8/2/2019 JNOS_29Jul09

1/13

30 July 2009 Maria Klimova

SLAVNEFT-YANOS(Bloomberg: JNOS RU, JNOSP RU)

Coverage In i t ia t ion:

The Unref ined Value

We initiate our coverage on Slavneft-YaNOS, thefifth largest Russian oil refinery, with a BUYrecommendation. We favour preferred shares(JNOSP), which look dramatically undervaluedcompared to common shares (JNOS) offering a318% upside potential. On top of that prefs carryvoting rights, as the issuer didn't pay theguaranteed preferred dividends for 2008.Our valuation approach is based on comparingJNOS to European downstream companies basedon the Equivalent Distribution Capacity (EDC). Weregard the asset-based EV/EDC multiple as themost appropriate measure of the refinerysrelative value because the tolling practicesapplied by JNOSs effective co-owners, TNK-BPand Gazpromneft, make the issuer's financialstotally misrepresenting.

Advantages: The firth largest Russian refinery with an above-

average 5.4 Nelson Complexity Index.

Favourable geographic location ensures stabledomestic demand for JNOSs end productsincluding European standard fuels.

An ambitious modernization program is designedto upgrade JNOS into one of the most advancedRussian refineries with an 88% refining depth.

The Sever oil products pipeline launched in May2008 provides JNOS with direct access toEuropean export markets.

The existing export duty regime makes the in-house oil refining more attractive than crudeexport.

If the co-ownership status of JNOSs parent

company, Slavneft, is resolved, the ultimateowner (most likely Gazpromneft) may ease oreven abolish the transfer pricing applied through atolling scheme unlocking the refinerys value.

A speculative idea betting on the possibility of aminority buyback if either TNK-BP or Gazpromneft establishes the ultimate sole ownership.

Disadvantages: The Slavnefts ownership split results in re-distribution of added value to the effective majority

owners of JNOS. Gazpromneft and TNK-BP are co-running the refinery as a tolling centre paying ittiny processing fees comprising a fraction of the real refining margins.

The scenario implying a single owner establishing control over JNOS remains distant in time. Low liquidity and a potential squeeze-out risk: major owners indirectly control a 94.1% equity stake.

The implementation of the last stage of the facilities upgrade program seems to be behind schedule.

High debt 30% denominated in foreign currency (JPY).

Stock information

Ticker, common shares JNOS RUMid-price, $ 0.285Target price, $ 0.483Upside, comm 69%Rating, comm BUY

Ticker, preferred shares JNOSP RUMid-price, $ 0.093Target price, $ 0.386Upside, prefs 318%Rating, prefs BUY

Market value, $ m

MCAP 294.6Net debt 545.7Enterprise Value 840.2

JNOS, JNOSP vs RTS

0%

20%

40%

60%

80%

100%

120%

140%

Jan-07

Mar-07

May-0

7

Jul-07

Sep-0

7

Nov-07

Jan-08

Mar-08

May-0

8

Jul-08

Sep-0

8

Nov-0

8

Jan-09

Mar-09

May-0

9

Jul-09

RTSJNOSJNOSP

Source: Bloomberg, OLMA estimates.

8/2/2019 JNOS_29Jul09

2/13

OLMA Investment Company Slavneft-YaNOS

30 July 2009 2

COMPANY SNAPSHOT

A high-quality assetSlavneft-JNOS (JNOS), the subsidiary of Slavneft oil holding, is the firth largest Russian oil refinery with a111 m barrels-per-annum (bpa) crude distillation capacity (15.2 m tonnes per annum (tpa), 304000 barrels-per-day (bpd)). The refinery is located just 300 km from Moscow in the city of Yaroslavl (650 thousand

inhabitants). The refinerys capacity utilization has been one of the highest in Russia over the past decade.The refinerys crude supplies mainly come from Western Siberian oil fields (from Megionneftegaz and otherSlavnefts upstream subsidiaries). The output oil products are 50:50 shared by TNK-BP and Gazpromneftwho feel comfortable with operating JNOS as a tolling center until they agree on how to split Slavneftsassets. The co-owners skim most of the added value produced by refining operations by paying JNOS tinyprocessing fees, which have low correlation with the true economics of the refining business.

JNOS capacity utilization Refineries by Nelson Complexity Indexes

13 800

14 000

14 200

14 400

14 600

14 800

15 000

15 200

15 400

2004 2005 2006 2007 2008 2009e

tpa

80%

82%

84%

86%

88%

90%

92%

Refining capacity (l.h.s.) Capacity Utilization (r.h.s.)

US refineries

Worldwide

Ufaneftekhim(ufnc)

JNOS (jnos)

Moscow NPZ

(mnpz)

Novoil (nunz)

Russia

Orsk NPZ (orfe)

Khabarovsky

NPZ (hnpz)

SalavatNOS

(snoz)

Ufimsky NPZ(unpz)

Saratovsky NPZ(krkn)

0.0 2.0 4.0 6.0 8.0 10.0 12.0

Source: Company data, OLMA estimates Source: Oil&Gas Journal, OLMA estimates

Installation and integration of new deep oil refining units performed through 2001-2006 upgraded JNOS from

the position of an industry laggard to an above-average Russian refinery in terms of complexity, product mixand quality. The Nelson Complexity Index (NCI)

1for JNOS is 5.4, slightly above the Russian average. The

refinerys NCI is likely to increase further following the implementation of the final stage of the modernizationprogram originally scheduled for 2007-2010.

