oil in 2010, or 52% of

total production);

Orenburg brownfields, accounting for another quarter of TNK-BP production

(about 20 mln tonnes of crude oil in 2010, or 26% of total output);

New production fields – Verkhnechonskoye field and Uvat (2010 – about 8 mln

tonnes of crude oil, or 10% of the total output) – and prospective fields; most

of them are going to start production in 2016-2019. These mainly include

Yamal-based oil fields – Russkoe, Messoyakha fields, Suzun, Tagul and Russko-

Rechenskoye fields (the last three currently owned by parent TNK-BP group

company).

TNK-BP crude oil production forecast

0

10

20

30

40

50

60

70

80

90

2010 2011E 2012E 2013E 2014E 2015E 2016EWestern Siberia brownfields Orenburg Greenfields

Source: company data, Gazprombank estimates

19.03.2012


11


In 2010, Samotlor produced about 21.6 mln tonnes of crude oil, accounting for about 28% of the total crude oil output by the company. Samotlor is an already perfectly developed field with all infrastructure in place and no large capex requirements. It is the source of technologies in water flood management. Orenburg region is a source of oil production growth for TNK-BP as well as for Gazprom neft, Gazprom and Tatneft. TNK-BP has one of the best greenfield portfolios in the Russian oil and gas industry.

West Siberian brownfields

Samotlor is the main production location of TNK-BP. It is one of the largest Russian

oil fields. In 2010, it produced about 21.6 mln tonnes of crude oil, accounting for

about 28% of the total crude oil output by the company. The field production is

declining – we estimate 7% YoY decrease in crude oil output at the field in 2011.

This is the main source of possible downside for TNK-BP’s crude output. The

company aims to stabilize the decline rate at 2-3% in 2013-2015 and, probably,

further to 1% since 2016, when crude production at the field would stand at slightly

above 15 mln tonnes.

On the other hand, Samotlor is also the source of free cash flow and new

technologies for the company. It is an already perfectly developed field with all

infrastructure in place and no large capex requirements. Samotlor is the source of

technologies in water flood management. Just a simple example: in order to produce

about 21.6 mln tonnes of oil TNK-BP pumps out more than 350 mln tonnes of

liquid; as a result, water flood management technologies are crucial for TNK-BP.

Samotlor is also a pilot project for “intellectual field” technology implementation.

From a single dispatch center, operators can plan and manage current maintenance

and workover activities, remotely start or stop individual production or injection

wells, change the productivity of pumps installed in individual wells, track movements

of crews. As far as we know, none of Russian oil companies use systems like this.

Orenburg brownfields

Orenburg currently is being one of the good surprises for Russian crude oil

production as a whole and for TNK-BP in particular. The region has no large major

fields, but a plenty of small fields. Together with softer climate and excellent

infrastructure, Orenburg region is a source of oil production growth for TNK-BP as

well as for Gazprom neft, Gazprom and Tatneft.

On more than 100 license fields in Orenburg region, TNK-BP produced

approximately 20 mln tonnes of crude oil in 2011. In our estimates, the largest of

those fields yielded less than 3.5 mln tonnes of crude oil in 2011. We estimate TNK-

BP may produce in Orenburg about 24 mln tonnes of crude oil by 2017, CAGR of

almost 5%. We project production of 24 mln tonnes of crude oil would be a plateau

at Orenburg through 2020.

New production and prospective fields

TNK-BP has one of the best greenfield portfolios in the Russian oil and gas industry. It

has both productive greenfields and prospective fields, which could provide upside for

TNK-BP’s production starting in 2017, when the current growth drivers are depleted.

Verkhnechonskoye field in 2011 produced about 4.6 mln tonnes of crude oil in our

estimates. By 2015, it would peak at 7.5 mln tonnes per annum, where we think it

could stay for at least 5 years.

Uvat field is another major greenfield project with 2011 estimated production of

about 5.3 mln tonnes of crude oil, peaking at 9 mln tonnes by 2015, which we

estimate as the major source of growth of TNK-BP crude oil production by 2015.

