with Alexei Maximov, Chief Executive, Alexei Maximov
Urals Energy has had a turbulent couple of years. Would you begin by describing its development over the last few years?
There have been several manifestations of Urals Energy. The first was started by Mr. Ramzaitsev and Mr. Rovneiko in the late 1980s as a trading company. The company then started to develop into a large producing company based in the Komi Republic and at that time the company was well known in Russia. Then in 2002 most of Urals’ assets were taken over by Lukoil in a divestment deal.
Right now we are at Urals Energy No. 3 which has been organised by the same shareholders as those of Urals Energy No.2. Most of the money came from the proceeds from the 2002 deal with Lukoil and the first acquisition was a $6million asset. By 2005 Urals Energy had become a large producer. A year and a half later Urals Energy was successful in carrying out an IPO in London and from then on the company grew exponentially, acquiring a few very promising assets in the process. The first of these was Dulisma. Urals then acquired a minority stake in Taas-Yuriakh, – a deal with a very difficult structure and financing scheme for the company. The asset was underdeveloped and required serious infusion of capital, most of which came from the leading Russian financial institution – Sberbank. Unfortunately, due to a combination of negative factors including the world economic crisis, the company simply ran out of time and cash to develop its growing asset base and was subsequently faced with a margin call from Sberbank, which led to a management crisis.
It took the company more than 2 long years to deal with this problem, but at the end of 2009 Urals came to an agreement with Sberbank whereby the company’s 2 largest assets (Dulisma and Taas-Yuriakh) were traded for the forgiveness of the loan. When I took over in November 2009, trading was suspended, morale was low, and the perspectives of survival were dim. Some of the original shareholders and managers of the company were faced with a choice of simply walking away or trying to salvage the company. We chose the second path. Even though Urals Energy was forced to sell its best assets to Sberbank, it retained two smaller assets, Arcticneft and Petrosakh, which became the building blocks of our rebirth.
For the last two years the company has focused on restructuring its loans, strengthening relationships with its partners, and significantly reducing its G&A and other costs including corporate headcount. As a result, the company has dramatically cut costs and inefficiencies and has almost rid itself of legacy issues from the old Urals Energy days. In addition, downsizing the company brought a major change in the corporate culture which is now focused less on deal-making, and more on daily operations implemented by a lesser number of devoted employees.
At the end of 2011, after almost 9 months of negotiations, Urals Energy closed the deal with its former partner Taas-Yuriakh on early payment of a shareholder loan not due until 2015. As a result Urals Energy received $26 million in cash, which will now be used for operations in both Kolguyev and Sakhalin.
Urals Energy is in a recovery mode at the moment and is expected to return to profitability in 2012. All our projections are being revisited as a result of our deal with Tass-Uriyakh and the company feels comfortable at this point.
How tempting is it to return to the M&A activity which typified Urals Energy No. 2?
There is always a temptation, there are always deals to be found and the company monitors the market attentively. M&A activity will continue but the company will be more diligent in its choice to make the right deal. This will need new effort and we have limited our appetites to very specific targets, chiefly within the European part of Russia. However, if something exceptional were to come up elsewhere we would not refuse it on principal – never say never.
We will look exclusively at producing companies. In financing, Urals Energy would use a combination of its own money and civil ratio of debt/equity both from Russian and foreign sources; we will obviously continue utilising our existing and growing shareholder base.
The Russian market is difficult for juniors and the overall trend is a fall in the percentage of production from 10% to 2%. What are the challenges that you see?
First of all, the best assets always go to the biggest players, so what the juniors are left with generally requires more effort, capital and know-how. It is a question of finding the right strategy and delivering on it. We believe that we are now doing that.
The other issue is performance and productivity. Smaller operators by virtue of their nature are supposed to be more efficient than the larger companies. The big companies receive the juicy pieces whilst the junior companies get the smaller ones, so as a junior you have to be an efficient operator.
But unfortunately, this is not always the case, and scale and personnel issues do not always work in our favour; even though Russia is an oil and gas country, it is extremely difficult to find the right people to do the job and/or come up reasonable ways of evaluating results. So there is always an issue of whether to use in-house or outsourced services, and to find the right balance of risk and reward.
In addition, the amount of time and resources we need to put into the “servicing” of the business is much greater than our larger counterparts, which can afford to keep a huge staff of non-production employees who do nothing but oblige to a growing number of bureaucratic demands and procedures.
Finally, small operators have less muscle to access cheap sources of capital, thus we are limited in the intensity of our growth.
As a junior company, are there any steps you can take to protect your licences and assets?
The big dog will always try to eat the small dog’s bone.
Fortunately, the large operators have their hands full at the moment and Urals Energy is looking for those assets which do not fit into their strategy. There are not many of the ‘small guys’, but juniors still exist based on these unwanted assets. What is material to us may not be for larger players.
How do you see the government’s 60-66 reforms impacting on this dynamic?
It still remains to be seen how these measures will be profitable for everyone. For Urals Energy it appears that they may produce a positive result. Our company is one of the most northern producers in the world with our work on Kolguev island. The challenges of production from this area mean that the upstream incentives offered by the 60-66 reforms should be a good thing for the company.
Everyone pays taxes in Russia and, depending on the operator, the government offers certain preferential treatment to some companies. We are yet to receive such a favour from the state. It is probably too early to tell how these reforms will pan out from a government’s perspective.
What is the vision of the future of Urals Energy?
We are now finished with Urals Energy No.3 and it is time to build Urals Energy No.4. The model used in the previous cases can be repeated but it needs to be done in a more considered way. Currently we are focusing on growing our production base and have a clear plan in place to do this.
In 2012, Urals Energy will primarily concentrate on what we already have. There will be incremental growth through our well workover program. Urals Energy may consider additional deposits particularly on Kolguev Island where there is the Tarskoye Field deposit. The company intends to bid for this asset at auction. We will not be adding anything at Petrosakh site – improvement will be the major strategy there. Urals Energy has a refinery at Petrosakh and will try to increase refining depth from this asset.
As far as M&A activity is concerned, Urals Energy is alert to opportunities and if something interesting crops up then the company will take it.
Other than this, Urals Energy will be looking to build on its efficiency. Operating in Russia requires attention to an incredible amount of information on a daily basis. This is not even information about production but information about the paperwork connected to licenses. The number of bureaucratic procedures that we have to adhere to is huge, but this is part of doing business in Russia.
The last two years have been testing for the Company and the share price has languished, but Urals Energy is moving past this stage having reduced the debt. Capitalisation becomes important and this is done through production, efficiency and a strong balance sheet.
What have you personally brought to the company as its chief executive?
I have been focused on the company’s cultural change. Currently Urals Energy is a very tight group of people having cut costs and retained only those who are critical to the company. It takes a lot of work to create the understanding that the functioning of the company is a collective effort. The next challenge is to get our producing companies to exist within the same culture. This is partially achieved already but has a way to go.
What would be your message on behalf of Urals Energy to the readers?
Urals has turned a corner, with legacy issues now behind us. Whilst some challenges remain for the small players in this market, we believe in the potential of our acreage and believe that investors will benefit from the company’s return to growth.