The Sever oil products pipeline launched in May 2008 connected JNOS to the Baltic port of Primorsk,providing a direct route to European export markets. Access to the pipeline is a strong competitiveadvantage for JNOS. If JNOS were allowed to operate on fair market terms, the benefits of the newtransportation route (which are now reaped by TNK-BP and Gazpromneft) would transform into materialtransportation cost savings for the company.

The Sever pipeline

Source: Transnefteproduct, OLMA

1 The Nelson Complexity Index (NCI) measures relative refinery construction costs based upon the distillation and upgrading capacity arefinery has. The index was developed by Wilbur L. Nelson in the 1960s to quantify the relative cost of the components that make up arefinery. The Nelson index compares the costs of various upgrading units such as a catalytic cracker, or a reformer to the cost of a basiccrude distillation unit. (The Oil&Gas Journal)

8/2/2019 JNOS_29Jul09

3/13

OLMA Investment Company Slavneft-YaNOS

30 July 2009 3

Modernization program leads to product mix evolution

A large-scale modernization program should transform JNOS into one of the most advanced refineries inRussia. The first-phase upgrade program of more than $700 m total cost was implemented through 2001-2006.

New deep oil refining units installed at JNOS.

Equipment Year ofinstallation

Description/Expected result Unit'sNCI

Preliminary Hydrorefining unit 2003 Hydrorefining unit is used in the diesel production process 2.50

Visbreaking unit 2004Visbreaking alows to increase the yield of middle distillates(mainly, heating oil) by reducing viscosity of residual oil.

2.75

Hydrocracking unit 2005Cracking processes increases the yield of light and middledistillates. The hydrocracking unit is designed to boost JNOS'spotential refining depth from 62% to 71%.

6.00

Catalytic reforming unit 2006Catalytic reforming process is used to increase the yield of high-octane gasoline. The unit is required to produce gasoline meetingthe Euro-3 and Euro-4 standards.

5.00

Vacuum distillation unit 2006Vacuum distillation is a more sophisticated primary refiningprocess compared to atmospheric crude distillation. Vacuumgasoil is used as a feedstock for the hydrocracking and catalyticreforming units.

2.00

Source: Oil&Gas Journal, JNOS, OLMA estimates

The installation of the new equipment boosted JNOSs refining depth from 60% to 67%. The refinerynoticeably increased the light products share in its end-product mix and launched production of the motorfuels meeting Euro-4 standards.

The second phase of JNOS's modernization scheduled for 2007-2010 should allow to rollout the productionof low-silphur diesel and fuel oil meeting European standards and to increase its crude refining depth to 88%in 2010. However, the to-date implementation of these ambitious plans raises a lot of questions.

Were getting to believe that the above stated 88% refining depth is a distant goal for JNOS rather than a

realistic 2010 target. Since 2006 JNOS has announced no new large-scale equipment launches. Since thefirst stage of upgrade was finalized in 2006 the refinerys oil processing depth remained in the 66-67% range,which may signal about the absence of progress with the implementation of the second phase of theupgrade program. From the more optimistic point of view, in 2007-2008 JNOS might have decided to deferfurther makeover activities until domestic demand for high-octane gasoline is sufficient to justify theinvestments. The demand for European-standard fuels remains low in Russia, as a large number of carsowned by individuals and companies are outdated and the Russia-wide implementation of Euro-4 fuelstandards will likely be postponed till 2012.

JNOS product mix evolution JNOSs refining depth growth plans

6% 7% 7.1% 5%

42% 41% 35% 36%

34% 33%30% 31%

5% 6%

6% 5%

9%6%

3% 4%

7%11%

15% 15%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2005 2008 Russia

avg.(2008)

Other Fuel Oil DieselJet Fuel Low-Octane gasoline High-Octane gasoline

60.00%

65.00%

70.00%

75.00%

80.00%

85.00%

90.00%

2005 2006 2007 2008 2009 2010e

Rus sia av g YaNOS

Source: JNOS, InfoTEK, Lukoil, OLMA estimates Source: Minpromenergo, JNOS, OLMA estimates

8/2/2019 JNOS_29Jul09

4/13

OLMA Investment Company Slavneft-YaNOS

30 July 2009 4

Ownership structure and share liquidityWe believe Slavneft parent holdings co-owners, Gazpromneft and TNK-BP, effectively control 94.1% ofJNOS. A 39.1% stake is directly owned by Slavneft and another 55% stake belongs to two offshorecompanies. These entities, in turn, are presumed to be affiliated with Slavneft or less likely to Gazpromneftand TNK-BP, which means that it would be quite easy to accumulate the 95% stake required for a minoritysqueeze-out on a single legal entity. Theoretically, JNOS may become a consolidation play if the refinery

finds a single owner. However, both minority buyback and minority squeeze-out chances look very remotefrom the current standpoint as no progress towards the resolution of Slavnefts co-ownership status havebeen made since 2006.