We also highlight a number of projects, where the company would start production in

2016-2019 – Yamal fields, including Messoyakha, Suzun and Tagul fields, as well as

Russkoye and Russko-Rechenskoye fields. Suzun, Tagul and Russko-Rechenskoye fields

are owned by TNK-BP International now. Transfer of these fields ownership to TBH is

possible in the future, but is not crucial in our view. We also note that these 3 fields

would be sold to TBH by TNK-BP International for cash. On the one hand, these three

fields are key new upstream projects for TNK-BP for 2016-2019. On the other hand,

there is the risk that deal may be treated by the market as a form of dividend to major

shareholders. Even if it happens, the price would be at the fair valuation.

Crude distribution

19.03.2012


12


TNK-BP has relatively low refining capacity as compared to its crude output volumes, which makes the company the second-largest crude exporter in Russia in terms of volume. Being the second largest crude oil exporter in Russia, TNK-BP is one of main beneficiaries of decrease in oil export duty, which was a part of changes in taxation of oil and gas industry, known as 60-66 scheme. As a result of taxation changes, we estimate in 2012 Russian oil companies crude oil export netback (before transportation expenses and lifting costs) may increase by 10%, from 28$ per bbl to 31$ per bbl, as compared to the old taxation scheme.

As mentioned above, TNK-BP has relatively low refining capacity compared to its

crude output volumes. That makes TNK-BP second largest crude exporter in Russia

in terms of crude oil output. According to CDU TEK data, in 2011 TNK-BP Holding

exported almost 30 mln tonnes of crude oil, or 41% of its total 2011 crude output.

At the same time we note, that the share of export in TNK-BP crude oil distribution

matches the average 41% among Russian oil majors. Rosneft, Surgutneftegaz and

Tatneft export larger share of its crude oil than TNK-BP does.

Russian largest crude oil exporters in 2011, mln tonnes Company Export Output Share

Rosneft 59.0 114.5 52%

TNK-BP Holding 29.8 72.6 41%

Surgutneftegaz 27.0 60.8 44%

Lukoil 23.8 85.3 28%

Tatneft 15.6 26.2 59%

Gazprom neft 12.7 30.2 42%

Russneft 5.6 13.6 41%

Bashneft 3.6 15.1 24%

Other exporters 32.5 93.0 35%

Total export 210.9 511.4 41% Source: Contek, Gazprombank estimates

Further 32% of crude oil are refined at TNK-BP own refineries in Ryazan and

Saratov. The rest of the crude oil, 27% of the total TNK-BP Holding output, or

slightly less than 19.6 mln tonnes of oil, are mainly refined at other TNK-BP Group’s

refineries through the tolling scheme, namely, at YANOS and LINIK (deliveries to

LINIK suspended from 1 March 2012), sold domestically or to other related partied

of the company.

We estimate changes in taxation would increase TNK-BP EBITDA by at least 1% in

2012.

Being the second largest crude oil exporter in Russia, TNK-BP is one of main

beneficiaries of decrease in crude oil export duty, which was a part of changes in

taxation of oil and gas industry, known as 60-66 scheme.

Crude oil export duty decrease was the major change in taxation for the oil

companies in monetary terms, which would bring Russian oil companies more than

$ 5 bln in 2012, in our estimates. The base rate of oil MET was calculated as $29.2

per ton plus 65% from the surplus of Urals price under $29.2/bbl. Starting 1

October 2011 the base ratio of the crude oil export duty formula was decreased

from 65% to 60%. As a result, we estimate, that average crude oil export for 2012

would decrease by $5 per bbl, or by 9%, compared to the old tax regime.

That is partially corrected with MET increase. Starting from 1 January 2012 the base

rate in oil MET formula will be increased from current RUB 419 to RUB 446, or by

6.4% YoY, and further to RUB 470, or by 5.4% YoY starting 1 January 2013. That

would effectively increase our projected 2012 crude oil MET rate from RUB 4,409

per ton ($20 per bbl) to RUB 4,693 per ton ($21 per bbl).

As a result of taxation changes, we estimate in 2012 Russian oil companies crude oil

export netback (before transportation expenses and lifting costs) may increase by

10%, from 28$ per bbl to 31$ per bbl, compared to the old taxation scheme.

19.03.2012


13


In 2011, TNK-BP was also the third-largest producer of fuel oil in Russia, making 7.5 mln tonnes of fuel oil. TNK-BP is also the fifth-largest gas producer in Russia. In 2011, the company produced 10.8 bcm of associated petroleum gas, and 3.3 bcm of natural gas at Rospan International. TNK-BP Holding is the fourth largest Russian refiner, operating two large refineries in Ryazan and Saratov. In 2011, TNK-BP Holding refined about 22.9 mln tonnes of crude oil, or about 9% of the total Russian refined volume.

