SLAVNEFT-YANOS

(Bloomberg: JNOS RU, JNOSP RU)

Coverage Initiation: The Unrefined Value

We initiate our coverage on Slavneft-YaNOS, the fifth largest Russian oil refinery, with a BUY recommendation. We favour preferred shares (JNOSP), which look dramatically undervalued compared to common shares (JNOS) offering a 318% upside potential. On top of that prefs carry voting rights, as the issuer didn't pay the guaranteed preferred dividends for 2008. Our valuation approach is based on comparing JNOS to European downstream companies based on the Equivalent Distribution Capacity (EDC). We regard the asset-based EV/EDC multiple as the most appropriate measure of the refinerys relative value because the tolling practices applied by JNOSs effective co-owners, TNK-BP and Gazpromneft, make the issuer's financials totally misrepresenting. Stock information Ticker, common shares Mid-price, $ Target price, $ Upside, comm Rating, comm Ticker, preferred shares Mid-price, $ Target price, $ Upside, prefs Rating, prefs JNOS RU 0.285 0.483 69% BUY JNOSP RU 0.093 0.386 318% BUY

Market value, $ m MCAP Net debt Enterprise Value JNOS, JNOSP vs RTS
140% 120% 100% 80% 60% 40% 20% 0%
Ja n M -07 ar M -07 ay -0 Ju 7 Se l-07 p N -07 ov J a 07 nM 08 a M r-08 ay -0 Ju 8 l-0 Se 8 p N -08 ov J a 08 nM 09 a M r-09 ay J u 09 l-0 9

Advantages:
The firth largest Russian refinery with an aboveaverage 5.4 Nelson Complexity Index. Favourable geographic location ensures stable domestic demand for JNOSs end products including European standard fuels. An ambitious modernization program is designed to upgrade JNOS into one of the most advanced Russian refineries with an 88% refining depth. The Sever oil products pipeline launched in May 2008 provides JNOS with direct access to European export markets. The existing export duty regime makes the inhouse oil refining more attractive than crude export. If the co-ownership status of JNOSs parent company, Slavneft, is resolved, the ultimate owner (most likely Gazpromneft) may ease or even abolish the transfer pricing applied through a tolling scheme unlocking the refinerys value.

294.6 545.7 840.2

RTS JNOS JNOSP

Source: Bloomberg, OLMA estimates.

A speculative idea betting on the possibility of a minority 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 it tiny 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. Maria Klimova

High debt 30% denominated in foreign currency (JPY). 30 July 2009

OLMA Investment Company

COMPANY SNAPSHOT

Slavneft-YaNOS

A high-quality asset
Slavneft-JNOS (JNOS), the subsidiary of Slavneft oil holding, is the firth largest Russian oil refinery with a 111 m barrels-per-annum (bpa) crude distillation capacity (15.2 m tonnes per annum (tpa), 304000 barrelsper-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 other Slavnefts upstream subsidiaries). The output oil products are 50:50 shared by TNK-BP and Gazpromneft who feel comfortable with operating JNOS as a tolling center until they agree on how to split Slavnefts assets. The co-owners skim most of the added value produced by refining operations by paying JNOS tiny processing fees, which have low correlation with the true economics of the refining business. JNOS capacity utilization
tpa
15 400 15 200 15 000 14 800 14 600 14 400 14 200 14 000 13 800 2004 2005 2006 Refining capacity (l.h.s.) 82% 80% 2007 2008 2009e Capacity Utilization (r.h.s.)
0.0 2.0 4.0

Refineries by Nelson Complexity Indexes

92% 90% 88% 86% 84%
SalavatNOS (snoz) Khabarovsky NPZ (hnpz) Saratovsky NPZ (krkn) Ufimsky NPZ (unpz) Orsk NPZ (orfe) Russia Novoil (nunz) Moscow NPZ (mnpz) JNOS (jnos) Ufaneftekhim (ufnc) Worldwide US refineries 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 mix and quality. The Nelson Complexity Index (NCI)1 for 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 modernization program 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 competitive advantage for JNOS. If JNOS were allowed to operate on fair market terms, the benefits of the new transportation route (which are now reaped by TNK-BP and Gazpromneft) would transform into material transportation 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 a refinery has. The index was developed by Wilbur L. Nelson in the 1960s to quantify the relative cost of the components that make up a refinery. The Nelson index compares the costs of various upgrading units such as a catalytic cracker, or a reformer to the cost of a basic crude distillation unit. (The Oil&Gas Journal)

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OLMA Investment Company

Slavneft-YaNOS

Modernization program leads to product mix evolution

A large-scale modernization program should transform JNOS into one of the most advanced refineries in Russia. The first-phase upgrade program of more than $700 m total cost was implemented through 20012006. New deep oil refining units installed at JNOS.
Equipment Preliminary Hydrorefining unit Visbreaking unit Year of installation 2003 2004 Description/Expected result Hydrorefining unit is used in the diesel production process Visbreaking alows to increase the yield of middle distillates (mainly, heating oil) by reducing viscosity of residual oil. Cracking processes increases the yield of light and middle distillates. The hydrocracking unit is designed to boost JNOS's potential refining depth from 62% to 71%. Catalytic reforming process is used to increase the yield of highoctane gasoline. The unit is required to produce gasoline meeting the Euro-3 and Euro-4 standards. Vacuum distillation is a more sophisticated primary refining process compared to atmospheric crude distillation. Vacuum gasoil is used as a feedstock for the hydrocracking and catalytic reforming units. Unit's NCI 2.50 2.75