The latest important event in the life of Slavneft holding is dated back to April 2006 when its two owners,Gazpromneft and TNK-BP, decided to equally share the holdings crude output and refining capacity afterfailing to agree on how to share the jointly-owned assets. We believe Gazpromneft, which is short of refiningcapacity, is more likely to become the ultimate single owner of JNOS.

2The resolution of the endless dual-

ownership status obviously seems a matter of distant future. However, any news from this front couldbecome a positive trigger for the JNOS share price. When the refinery finds its ultimate owner, the existingvalue-distortion transfer pricing practice may be eased (or even abolished), thus, unlocking JNOSs upsidepotential.

JNOS ownership and free-float

Total Interest Commons Prefs

Slavneft 39.1% 50.7% 1.0%

Other majority owners* 55.0% 46.2% 20.3%

Free-float 5.9% 3.0% 78.7%

Free-float value, $ m 31.3 8.1 23.2

* Offshore companies affiliated with Slavneft, or TNK/BP and GazpromneftSource: Company data, OLMA estimates

The free-float in JNOS is very low. Virtually no common shares circulate on the market, and de-facto onlypreferred shares are available for purchase. The additional reason for picking prefs instead of commons isthat they currently possess voting rights since JNOS refused to pay dividends for 2008. The refinery hasnever been a generous dividend payer, but the tiny dividends of 0.01 RUB/share (1% of the stocks parvalue) are guaranteed by the companys charter.

Financial performance is distorted by transfer pricing

Operating on a tolling basis, JNOS collects a fraction of profits it could have earned as an independentrefinery. JNOSs financial statements totally misrepresent the economics of the Russian oil refining business.Over the past five years, JNOS has reported outrageously small processing margins (processing fees net ofprocessing costs) compared with the implied domestic refining margins for the respective years. According toour calculations, the 2008 operating profit would have been 16 times higher than the reported figure if JNOSwas working on fair market terms (i.e. if the refinery was buying crude from independent suppliers and sellingits refined products on the domestic market).

On a positive note, its affiliation to the two oil majors provides JNOS with an extremely cheap source of long-term financing. We emphasize that the refinerys large-scale modernization program was mainly financed viathe low-interest and interest-free loans from the Slavnefts subsidiaries. Despite the extreme debt

repayments due in 2009, the default risk for JNOS is minimal as most of the companys debt is owed to itsparent company.

The below graph illustrates the extent of JNOSs value erosion due to transfer-pricing.

The reported processing margin calculated per barrel of crude throughput is simply the processingfee received by JNOS less the refining cost as reported in the RAS financials.

The theoretical refining margin is the margin JNOS would have earned if it was allowed to sell its oilproducts on the domestic market and to buy crude oil from domestic producers. The theoreticalrefining margin is net of processing and transportation costs. We also subtracted the implied interestexpenses JNOS would have to pay if it was borrowing from the banks instead of using the interest-free loans from its parent company. The incoming oil price was estimated on an export netback

2One scenario suggests that one partner, most probably Gazpromneft, would eventually buy out the other's stake in Slavneft. The otherscenario assumes that Gazprom, the parent company of Gazpromneft, would finally acquire control in TNK-BP Holding (negotiationswere rumored to take place in 1H2008) and consolidate Slavneft under Gazpromneft. The third scenario is that the partners finally agreehow to strip assets out of Slavneft. In such a case Gazpromneft would be more interested in taking over the refining business. So far,we've seen little progress in realizing either of these scenarios.

8/2/2019 JNOS_29Jul09

5/13

OLMA Investment Company Slavneft-YaNOS

30 July 2009 5

basis.3

Although it may substantially differ from the real crude prices quoted by oil producers, theexport netback price is close enough to the average crude oil price inside Russia to be used for ourillustrative theoretical refining margin calculation.

The reported processing margins of JNOS comprise a fraction of the theoretical refining margins, whichmeans that the bulk of the oil refining added value is accumulated in the hands of the majority owners.

JNOSs reported refining profits vs implied refining margins

0

2

4

6

8

10

12

14

16

18

20

2005 2006 2007 2008 2009e

$/bbl

0

10

20

30

40

50

60

70

80

90

100

$/bbl

Reported processing margin (l.h.s.) Reported processing fee (l.h.s.)Theoretical refining margin (l .h.s.) Urals (r.h.s.), $/bblUrals export netback (r.h.s.)

Source: JNOS, Bloomberg, Transneft, OLMA estimates.

High JPY-denominated debt is a source of financial riskJNOSs modernization program was financed via massive debt issuance. As of 1Q09 JNOSs totalborrowings accounted for $545 m with about 29% of the debt is denominated in Japanese Yens (JPY). In2000 JNOS attracted a $230 m JPY-denominated loan from the Japanese Eximbank via the Bank of Tokio-Mitsubishi. On top of that, since 2003 the refinery has been actively exploiting the virtually non-interestrouble loans from Slavneft parent holding and affiliated companies.