Crude oil export netback, old scheme vs. new, at Urals price of $104/bbl

$56 $52

$20 $21

$28 $31

$0

$20

$40

$60

$80

$100

$120

Old New

Export duty MET Netback


We estimate that TNK-BP may get extra $1 bln of crude oil export EBITDA in 2012.

At the same time, changes in oil products export duties, as well as higher excise

taxes, partially decrease the positive effect of crude oil netbacks growth. In 2011,

TNK-BP was also the third-largest producer of fuel oil in Russia, making 7.5 mln

tonnes of fuel oil, and the export duty on this product would increase by 58% YoY

in 2012 to about $250 per tonne, in our estimates. We assess the additional tax

payments by TNK-BP on oil product sales at approximately $0.4 bln. Another $0.4

bln would be paid additionally as MET payments as a result of MET increase in 2012.

As a result, the net result of changes in taxation would not alter EBITDA of TNK-BP

by more than $0.2 bln, or at least 1% of 2012 projected EBITDA.

Gas

TNK-BP is also the fifth-largest gas producer in Russia. In 2011, the company

produced 10.8 bcm of associated petroleum gas, and 3.3 bcm of natural gas at

Rospan International. In total, in 2011 TNK-BP has produced about 87 mln boe,

which is approximately 13% of total TNK-BP group hydrocarbon production.

Associated gas in mainly processed and then sold to industrial consumers. They have

consumed almost 10 Bcm of TNK-BP associated gas in 2011 in our estimate. At the

same time, according to our estimate, in 2011 gas has brought less than 3% of TNK-

BP total EBITDA.

TNK-BP plans to increase gas production at Rospan to 8 Bcm by 2015. The

company notes a possibility for further increase of gas production at Rospan to 16

Bcm by 2020. TNK-BP has a “20/20/20 strategy” for gas – gas should contribute

20% of production and EBITDA of TNK-BP group by 2020. We model Rospan will

contribute $6bln to TNK-BP revenues, by 2020, or 9% of total 2020 estimated

revenues of TNK-BP and note an upside risk to our long-term revenue and margins

projections.

Downstream

TNK-BP Holding is the fourth largest Russian refiner, operating two large refineries

in Ryazan and Saratov. In 2011, TNK-BP Holding refined about 22.9 mln tonnes of

crude oil, or about 9% of the total Russian refined volume. This accounted for 32%

of TNK-BP’s production. We note that this figure significantly differs from the total

TNK-BP group refining cover of 44%, according to the company. The difference

attributes mainly to YANOS refinery, which is 50% owned by TNK-BP through

Slavneft and Ukrainian refinery LINIK.

19.03.2012


14


TNK-BP’s downstream contributes significantly into the company’s total revenues and EBITDA. The company has the largest retail network among Russian oil majors in Moscow, the largest petrol consuming region in Russia, occupying almost 30% retail petrol market share in Moscow region.

TNK-BP Holding 2011 refining overview, mln tonnes

16,638

3,025 4,242

5,759 1,090

0

5,000

10,000

15,000

20,000

25,000

Oil refined Petrol Diese l Fuel Oil Kerosene

Ryazan Sa ratov


TNK-BP Holding oil products output share in Russia, 2011

9%

11%

8%

10%

12%

0% 2% 4% 6% 8% 10% 12% 14%

Oil refined

Petrol

Diese l

Fuel Oil

Kerosene


TNK-BP refining capacities are slightly below average Russian figures in terms of

quality and refining depth. We estimate in 2011 light product yield at TNK-BP

refineries was 53%, while Russian average yield was 61%.

At the same time we note TNK-BP downstream contributes significantly into the

company’s total revenues and EBITDA. According to the 2010 segment information

report from TNK-BP, its downstream segment (refining, marketing and distribution)

has contributed 35% of the company’s EBITDA, or $3.6 bln out of total $10.2 bln.

Oil products revenues were about 43% of total 2010 TNK-BP revenues of $41.1

bln.

TNK-BP has one of largest retail stations network in Russia (stations in Belarus and

the Ukraine are owned by the parent company) operating more than 1,000 retail

stations. We note TNK-BP retail is concentrated mainly in the premium regions –

Moscow, Saint-Petersburg, southern regions of Russia. The company has the largest

retail network among Russian oil majors in Moscow, the largest petrol consuming

region in Russia, occupying almost 30% retail petrol market share in Moscow region.

