DROP IN WORLD OIL PRICES MAKES UKRAINA (UKRAINIAN OIL) STOCK PROBLEMATICAL

Even in winter, the heating season. Now the price fall cannot be checked, the more so since not all OPEC countries adhere to their production quotas.

This instantly affected most major Russian oil companies' stock prices. Because of the market backwardness, in Ukraine they did pass unnoticed, though Ukrnafta in some indices is approaching the average for Russian companies.

Let's take for comparison one of them, Noiabrskneftegaz (Noiabrsk Oil & Gas), producing 6% of petroleum in Russia and occupying the sixth position in production volume (18.6 million tons in 1996) and eighth in proven reserves (about 1.5 billion tons). The company exceeds Ukrnafta in oil production six times and in proven reserves 4-5 times. Vis-€-vis Ukraine its production cost price is rather low, with its fields are efficiently pumped and not old. Since January 19, 1998, now 51% of the Noiabrskneftegaz's shares belong to the newly created UKSI oil company. This points to the rising petroleum giants in Russia and forced division of the Ukrainian company, being rather small in world terms.

On January 1, 1998, general market capitalization of the Noiabrskneftegaz joint-stock company topped about $314.18 million, or Hr 596.94 million.

On January 1, 1998, general market capitalization of Ukrnafta topped out around $228.33 million, or Hr 433.83 million. An illustrative comparison. And this with the fields being old, low annual production volume, and company integrity dubious. Thus Ukrnafta was decidedly overvalued, even in comparison with an average medium-sized Russian company, let alone the big ones.

For Ukrnafta spends almost nothing on transportation, and the profitability of its oil production is acceptable for such a profitable sector. The company is actually a monopolist in Ukrainian oil production. What would happen if its price were the same as the average for large oil fields? And this will sooner or later happen.

Thus, oil business high profits are impossible in the long term, we have inherited such nonsense from the Cold War period, when oil was a strategic raw material. The financial institutions that then invested the great bulk of their capital into oil companies could even lose them in case of their fast depreciation. Thus the oil exporting states (OPEC) set rigid quotas on oil production.

If prices fall Ukrnafta's oil will not compete with that of the more profitable Near Eastern, Russian, and North Sea oil fields, Ukrnafta would be compelled to cap most of its wells. And its shares would naturally fall in price.

Hence, with the fall of world oil prices, Ukrnafta stock could also. Nonetheless this all belongs to the remote future, now one can play well enough with these shares, especially if the latest rumors and talk about breaking off Okhtyrkanaftahas (Okhtyrka Oil & Gas) are only a government provocation (deliberate or not is another question).

Should Ukrnafta integrity be threatened (now improbable, but theoretically it could happen should the current government breaks Ukrainian tradition and remains in power over a year, and should it gain wide prestige and support without forgetting its old ideas), share price could fall up to Hr 5 or lower.

Photo by Valeriy Miloserdov, The Day:
Ukrainian oil workers, toiling with their hands for a living and often getting paid after much delay, had pinned virtually their last hope on the shares of their employer, the most profitable ones in Ukraine. But, judging by the capitalization index petroleum securities seem somewhat overvalued... And what can we expect now?