The Japanese loan (VEB loan) was granted as part of the Russia-Japan cooperation agreement andguaranteed by the Russian government via Vnesheconombank (VEB). Unsurprisingly, the original loanagreement implied extremely attractive terms: the principal repayments were scheduled for a 10-year periodstaring from 2005, and the effective annual interest rate was less than 3%, according to our calculations. TheJPY-denominated debt was an advantage to JNOS during the recent wealthy years when Russian roublewas appreciating together with oil prices. However, the same loan became a material negative factor for thecompanys financial performance during the dramatic rouble devaluation in 4Q08-1Q09. According to ourestimates, in 2008 and 1Q09 JNOSs FX-losses incurred through revaluation of its borrowings accounted for$67 m and $5mn, having sent the respective periods net profits into negative territory. Considering ourmacroeconomic projections implying further rouble depreciation, we regard the large amount of JPY-denominated debt as an additional financial risk for JNOS.

In regard to the debt maturity schedule, the peak of repayments comes due in 2009. The $350 m amount ofdebt maturing this year looks exorbitant for JNOS. However, we consider the insolvency risk extremely low,since the major portion of repayments is comprised of the loans from Slavneft-affiliated companies. Webelieve the refinery will simply re-finance the debt when it comes due via the new interest-free or low-interestloans from the parent company (de-facto from TNK-BP and Gazpromneft).

JNOS debt structure, 1Q09 JNOSs scheduled debt repayments

"VEB"

loan - ST

portion

5%

Slavneft&

affiliates -

LT portion

9%

"VEB"

loan - LT

portion

24% Slavneft&

affiliates -

ST portion

62%

0

50

100

150

200

250

300

350

400

2009e 2010e 2011e 2012e 2013e 2014e 2015e

$ m

"VEB" loan Interest-free loans from Slavneft

Source: JNOS, OLMA estimates

3Crude export netback=Urals fob price (Urals cif price net of freight and insurance costs)-Crude export duty- transportation costs.

8/2/2019 JNOS_29Jul09

6/13

OLMA Investment Company Slavneft-YaNOS

30 July 2009 6

Valuation

Our valuation of JNOS is based on comparing its market value per unit of its Equivalent Distillation Capacity(EDC)

4to European refineries. We consider the EV/EDC multiple the most appropriate way of measuring the

refinery's relative value taking into account that its financials are totally distorted by the existing tollingpractices.

Since JNOSs RAS statements are estranged from reality, the DCF model based on the reported numberswould produce totally misleading results and would significantly underestimate the true value of thecompany. At the same time, applying a DCF model based on the theoretical refining profitability that JNOScould earn as an independent entity would not be a fair approach either since we have no grounds toassume that transfer pricing vanishes in the foreseeable future. We do not apply financial-based multiples forthe same reason considering them unrealistic and hardly comparable to peers.

We estimated the target EV/EDC multiples for JNOS using three comparison methodologies: PeerComparison, M&A Deals Comparison and Replacement Cost.

Peer Comparison is the only way allowing us to trace the current relative premiums/discounts topeers. It is the most reliable approach, in our view. Our fair value calculation for JNOS is 100%based on the companys benchmarking to the European refineries on the EV/EDC basis.

We used the M&A-based approach to cross-check our peer-based valuation, though we decided not

to incorporate the results into the target price calculation. The historical EV/EDC ratios implied in therecent refineries acquisitions may have become outdated amid the financial markets turbulence,which led to lower asset valuations across the world.

The comparative data about the refinerys replacement costs are the least reliable, becausegreenfield refinery construction projects substantially differ by their size, complexity, geographiclocation etc. We estimated the replacement cost for JNOS based on its reported asset impairmentdata for the purpose of double-checking rather than for target price calculations.

Valuation process:

Step 1. We benchmarked JNOS against other domestic and foreign publicly traded refineries. Havingstudied the oil refining sectors across the world, we considered European oil processing plants the mostsimilar to Russian refineries in terms of their complexity, raw material quality (many European refineries

process Urals crude oil), the end-product mix and the sales geography. Therefore, we decided to apply theEuropean refineries average EV/EDC ratio as a benchmark multiple to estimate the fair value for JNOS.

We note that JNOS doesnt look like a cheap option compared to the traded Russian refineries. Despite that,we consider JNOSs investment case one of the strongest in the sector (after the three Bashkiria-basedrefineries unpz, ufnc, nunz), due to its high-quality asset base, favourable geographic location, high capacityutilization and the huge unrealized upside sealed by transfer pricing.

The peer comparison table containing the full foreign peers list (including US and developing marketsrefineries) is provided in Appendix 3.