At the same time we do not see TNK-BP retail network as competitive advantage

of the company to other Russian oil majors. Rosneft operates more than 1,700

stations in CIS, Gazprom Neft – about 1,600 stations, Lukoil – almost 2,800 stations.

At the same time we may estimate TNK-BP average petrol station daily traded

volume is larger than any other Russian oil major retail network.

19.03.2012


15


Our estimate of the fair discount for the company’s preferred stock relative to common shares is 8.7%.

TNK-BP has historically paid out dividends on preferred shares equally to ordinary shares. The dividend payout ratio is expected to be maintained at approximately 40% of US GAAP-based net profit. We note that in 2009 and 2010 payout ratio was above 90%.

We are not looking for any substantial additional upside from downstream for TNK-

BP. We think TNK-BP is unlikely to increase its refining capacity in the nearest

future, which makes us believe that share of downstream segment in total TNK-BP

revenues and margins would not differ much from current. We estimate 2011 oil

products share in revenues would be slightly less 49% of total estimated revenues of

$51 bln, by 2016 we see oil products revenues share at 48% out of total $61 bln

estimated revenues.

Preferred shares valuation

We have calculated a 8.7% fair discount for the company’s preferred stock relative

to common shares. Based on our estimates, the company’s average daily traded

volume is $0.5 mln for common shares and $0.3 mln for preferred shares. We note

that the free float of common shares is about 5%, as compared to almost 100% for

prefs, making the cost of free float of prefs about 40% less, than the free float cost

of common shares, which makes the trading volume for prefs seem fair for a free

float. Taking these factors into account, we do not apply any discount for liquidity of

preferred shares.

The par value of both preferred and common shares is RUB 1. Preferred shares

generally lack voting rights, although in years when dividends are not paid out, they

are automatically vested with voting rights. However, TNK-BP has historically paid

out dividends on preferred shares equally to ordinary shares. We also note free float

of ordinary shares is just 5%, which makes minorities’ ability to influence decisions of

TNK-BP major shareholders is insignificant. We therefore apply just a 10% discount

for voting factor. Finally, to account for the higher dividend yield on preferred shares

relative to common stock, we are introducing an offset factor of 1.3%. The overall

fair discount for preferred shares is 8.6%, or 10% for voting rights, minus 1.3% for

the difference in the dividend yields.

Preferred shares valuation Preferred current price per share, $ 2.88 Preferred dividend per share, $ 0.38 Preferred dividend yield 13.4% Common current price, $ 3.19 Common dividends per share, $ 0.38 Common dividend yield 12.1% Difference in yields -1.3% Discount calculation Voting rights discount 10.0% Liquidity discount 0.0% less dividend yield premium -1.3% Total discount 8.7% Common share, target price price, $ 4.06 Preferred share target price, $ 3.71


Dividend Discount Model (DDM) valuation

In order to provide an alternative valuation of TNK-BP preferred stock, we use a

dividend discount model (DDM). We contend that the DDM is appropriate as

amounts of dividends on TNK-BP shares have been significant over the past five

years, with the yield above 5%.

We believe that the dividend payout ratio will be maintained at approximately 40%

of US GAAP-based net profit. We note that in 2009 and 2010 payout ratio was

above 90%.

We apply two threshold discount rates to determine the present value of dividend

flows: the cost of equity at 10.6%, and the 2010 annual preferred dividend yield at

13.4%. We believe that a reasonable discount rate for determining the PV lies

19.03.2012


16


somewhere between these two values. At the same time, however, we think that

the discount rate should be closer to the lower end of the spectrum as TNK-BP

shares have historically demonstrated high dividend return and outpaced Russian

market in last 3 years. In this respect, we apply the WACC (11.1%) used in our

discounted free cash flow model for TNK-BP as a proxy to discount the forecasted

dividends (see the table below). Ultimately, we obtained the fair value of $4.24 per

both ordinary and preferred share (RUB 125,5), 31% above the current price of

ordinary share and 45% - of preferred share, which supports our DCF-based target

price. We underline that even discounting dividends at the highest assumed rate of

13.4%, we still get an upside potential for the share price, which supports our

recommendation.

