Building Corporate Value - Conference organized by PriceWaterhouseCoopers, 24 May 2000, Moscow
Ladies and gentlemen,
it is a pleasure to be invited to address you today, particularly as the topic we are discussing is so important for the future of this country's economy. Sibneft is one of Russia's largest oil companies, one which has made substantial progress in improving efficiency and raising profitability. Yet despite our successful track record, by most measures our company's stock is still seriously undervalued. Why is this?
The one issue which comes up again and again in my meetings with investors is corporate governance. We long ago recognized its importance and we blazed a trail with the introduction of a corporate governance charter and a series of other steps aimed at bringing our company into line with global best practice. I shall talk more about that later. We believe that we have made big strides towards improving corporate governance, but we have still some way to go before we achieve the ambitious goals that we have set for ourselves.
Our experience has taught us one important lesson: good corporate governance is not only important for building investor confidence, but it is also good for the company's bottom line. When you set yourself clear goals and you benefit from transparent operations and finances, you are far better placed to take advantage of growth opportunities than you would be otherwise.
We very much hope that other companies will follow the example that we have set, because until standards are raised throughout the Russian economy, investors will continue to be wary of investing in Russian stocks. The country also needs legal mechanisms to enforce these standards, otherwise the abuses of shareholder rights which we have heard so much about will continue to happen. And investors will quickly decide that the tradeoff between risk and reward is better in other emerging markets.
Too many businesses in this country continue to believe that siphoning off the value that the company creates today is more important than unlocking the latent value that the company has the potential to create tomorrow. This has to change.
Now let me talk in a little more detail about the steps Sibneft has taken in the field of corporate governance. The key word is transparency - a transparent organization, a clear set of goals and transparent finances. It has taken us almost two years to get where we are today, and we have still not fully achieved our aims.
One of our goals is to create a single entity out of the various units that make up Sibneft today. By spring 1999, we had raised our stake in our Noyabrsk production subsidiary to 95%, while the consolidation of the Omsk refinery is still ongoing.
Sibneft's corporate governance charter published in July 1998 was the first major corporate governance initiative in Russia. A committee of foreign experts produced a set of recommendations, which were adopted in full and have now been fully implemented. Sibneft's nine-member board now includes three non-executive directors. The company has four years of accounts audited to US GAAP standards, and we have made commitment to open up our shareholder register.
Sibneft now has five committees, including an audit committee, a remuneration committee and one specifically dealing with minority shareholders. The company's stock is listed on a number of Russian exchanges, while its American Depositary Receipts trade in the US, Frankfurt and Berlin.
We believe that a clear mission and strategy are absolutely essential, both for the outside world and for the running of the company itself. We have introduced a one-year business plan, which forms the basis for monthly budgeting. We have also adopted a five-year plan called Project 2003. Our company has put considerable effort into the creation of an advanced system for the management of information which allows us to keep track of our operational and financial performance on a daily basis.
Our mission is to fully realize and enhance the potential of our resource base, our people and the markets we serve. We aim to provide a world class return on a high quality asset base, and to create a simple and transparent corporate structure with a single share. We also strive to set a new Russian benchmark for efficiency and competitiveness in the oil industry.
Our key targets over the next five years are to increase production in West Siberia to 400,000 b/d, raise the share of outsourced service and maintenance to half of our overall spending on these items, and to further reduce our workforce from 42,000 to 25,000. We also aim to increase the amount of our own production sold through Sibneft's retail outlets from 13% currently to more than 60%, while raising the number of retail sites to 1,300.
Sibneft is keen to acquire new assets where the price is right, but we do not intend to enter into any mergers. We remain open to the possibility to striking up strategic partnerships with other companies, and we have been continuing discussions with TotalFinaElf over cooperation in the development of our Sugmut field.
We regard the creation of a new planning system as one of our major achievements. The new system has a crucial role to play in ensuring that we maximize the return on our investment. We are for the first time able to accurately measure the profitability of each field, and we are also able to evaluate and compare returns on investments made at the level of individual wells. In our planning process, we use fairly conservative assumptions - our current benchmark is a 22% NPV discount rate at an average long term oil price of $16.
Sibneft has come a long way in the last four years. We have broken new ground with our initiatives aimed at improving corporate governance and introducing greater transparency. And we have been encouraged by the strong vote of confidence which we have received from investors in doing so. But we still have a long way to go before we achieve the targets we have set for ourselves.Thank you for your attention.