JNOSs peer comparison summary table

Holdingcompany Ticker

MCAP,$ mn

EV, $mn

Distilla-tion

capacity,m bpa NCI EDC

EV/EDC,$/bbl/NCI

JNOS Slavneft jnos ru 295 840 111 5.4 603 1.4

OrskNOS Russneft orfe ru 210 255 47 4.7 223 1.1

Saratov NPZ TNK-BP krkn ru 226 226 44 3.8 167 1.4

Moscow NPZ Gazpromneft mzpz ru 191 189 89 5.3 469 0.4

Ufaneftekhim JSFC Sistema ufnc ru 763 773 67 6.0 407 1.9

Ufimsky NPZ JSFC Sistema unpz ru 408 269 86 4.5 382 0.7

Novoil JSFC Sistema nunz ru 574 492 104 5.2 536 0.9

Khabarovsk NPZ Alliance (WSR) hnpz 28 338 32 3.4 108 3.1

Average: Russian refinerie*s 2 504 3 193 491 4.9 2 427 1.3

Average: European refineries 3.3

JNOS's premium/(Discount) to domestic refineries 8.7 6%

JNOS's premium/(Discount) to European refineries -57%*The Russian refineries average numbers were calculated without mnpz, whose shares price-in the long-lasting shareholders conflict.

Source: Bloomberg, Companies, Oil&Gas Journal, OLMA estimates

4The Equivalent Distillation Capacity (EDC) is calculated as the refinerys Crude Distillation capacity times its NCI.

8/2/2019 JNOS_29Jul09

7/13

OLMA Investment Company Slavneft-YaNOS

30 July 2009 7

Step.2. We tracked the recent M&A history in the European refining sector, having analysed 13 dealscompleted in 2006-1H09. Again, JNOS appears heavily discounted compared to the average assetacquisition multiples in Europe. If a refinery of the same size and complexity was put on sale in Europe, theimplied EV of such a deal would be 2.6 times higher than that of JNOS.

We decided to use the European average M&A EV/EDC multiple of 3.7 to cross-check our fair valueestimate for JNOS. The full table showing the details of the analysed assets acquisitions is provided in

Appendix 4.JNOS is cheap compared to refineries acquired in Europe.

RegionAverage implied EV/Capacity,

$/bbl

AverageimpliedEV/EDC Comments

Europe 28.1 3.7

Average multiples are calculated based on 13refinery acquisitions that have taken place in 2005-2009

JNOS current multiples 7.6 1.4

Implied premium/(discount) to European M&A valuations -62%

Source: Bloomberg, Companies, Oil&Gas Journal, OLMA estimates

Step 3. We studied the recently announced greenfield projects across the world to calculate the averagereplacement cost per barrel of throughput per annum, which is equal to $57/bpa. We note that this

replacement cost estimate doesnt account for the relative refineries complexity. Since we do not havereliable data on the complexity of the announced projects, we decided to use the replacement cost estimateonly to cross-check our peer-based valuation results. In order to be conservative we assumed that the newoil cracking plants will be high-complex facilities with an average NCI equal to 10.

Greenfield refinery projects

Company LocationExpected

completiondate

Capacity,bpd

Capacity,m bpa.

Cost,$ b

Cost,$/bpa

Petrovietnam Vietnam 2009 142 000 51.8 3.0 58

CNPC and Rosneft Tianjin, China 2012 200 000 73.0 3.1 42

Kuwait Petroleum and Sipnopec Guangdong, China 2013 300 000 109.5 8.5 78

SOCAR (via Petkm) Turkey 2010 160 000 58.4 3.0 51

Saudi Aramco and Total Jubail 2015 400 000 146.0 10.0 68

Rosneft Vladivostok 2014 400 000 146.0 7.0 48

KazMunaiGaz, Oil India, Calik Enerji, Eni Jeihan, TurkeyProject put

on hold300 000 109.5 5.0 46

Total/average: 1 902 000 694 39.6 57

Target EV/Capacity, $/bbl 57

Assumed NCI for new refineries 10

Target EV/EDC for JNOS EV/Capacity/NCI 5.7

JNOS's EDC EDC 603

Gross replacement cost for JNOS, $ m EV/EDC*EDC 3 438

Depreciation Dep 34%

Net replacement cost for JNOS, $ m EV/EDC*EDC*(1-Dep) 2 275

Source: Companies, Reuters, RBC Daily, Oil&Gas Vertical, WSJ, OLMA estimates

Step 4. We calculated the target fair value ($1.97 b) for JNOS by multiplying the peer-based target EV/EDCmultiple by JNOSs estimated EDC. We further compared the resulting fair value to the M&A-based fair valueand estimated replacement cost. Both M&A-based ($2.21 b) and replacement cost ($2.28 b) valuationresults exceeded the peer-based fair value estimate by 12-16%, thus, supporting our calculations.

Step 5. We applied liquidity and corporate governance discounts to produce an adjusted fair value estimate.

1) Liquidity discount

Our valuation produces an estimate of the target mid-price, so our liquidity discount should reflect the factthat investors will buy the low-liquid JNOS shares at the offer price and sell at the bid price. Having studied

the real bid-to-offer spreads history for JNOS and JNOSP we considered a unified 50% liquidity discountreasonable.