DDM valuation for TNK-BP shares Cost of equity (10.6%) 10.6% NPV 2.78 Terminal value 1.66 Fair value, $ per share 4.44

WACC (10.4%) 11.1% NPV 2.73 Terminal value 1.51 Fair value, $ per share 4.24

Preferred dividend yield (13.4%) 13.4% NPV 2.51 Terminal value 1.02 Fair value, $ per share 3.53

Source: Gazprombank estimates . We do not expect the company to make an additional share placement or to list its shares on any other major stock exchange.

TNK-BP share market

The company’s shares are listed on the MICEX, tickers are TNBP for ordinary shares

and TNBPP for preferred shares. Average daily traded volume in last 12 months was

$0.5 mln for common shares and $0.3 mln for preferred shares. TNK-BP is not listed

on any other Russian or foreign stock exchange, which reduces company’s shares

liquidity and restricts access of some international investors to TNK-BP shares. As

we mentioned above, we do not expect the company to make an additional share

placement or to list its shares on any other major stock exchange.

We note TNK-BP historical spread between ordinary and preferred shares is one of

the lowest in Russian equity universe and usually fluctuates between 5% and 15%.

We note that spread usually tightens before the dividend cut-off date and peaks just

after this date.

Spread between TNK-BP ordinary and preferred shares

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Jan

11

Feb

11

Mar 1

1

Apr 11

May

11

Jun

11

Jul 11

Aug

11

Sep

11

Oct 1

1

Nov 1

1

Dec 1

1

Jan

12

Feb

12

Mar 1

2

Spread Average


19.03.2012


17


On all three multiples we used TNK-BP looks fairly valued compared to its Russian peers and on 2012 and 2013 multiples is traded with a premium or discount not exceeding 10%.

Peer group valuation. TNK-BP seems fairly valued compared to

Russian peers

Although DCF valuation is our preferred method, for the sake of integrity we also

provide peer groups multiple comparison.

We compare TNK-BP Holding with Russian largest integrated oil companies, as well

as international oil and gas majors. We employ EV/EBITDA, P/E and EV/Proven

Reserves multiples. We use our in-house estimates for covered Russian oil and gas

companies’ multiples and Bloomberg consensus projections for other companies.

We note that on all three used multiples TNK-BP looks fairly valued compared to its

Russian peers and on 2012 and 2013 multiples is traded with a premium or discount

not exceeding 10%. Moreover, it is traded in line with international majors on

EV/EBITDA multiple and has a discount on P/E and EV/Reserves to international

majors mainly. We consider multiples comparison as an indirect support to our

opinion that TNK-BP shares has pretty limited upside. At the same time we note

that the major part of TNK-BP earnings is distributed as dividends, which could

justify a premium for TNK-BP shares, that is why we believe TNK-BP shares have

valuation potential.

TNK-BP peer comparison on multiples

Mcap EV/EBITDA P/E Reserves, $ mln 2010 2011E 2012E 2013E 2010 2011E 2012E 2013E $/boe

