S A ADVISORY July - August 1999


S.A. Advisory
2274 Arbor Lane #3
Salt Lake City, Utah 84117

The Internet Black Eye!
On December 28, 1998, we formed a small group of internet issues that in our opinion were perfect candidates for disaster. Eyeballs and clicks can only last so long.
Symbol Sale Price Current Price %G or L
UBID 84.125 $27 7/16 G
EBAY (3 for 1) 98.79 $140 3/4 L
AMZN (3 for 1) 106.25 $110.69 L
AOL 117 $103.81 G
ONSL 68 $18.31 G
NSOL 2-1 82.375 $76 3/8 G
YHOO 247.50 $160 G

Another internet issue that will be added to our list: 1. Priceline.com - PCLN stock trades @ 111 1/2 Bk of $1.31, huge losses and only .21/share in cash. I would rather buy a bottle of air. At least the bottle would be worth something. This issue is worthless.

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Russian Oil Company
Current Price $8 - surgutneftegaz - SGUZY
Ticker symbol: SGUZY -- Exchange OTC
Ratio 1:50 -- Type: ADR
CUSIP: 46625F104 -- 52-week range: 7/8 - 9
Top 3 Mutual Fund: Invesco PLC - 5 million
Goldman Sachs Asset 2.3 million - Barclays Glob 596,570
surgutneftegaz - third largest Russian oil company

The company is probably the most profitable company among the publicly traded Russian stocks. SGUZY is Russia’s second largest exporter of oil in absolute terms. As a percentage of their total output, however, their exports are number one. It is estimated that SGUZY exports around 70% of their crude while LUKOIL exports only 45%. Since the export markets are so much more profitable than the domestic market, it pays off in a big way for SGUZY.

Exporters gained from the currency crisis in many ways. The bulk of their production costs, such as salaries and most of the capital expenses, are in rubles. But they sell their oil for dollars.

SGUZY is the only oil company that increased its upstream investment last year. It is engaged in active developing drilling, representing one third of Russian oil companies’ total. It accounts for 20% of exploration drilling in the time when many Russian oil firms practically stopped looking for additional reserves. SGUZY avoids debt, doesn’t plan any big acquisition and intends to remain based in Surgut, Russia, 2000 kilometers northeast of Moscow. According to the president of SGUZY, at least $1.3 billion USD is safe in a few select Russian banks. According to management, hundreds of millions this year will be plowed into its Siberian oil fields, where production has been rising for four years.

The company headquarters in Surgut, a drab collection of Soviet-era apartment buildings in a mosquito-infested sub-Arctic swamp. Though its one refinery is 2500 kilometers away, it is well-positioned commercially, pumping out refined products near the lucrative St. Petersburg market and export routes to Europe.

The company said the average number of working wells rose to 13,143 from 12,299 in 1997.

It is estimated the SGUZY cost/barrel is around $2.10.

Surgut reported that net sales in 1998 edged up to 25.77 billion rubles from 25.55 billion, while production costs climbed to 18.06 billion rubles from 17.64 billion. The holding company’s oil output rose to 35.2 million tons in 1998 from 33.9 million tons, while production in the first quarter climbed to 8.9 million tons from 8.5 million.

Output of gas rose last year to 10.3 billion cubic meters (bcm) from 10.1 billion. In the first quarter it was up to 2.7 bcm from 2.6.

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Price $3.50 - CUSIP # 825731102

1. Seventh largest Russian oil company.
2. Recently created an ADR - 20 for 1 - 4.5 billion shares outstanding.
3. Sibneft is a latecomer among Russian’s virtually integrated oil companies.
4. The company has recently shown signs of investor-friendly policies.
5. Production costs down to a current level of $2.80/barrel, compared with $1.8/barrel for     LUKOIL and $2.1 for Surgut.
6. Sibneft’s average well output is 14 tons against an industry of 6.8 tons.
7. In an effort to increase hard currency flows, Sibneft is focusing on expanding its export     sales, which grew by 119% over the last six years. During 1998 the company channeled     5.9 million tons of crude abroad.
8. Net profit for 98 $36.5 mil under US GAAP up from $23.9 mil in 1997.
9. Another positive factor in Sibneft strategy is an increase of income through expansion of its operations in Central Russia, adding to its dominance in Siberia, where in 1998 it gained almost full control over the fuel markets in the Omsk, Yekaterinburg, Novosibirsk and Kemerovo regions thanks to a total 130 outlets. The market share of the company in these regions increased from 70% 1997 to 90% in 1998. Sibneft has transferred to GAAP standards and is pushing through full corporate restructuring. Its transparent and westernized management has impressed investors.

The financial crisis has hit Sibneft financial results, but ruble devaluation gives the company a chance of presenting brighter financial results in 1999, when the company is hoping for $100m net profit. Following Lukoil, the company is pursuing a policy of expansion abroad, where it wants to find a more friendly tax regime and more solvent consumers. In 2010 Sibneft plans to extract 20% of its crude abroad, mainly in the Caspian basin and the Middle East.

The Level-1 ADR debut on international markets is clearly a bid to join the Russian blue chip club, and the discount if Sibneft stock compared with market leaders Lukoil and Surgutneftegas deserves a second look.

Comparative Valuation• Values during April 99
Company Market Cap USD min  
Surgutneftegaz 2698  
Lukoil 3896  
Sibneft 587  
Tatneft 196  

Sibneft benefits greatly from Iraqian oil sale via UN.
It should be understood that the usual reams of information on seasoned companies allows astute investors all the tools needed to evaluate the potential of an investment opportunity. Both SGUZY and SBKYY have lots of “sound Bites” for financial information. In our lengthy search, we wish that more finite information was available for us to evaluate for more concrete financial evidence. In our opinion, if everything was “cut and dry”, both of these severely undervalued opportunities would most likely be much higher priced. We rate SGUZY and SBKYY with a strong buy recommendation. It is the Wild West in Russia and risks are everywhere, but over the long term with some luck these stock picks could easily increase in price by 10 times. We personally own all three.

For stock quotes, call Greg Nelson at 1-800-269-9460. Corporate Web: sibneftoao.com


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