2) Corporate governance discounts

8/2/2019 JNOS_29Jul09

8/13

OLMA Investment Company Slavneft-YaNOS

30 July 2009 8

In addition, we applied a corporate governance discount to reflect our subjective view on JNOSs corporategovernance practices and the minority mistreatment risks related to the Slavneft parent company. Wedecided to assign JNOS the same 20% discount for corporate governance, which we earlier applied toSlavneft upstream subsidiaries (mfgs, slme, obne). We note that JNOSs majority owners have to collect lessthan 1% from the market to reach the 95% minority squeeze-out threshold. However, we have no reason toassume that a minority buyback or a squeeze-out will take place until the ultimate single ownership of JNOSis defined.

Step 6. We assigned a 20% preferred to common shares discount to estimate the target share price for bothstock types. We intentionally lowered the conventional 30% pref-to-common discount taking into account theabsence of liquidity in commons, and the voting rights the prefs possess after not paying 2008 guaranteeddividends.

JNOS target price calculation

JNOS data

Capacity, m bpa 111.0

EDC, m bpa*NCI 603.1

MCAP, $m 294.6

Net debt, $m 545.7

EV, $m 840.2

Peer-based valuation Formula EV/Capacity, $/bbl EV/EDC, $/bbl/NI

Current multiples:

JNOS 1.4

European refineries average: EV/EDC(ER) 3.3

JNOS premium/(discount) -57%

M&A multiples

Average EV/EDC(MA) 3.7

JNOS premium/(discount) -62%

Replacement cost

Average for greenfield projects EV/Cap 57.0 5.7

JNOS assets impairment* Dep 34% 34%

Target EV, $ m

Peer-based valuation EV/EDC(ER)*EDC 1 972.1

M&A-based EV EV/EDC(ER)*EDC 2 208.0Replacement value EV/EDC*EDC*(1-Dep) 2 275.2

Less: Net debt 545.7

Target MCAP, $ m Weighs

Peer-based valuation Target EV-Net debt 100% 1 426.5

M&A-based EV Target EV-Net debt 0% 1 662.3

Replacement value Target EV-Net debt 0% 1 729.5

Target MCAP (weighted average) 1 426.5

Liquidity discount LD 50%

Corporate governance discount GD 20%

Adjusted target MCAP, $ m MCAP*(1-LD)*(1-GD) 570.6

Implied upside 94%

# Common shares, m 932.7

#Preferred shares, m 310.9

Target Pref/Com discount 20%

Current price - comm, $ 0.285

Target price- comm, $ 0.483

Upside 69%

Current price - pref, $ 0.093

Target price- pref, $ 0.386

Upside 318%

* Accumulated depreciation/replacement value (according to the 1Q09 RAS statements)

Source:OLMA estimates

Our valuation resulted in the $0.483 and $0.386 target prices for JNOSs commons (JNOS) and prefs

(JNOSP), respectively. We assign BUY to both share types, although we favour preferred shares. Prefs offera 318% upside potential and look dramatically undervalued compared to commons, especially consideringthe voting rights prefs possess.

8/2/2019 JNOS_29Jul09

9/13

OLMA Investment Company Slavneft-YaNOS

30 July 2009 9

APPENDIX 1: RUSSIAN REFINING INDUSTRY DRIVERSMargins in the oil downstream business substantially expanded in Russia in the last several years. Themajor positive factors for the industry were:

The strength of oil and oil products export prices.

A favourable export duty regime making the oil refining more profitable compared to crude exports.

The absence of price regulations on the domestic crude and fuel markets. Steadily growing domestic demand for fuels, especially for gasoline and diesel, backed by rapid

expansion of the number of cars registered in Russia.

The deficit of in-house refining capacity for high-quality fuels meeting international standards (theEuro-3 fuel standards were officially implemented in Russia at the beginning of 2008).

Domestic prices for oil, gasoline, diesel and other fuels are mainly determined by the export parity, and, thus,are closely linked to the respective export netbacks

5. The general correlation between domestic and export

fuel prices is more or less stable. However, the actual prices for fuels vary greatly across Russia due todifferent product specifications, regional demand-supply balances, transportation costs differences etc.

In 2005-2009 export fuel prices followed the Urals price trend, and the weighted value of the export fuelbasket

6was very close to Urals quotes. Meanwhile, the existing export duty regime stipulates substantially

lower export duties for refined products compared to the crude oil exports, which leads to higher exportnetbacks for oil products compared to crude oil, and, consequently, results in higher domestic fuel prices andoils refining margins. The profitability of domestic downstream operations is positively correlated with the oilprice, as the gap between oil- and oil products export duties expands with the oil price growth.

Export prices for oil products vs Urals Export duties for oil and oil products

20

40

60

80

100

120

140

160

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

$/bbl

Urals Motor gasolineDiesel fuel Fuel oilExport fuel basket, $/bbl

0

10

20

30

40

50

60

70

80

90

30 40 50 60 70 80 90 100 110 120 130 140Oil price, $/bbl

Export duty,

$/bbl

Crude oil Light oil products Dark oil products

Source: Bloomberg, OLMA estimates Source: Federal Customs Service, OLMA estimates

Downstream margins7

in Russia vs Europe and US

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.016.0

18.0

20.0

Export refining

margin in

Russia

Urals refining

margin in

Europe

Brent refining

margin in

Europe

Brent refining

margin in US

WTI refining

margin in US

$/bbl

2006 2007 2008 1H09

Source: Bloomberg, InfoTEK, OLMA estimates

5Export netback=Export fob price (Export cif price net of tanker freight and insurance costs)-Export duty-Average transportation costs(railway or pipeline).6

Export fuel basket is comprised of 13% gasoline, 28% diesel, 48% fuel oil, 2% jet fuel, 5% other products (lubes etc.), assuming 5%technological oil loss.7All margins are net of oil refining costs. The export refining margins for Russia are based on the export netbacks.