Bashneft 12,177 4.7 4.0 3.9 3.9 10.7 9.0 7.6 7.6 7.0

Gazprom neft* 26,017 4.8 3.3 3.7 3.8 8.0 5.0 5.9 6.4 3.9

Lukoil 54,260 4.0 3.2 3.4 3.4 6.0 4.6 5.1 5.2 3.6

Rosneft 80,511 5.4 4.5 5.2 5.1 7.7 6.4 7.5 7.7 4.4

SurgutNG 42,753 3.7 2.5 2.9 3.0 37.0 5.8 8.1 8.2 3.2

Tatneft 14,906 5.6 3.9 3.9 5.1 8.2 5.8 5.9 8.3 2.7

TNK-BP Holding 47,791 5.4 4.4 4.2 4.4 7.5 6.4 6.5 7.6 5.0

Average 4.8 3.7 3.9 4.1 12.2 6.1 6.7 7.3 4.3

Gazprom 158,467 4.2 3.1 3.0 2.8 6.5 5.0 3.6 3.3 1.6

NOVATEK 43,028 24.3 15.0 13.1 10.9 52.5 32.4 19.4 17.1 4.8

Average 14.3 9.1 8.1 6.9 29.5 18.7 11.5 10.2 3.2

Developed markets majors

BP 145,753 4.1 3.7 3.6 3.5 7.0 6.8 6.7 6.2 9.6

Chevron Corp. 219,640 5.0 3.8 3.8 3.7 11.8 8.2 8.8 8.5 19.8

ConocoPhillips Inc. 114,215 5.0 4.7 4.8 4.7 13.0 9.7 10.6 10.3 15.6

ExxonMobil Corp. 416,579 5.9 4.5 4.7 4.5 14.2 10.2 11.1 10.4 18.9

Repsol YPF 23,862 3.2 3.4 3.0 2.8 7.9 9.0 7.2 6.3 17.7

Royal Dutch Shell 218,771 4.7 3.7 3.6 3.4 11.8 8.5 8.0 7.4 21.4

Total SA 131,145 3.9 3.5 3.3 3.2 9.2 8.6 8.2 7.7 14.5

Average – 4.5 3.9 3.8 3.7 10.7 8.7 8.6 8.1 16.8

TNK-BP discount (premium)

to Russian oils – 12% 19% 7% 7% -38% 4% -2% 5% 18%

to Russian gas – -66% -60% -52% -40% -59% -67% -42% -29% 33%

to international majors – 18% 12% 8% 20% -30% -27% -24% -6% -70% Source: Bloomberg, Gazprombank estimates

19.03.2012


18


Oil price will be the main driver for TNK-BP revenues. We do not model any significant acquisitions both in downstream and upstream. For TNK-BP, which together with pretty stable oil price estimates makes our revenue forecast more or less unchanged compared to 2011.

Financial outlook

Income statement

We see oil price as the main driver for TNK-BP revenues. As we forecast TNK-BP

2020 oil output in 2020 to be just 1% larger than in 2011, the revenue dynamics is

mainly determined by the oil price changes.

Our base case forecast assumes the average Urals price of $104.4/bbl in 2012, a 2%

YoY decrease. We expect oil price to stay flat YoY in 2013, that we are looking for about 1.5% a year increase in oil price in 2014-2016.

Macro assumptions used in Tatneft model 2010 2011E 2012E 2013E 2014E 2015E 2016E Urals price, $/bbl 78.3 106.3 104.4 104.4 106.5 108.6 110.8 End of year exchange rate, RUB/USD 30.5 29.9 31.2 30.8 31.5 32.0 32.0 Average exchange rate, RUB/USD 30.4 28.8 30.9 30.6 30.8 31.5 32.0


We do not model any significant acquisitions both in downstream and upstream. For

TNK-BP, which together with pretty stable oil price estimates makes our revenue

forecast more or less unchanged compared to 2011. We estimate after sharp

increase in 2011 revenues by 22% YoY on the back of oil price increase a 5% YoY

increase in revenues in 2012 to $53.3 bln and further 4% YoY increase in 2013 to

$55.3bln, mainly on the back of crude oil output and sales increase.

TNK-BP revenues estimates summary, $ mln

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

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

Export of crude oil Domestic crude oil sales Export of oil products

Domestic oi l products sales Other revenues


The main drivers for expenses are taxes, other than profit tax. In 2011, 63% of total

TNK-BP’s costs would constitute taxes other than income tax, mainly Custom Export Duties (CED) and Mineral Extraction Tax (MET).

TNK-BP expenses estimates summary, $ mln

0

10,000

20,000

30,000

40,000

50,000

60,000

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

Export duties Taxes other than income tax Opera ting expenses

Purchasing expenses Transportation DD&A

SG&A Other Source: company, Gazprombank estimates

19.03.2012


19


We estimate the total expenses to increase by 17% YoY in 2011 to $40.6 bln, followed by a 7% YoY increase to $43.4 bln in 2012. In 2013. TNK-BP does not have any formalized dividend policy, but follows several basic rules, based on the charter or on historical practice.

Taxes other than income tax are mainly driven by CED and MET rates for crude oil,

whose rates are linked to oil prices. As a result, cost dynamics will be generally in

line with the revenue dynamics.

We estimate the total expenses to increase by 17% YoY in 2011 to $40.6 bln,

followed by a 7% YoY increase to $43.4 bln in 2012. In 2013, costs should increase

by 8% YoY to $46.8bln, mainly on the back of CED and MET payments.

After 20% jump in EBITDA per bbl in 2011, driven mainly by oil price increase, we

expect TNK-BP EBITDA per bbl to fluctuate between $20-23 in 2012-2016, while

total EBITDA to change between $12-13 bln.

TNK-BP EBITDA projections, $ mln (right scale), EBITDA $ per bbl (left scale)

15

16

17

18

19

20

21

22

23

24

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

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

EBITDA, % mln EBITDA per bbl, $


TNK-BP does not have any formalized dividend policy, but follows several basic

rules, based on the charter or on historical practice: dividends on preferred share

should be equal to dividends for ordinary shares, TNK-BP Holding declares

dividends normally twice a year and TNK-BP International, whose largest asset is

TNK-BP Holding, pays at least 40% of US GAAP Net Income on a quarterly basis.

Based on that, we estimate TNK-BP Holding. Based on that assumptions we forecast

dividends to be at least RUB 9.6 per both TNK-BP ordinary and preferred share

until 2016 at least in case if the company would not make major changes in its

corporate structure, which we do not believe in, as discussed above.

TNK-BP dividends estimates, RUB per ordinary and preferred share

0

2

4

6

8

10

12

14

16

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

Dividend per share, RUB


19.03.2012


20


We do not project sharp capex increase. TNK-BP is one of the most stable FCF generators in the industry. We estimate that the company is able to generate around $5 bln of FCF each year.

Capex and free cash flow

Unlikely two largest Russian oil companies, TNK-BP does not have any plans to

hugely increase its capex for next two years. Company’s guidance for 2012 is about

$5.5 bln organic capex (not including acquisitions) for TNK-BP International group,

but we do not think large part of that would be attributable to non-TBH assets. In

2013-2014 the company plans to spend around $6 bln organically each year. We do

not see much upside risk potential for TNK-BP capex and we think capex is unlikely

reach $6.5 bln by 2015, unless the company would make some major acquisitions

on TNK-BP Holding level.

TNK-BP Holding capex estimates and FCF yield, $ mln, %

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

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

Capex FCF yield (RHS)


As we noted before, we estimate TNK-BP is one of the most stable FCF generators

in industry. We estimate the company is able to generate around $5 bln of FCF

each year. FCF yield in this case would be around 10%, one the highest FCF yield in

industry in our estimates.

19.03.2012


21


Appendices

P&L statement, $ mln

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

Revenues

Crude oil - exports (Europe and CIS) 19,446 20,673 21,288 22,837 24,723 26,037 26,430 Crude oil - domestic 2,341 3,049 2,886 2,811 2,784 2,725 2,639 Oil products - exports (Europe and CIS) 10,308 15,578 17,922 17,823 18,214 18,544 19,489 Oil products - domestic 7,378 9,409 9,382 9,400 9,523 9,598 9,990 Other revenues 1,640 1,830 1,844 2,511 2,888 3,257 4,069 Revenues 41,113 50,539 53,323 55,383 58,133 60,162 62,618 Export duties 11,438 15,682 16,095 16,900 18,055 18,912 19,338 Taxes other than income tax 8,006 9,930 10,354 11,049 11,433 11,710 11,860 Operating expenses 4,609 5,267 6,001 6,563 7,093 7,480 7,757 Cost of purchased products 2,417 2,628 2,708 2,789 2,845 2,902 2,960 Transportation expenses 3,282 3,409 3,806 4,225 4,595 4,894 5,119 SG&A 1,236 1,322 1,462 1,604 1,727 1,825 1,900 DDA 1,812 2,337 2,915 3,576 4,259 4,949 5,625 Exploration expenses 62 68 75 83 91 100 110 Operating profit 8,132 9,898 9,907 8,594 8,035 7,391 7,947 Total other non-operating income ( )

198 -121 -186 -263 -316 -383 -344 EBITDA 9,944 12,235 12,822 12,169 12,294 12,340 13,573 EBITDA margin,% 24% 24% 24% 22% 21% 21% 22% EBITDA per bbl 18 22 22 21 20 20 22 Pre-tax income 8,330 9,777 9,721 8,331 7,719 7,008 7,603 Tax expenses -1,530 -1,796 -1,944 -1,666 -1,544 -1,402 -1,521 Net income before minority interest 6,800 7,981 7,777 6,665 6,175 5,606 6,083 Minority interest 260 305 297 255 236 214 233 Net income 6,540 7,676 7,479 6,410 5,939 5,392 5,850 Net margin 16% 15% 14% 12% 10% 9% 9%