8/2/2019 JNOS_29Jul09

10/13

OLMA Investment Company Slavneft-YaNOS

30 July 2009 10

APPENDIX 2: JNOSS FINANCIAL STATEMENTS

2005 2006 2007 2008 1Q09 2005 2006 2007 2008 1Q09Income Statement $ m $ m $ m $ m $ m RUB m RUB m RUB m RUB m RUB mRevenues 226.7 339.3 411.6 498.4 102.5 6 419 9 208 10 518 12 397 3 501

y-o-y 19% 50% 21% 21% 33%

Crude Processing 220.9 317.0 384.4 466.2 97.2 6 253 8 603 9 822 11 598 3 319

y-o-y 19% 44% 21% 21% 37%

Oil Products 0.1 0.1 0.2 0.3 0.1 2 2 4 7 2

Other services 5.8 22.2 27.1 31.8 5.3 164 603 691 792 180

Operating costs -193.4 -304.4 -371.5 -422.9 -80.3 -5 480 -8 273 -9 499 -10 522 -2 748

y-o-y 18% 57% 22% 14% 8% 0 1 0 0 0

Crude Processing -189.7 -285.5 -346.2 -391.8 -75.5 -5 371 -7 748 -8 846 -9 746 -2 580

y-o-y 20% 51% 21% 13% 9%

Oil Products -0.1 -0.1 -0.2 -0.3 -0.1 -2 -2 -4 -7 -2

Other Services -3.8 -19.3 -25.4 -30.9 -4.9 -108 -523 -649 -769 -167

Commercial Expenses 0.0 0.0 0.0 0.0 0.0 0 0 0 0 0

Operating Income 33.2 34.4 39.9 75.4 22.0 939 935 1 019 1 875 753

y-o-y 20% 4% 16% 89% 700%

EBITDA 76.6 127.4 154.3 195.3 44.5 2 168 3 458 3 942 4 858 1 520

Interest Income 0.0 0.2 0.6 1.1 0.3 1 5 14 29 10

Interest Expenses -2.2 -9.2 -8.0 -8.5 -2.0 -61 -249 -205 -211 -69

Income from Investments 0.0 0.0 0.0 0.0 0.0 0 0 0 0 0Non-operating incomes 42.0 42.6 34.7 24.5 20.9 1 189 1 155 887 611 713

Non-operating expenses -33.2 -38.4 -52.1 -115.9 -42.9 -941 -1 042 -1 331 -2 883 -1 466

Net Income Bfr Taxes 39.8 29.6 15.0 -23.3 -1.7 1 127 803 384 -580 -58

Provision for Income Taxes -10.4 -9.0 -4.7 4.3 0.2 -296 -244 -120 108 6

Net Income After Taxes 29.4 20.6 10.3 -19.0 -1.5 832 559 264 -472 -52

Net Income 29.4 20.6 10.3 -19.0 -1.5 832 559 264 -472 -52

y-o-y 273% -30% -50% -284% -81%

Preferred Dividends -0.1 -0.1 -0.1 0.0 0.0 -3 -3 -3 0 0

Balance Sheet $ m $ m $ m $ m $ m RUB m RUB m RUB m RUB m RUB m

Inventories 28.9 51.8 54.8 55.9 64.9 917 1 526 1 522 1 608 2 160

Prepaid expenses 2.0 2.0 2.9 2.8 3.7 64 58 81 81 123

Prepaid taxes 25.2 1.8 1.2 2.4 3.6 801 52 33 68 121

Receivables 63.9 54.6 84.6 92.1 68.6 2 033 1 609 2 348 2 651 2 282

Other ST Investments 0.3 0.3 0.3 0.7 0.5 10 7 7 19 18

Cash and Equivalents 3.5 4.1 6.6 14.0 2.3 111 120 183 404 76

Total Current Assets 123.8 114.5 150.4 167.9 143.7 3 936 3 373 4 175 4 832 4 778

Intangible Assets, net 6 4 3 1 1

Tangible assets, net 645.1 786.4 768.8 682.4 567.9 20 505 23 162 21 332 19 640 18 883

Construction in Progress 113.0 22.2 60.4 119.0 152.9 3 592 655 1 677 3 426 5 083

Long-term Investments 6.8 6.6 6.8 6.3 5.6 216 196 188 182 185

Deferred taxes 0.1 0.2 0.1 4.0 3.5 4 5 3 115 118

Total Non-curr. Assets 765.0 815.4 836.1 811.7 729.9 24 322 24 022 23 202 23 364 24 269

Total Assets 888.9 929.9 986.5 979.6 873.6 28 258 27 395 27 377 28 196 29 048

Short-term loans 46.5 0.9 40.0 380.7 328.2 1 479 28 1 109 10 959 10 914

Payables 36.5 31.6 70.9 120.0 119.7 1 161 932 1 967 3 454 3 981

Deferred Income 0.0 0.0 0.0 0.0 2.0 0 0 0 0 65

Total Current Liabilities 83.0 32.6 110.9 500.7 449.9 2 639 960 3 076 14 413 14 960

Long-term loans 600.2 656.4 609.6 238.7 217.4 19 076 19 335 16 915 6 870 7 230

Deferred Income Tax 6.4 7.0 8.3 7.4 6.3 205 206 230 213 210Total Liabilities 689.6 696.0 728.7 746.8 673.7 21 920 20 500 20 222 21 496 22 400

Equity capital 105.6 113.8 120.5 115.8 100.2 3 358 3 352 3 345 3 333 3 331

Reserve Capital 5.9 6.3 6.7 6.5 5.6 187 187 187 187 187

Retaine earnings 87.9 113.9 130.6 110.5 94.1 2 794 3 356 3 624 3 180 3 130

Total Equity 199.4 234.1 257.9 232.8 199.9 6 338 6 894 7 155 6 700 6 648

Total Liabilities&Equity 889.1 930.1 986.6 979.6 873.6 28 258 27 395 27 377 28 196 29 048

Margins 2005 2006 2007 2008 1Q09

Crude processing margin 14% 10% 10% 16% 22%

Operating margin 15% 10% 10% 15% 22%

EBITDA margin 34% 38% 37% 39% 43%

Net margin 13% 6% 3% -4% -1%Depreciation, % ofrevenues -19% -27% -28% -24% -22%

Debt indicators 2005 2006 2007 2008 1Q09

Interest coverage ratio 2.3 3.7 3.9 2.6

Debt/EBITDA 9.5 5.6 4.6 3.7Source: JNOS, OLMA estimates

8/2/2019 JNOS_29Jul09

11/13

8/2/2019 JNOS_29Jul09

12/13

8/2/2019 JNOS_29Jul09

13/13

OLMA Investment Company Slavneft-YaNOS

30 July 2009 Maria Klimova

OLMA Investment Company

7/1 Maly Karetny Per.

Moscow, Russia 127051

+7-495-960-3121

www.olma.ru

Sales and Trading

Head of Equities: Bob SaharovTel: +7 (495) 960-3121, ext. 303E-mail: bob@olma.ru

Co-head of Equities: Alexei BystrovTel: +7 (495) 960-3121, ext. 301E-mail: alex@olma.ru

Managing Director Sales and Trading:Nicholas BetskyTel: +7 (495) 960-3121, ext. 441E-mail: betsky@olma.ru

Head of Sales: Dmitry LobanovTel: +7 (495) 960-3121, ext. 308E-mail: lobanov@olma.ru

Sales: Roman RassadinTel: +7 (495) 960-3121, ext. 306E-mail: rar@olma.ru

Alexander LoktevTel: +7 (495) 960-3121, ext. 309E-mail: alexl@olma.ru

Sergey SheikovTel: +7 (495) 960-3121, ext. 296E-mail: sheikov@olma.ru

Sergey PetrovTel: +7 (495) 960-3121, ext. 320E-mail: spetrov@olma.ru

Research

Head of Research: Vladimir Detinich, CFA

Tel: +7 (495) 960-3121, ext. 414E-mail: dva@olma.ru

Equity Markets: Anton StartsevTel: +7 (495) 960-3121, ext. 452E-mail:sav@olma.ru

Metals & Mining: Teimur SemenovTel: +7 (495) 960-3121, ext. 478E-mail:tas@olma.ru

Special situations:Maria KlimovaTel: +7 (495) 960-3121, ext. 477E-mail: klimovamb@olma.ru

Infrastructure:Artur GalimovTel: +7 (495) 960-3121, ext. 480E-mail: artur.galimov@olma.ru

2009 OLMA Investment Company

The information contained herein is for your private use. OLMA respects international regulations concerning sales and

distribution of securities, therefore we do not solicit any action based upon this information. This is not to be construedas an offer or recommendation to purchase or sell any investment. OLMA has based this document on information

obtained from sources it believes to be reliable, but which sometimes it has not independently verified, therefore we

provide no guarantee for its completeness and/or accuracy. All judgments and/or viewpoints expressed in this material

can only be valid in conjunction with the current date appearing on this booklet. We do not guarantee that the

information is to be updated on a regular basis, and all disclosed errors and/or inaccuracies are to be corrected. OLMA

or its associated partners or its employees may own or have positions in any investment mentioned herein and may

from time to time add to or dispose of any such investment. Foreign currency denominated securities are subject to

certain price volatility and their purchase and/or sale may incur an adverse effect on the initial value or the price of, or

lower the income derived from, the investment.

This material has been issued by OLMA Publications. Any prospective investor should note that Russian securities

involve a high degree of risk.Any copying or reproduction, partly or wholly, of the information contained in this booklet can only be made withpermission of OLMA.