Source: Bloomberg, company, Gazprombank estimates

Balance sheet, $ mln

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

Cash 1,088 537 179 1,107 1,386 2,212 629 Receivables (net) 8,340 10,252 10,817 11,235 11,793 12,204 12,702 Inventory 942 1,158 1,222 1,269 1,332 1,378 1,722 Total Current Assets 10,568 12,141 12,409 13,808 14,711 16,001 15,247 Net PPE 18,592 22,425 25,591 28,150 29,998 31,428 31,986 Goodwill and intangible assets 741 741 741 741 741 741 741 Long-term loans issued to related parties 365 727 727 727 727 727 727 Other long-term assets 615 615 615 615 615 615 615 Total long-term assets 20,313 24,508 27,674 30,233 32,081 33,511 34,069 Total Assets 30,881 36,649 40,083 44,041 46,792 49,512 49,316 LIABILITIES AND EQUITY

Short-term debt 152 317 579 443 508 1,008 1,008 Accounts payable & accr.liab., net 3,121 3,846 4,108 4,428 4,741 4,994 5,173 Taxes Payable 1,202 2,582 2,485 2,541 2,515 2,459 2,372 Total current liabilities 4,634 6,904 7,331 7,571 7,923 8,620 8,713 Long-term debt 3,384 3,142 4,733 7,062 8,527 9,927 8,827 Assets retirement obligations 374 418 466 515 568 625 684 Deferred income tax liability 892 873 873 873 873 873 873 Other LT payables 494 494 494 494 494 494 494 Total long-term liabilities 5,144 4,927 6,566 8,944 10,462 11,919 10,878 Total liablilities 9,778 11,831 13,897 16,515 18,385 20,538 19,590 Minority interest 894 1,199 1,497 1,751 1,987 2,202 2,434 Share capital 520 550 550 550 550 550 550 Additional paid-in capital 4,115 4,115 4,115 4,115 4,115 4,115 4,115 Retained earnings 15,558 18,938 20,009 21,094 21,738 22,092 22,611 Total stockholders' equity 20,209 23,619 24,690 25,775 26,419 26,773 27,292 Total Liabilities & Equity 30,881 36,649 40,083 44,041 46,792 49,513 49,316


19.03.2012


22


Cash flow statement, $ mln 2010 2011E 2012E 2013E 2014E 2015E 2016E

Net income 6,800 7,981 7,777 6,665 6,175 5,606 6,083 Depreciation and amortization 1,812 2,337 2,915 3,576 4,259 4,949 5,625 Minority interest 260 305 297 255 236 214 233 Changes in WC:

Accounts receivable (301) (1,912) (565) (418) (558) (412) (498) Inventories (226) (216) (64) (47) (63) (46) (343) Accounts payable 303 725 263 319 313 253 180 Taxes payable 419 1,380 (97) 56 (26) (56) (87) Cashflow from operating activities 9,130 10,309 10,245 10,168 10,119 10,315 10,982 Net cash used for investing (4,730) (5,344) (5,795) (5,915) (6,065) (6,132) (6,305) Dividends (5,154) (6,772) (6,599) (5,655) (5,240) (4,757) (5,161) Net cash used in financing activities (3,637) (5,516) (4,808) (3,326) (3,775) (3,357) (6,261) Net change in cash 755 (551) (358) 928 279 827 (1,584) Cash at beginning of period 333 1,088 537 179 1,107 1,386 2,212 Cash Eop 1,088 537 179 1,107 1,386 2,212 629



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Copyright © 2003-2012. Gazprombank (Open Joint Stock Company). All rights reserved This report has been prepared by the analysts of Gazprombank (Open Joint – stock Company) (hereinafter – GPB (OJSC)) and is based on information obtained from public sources believed to be reliable, but is not guaranteed as being accurate. With exception of information directly pertaining to GPB (OJSC), the latter accepts no liability for accuracy and completeness of information herein. All opinions and judgments herein represent analysts’ personal opinion regarding events and situations described and analyzed in this report. They should not be regarded as the GPB (OJSC) position and are subject to change without notice, also in connection with new corporate or market events appearing. GPB (OJSC) is not under any obligation to update, amend this report or notify anyone on it. Financial instruments mentioned herein may be unsuitable for certain categories of investors. The report shall not be the only basis for investment decision. Investors shall make investment decisions at their own discretion, inviting independent consultants, if necessary, for their specific interests and objectives. Authors accept no liability whatsoever for any actions arising out of the use of this report.

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