Hydrocracking unit

2005

6.00

Catalytic reforming unit

2006

5.00

Vacuum distillation unit

2006

2.00

Source: Oil&Gas Journal, JNOS, OLMA estimates

The installation of the new equipment boosted JNOSs refining depth from 60% to 67%. The refinery noticeably increased the light products share in its end-product mix and launched production of the motor fuels meeting Euro-4 standards. The second phase of JNOS's modernization scheduled for 2007-2010 should allow to rollout the production of 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 the first 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 the upgrade program. From the more optimistic point of view, in 2007-2008 JNOS might have decided to defer further makeover activities until domestic demand for high-octane gasoline is sufficient to justify the investments. The demand for European-standard fuels remains low in Russia, as a large number of cars owned by individuals and companies are outdated and the Russia-wide implementation of Euro-4 fuel standards will likely be postponed till 2012. JNOS product mix evolution
100% 90% 80% 70% 60% 50% 40% 30% 42% 20% 41% 35% 36% 34% 33% 30% 31%

JNOSs refining depth growth plans

90.00%

7% 9% 5%

11% 6% 6%

15% 3% 6%

15% 4% 5%

85.00%

80.00%

75.00%

70.00%

65.00%
10% 0% 6% 2000 7% 2005 7.1% 2008 5% Russia avg.(2008)

60.00% 2005 2006 2007 Russia avg 2008 YaNOS 2009 2010e

Other Jet Fuel

Fuel Oil Low-Octane gasoline

Diesel High-Octane gasoline

Source: JNOS, InfoTEK, Lukoil, OLMA estimates

Source: Minpromenergo, JNOS, OLMA estimates

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OLMA Investment Company

Slavneft-YaNOS

Ownership structure and share liquidity

We believe Slavneft parent holdings co-owners, Gazpromneft and TNK-BP, effectively control 94.1% of JNOS. A 39.1% stake is directly owned by Slavneft and another 55% stake belongs to two offshore companies. These entities, in turn, are presumed to be affiliated with Slavneft or less likely to Gazpromneft and TNK-BP, which means that it would be quite easy to accumulate the 95% stake required for a minority squeeze-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 remote from the current standpoint as no progress towards the resolution of Slavnefts co-ownership status have been 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 after failing to agree on how to share the jointly-owned assets. We believe Gazpromneft, which is short of refining capacity, is more likely to become the ultimate single owner of JNOS.2 The resolution of the endless dualownership status obviously seems a matter of distant future. However, any news from this front could become a positive trigger for the JNOS share price. When the refinery finds its ultimate owner, the existing value-distortion transfer pricing practice may be eased (or even abolished), thus, unlocking JNOSs upside potential. JNOS ownership and free-float
Total Interest Slavneft Other majority owners* Free-float Free-float value, $ m 39.1% 55.0% 5.9% 31.3 Commons 50.7% 46.2% 3.0% 8.1 Prefs 1.0% 20.3% 78.7% 23.2

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

The free-float in JNOS is very low. Virtually no common shares circulate on the market, and de-facto only preferred shares are available for purchase. The additional reason for picking prefs instead of commons is that they currently possess voting rights since JNOS refused to pay dividends for 2008. The refinery has never been a generous dividend payer, but the tiny dividends of 0.01 RUB/share (1% of the stocks par value) 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 independent refinery. 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 of processing costs) compared with the implied domestic refining margins for the respective years. According to our calculations, the 2008 operating profit would have been 16 times higher than the reported figure if JNOS was working on fair market terms (i.e. if the refinery was buying crude from independent suppliers and selling its 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 longterm financing. We emphasize that the refinerys large-scale modernization program was mainly financed via the 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 its parent 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 processing fee 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 oil products on the domestic market and to buy crude oil from domestic producers. The theoretical refining margin is net of processing and transportation costs. We also subtracted the implied interest expenses JNOS would have to pay if it was borrowing from the banks instead of using the interestfree loans from its parent company. The incoming oil price was estimated on an export netback

One scenario suggests that one partner, most probably Gazpromneft, would eventually buy out the other's stake in Slavneft. The other scenario assumes that Gazprom, the parent company of Gazpromneft, would finally acquire control in TNK-BP Holding (negotiations were rumored to take place in 1H2008) and consolidate Slavneft under Gazpromneft. The third scenario is that the partners finally agree how 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.

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OLMA Investment Company

Slavneft-YaNOS

basis.3 Although it may substantially differ from the real crude prices quoted by oil producers, the export netback price is close enough to the average crude oil price inside Russia to be used for our illustrative theoretical refining margin calculation. The reported processing margins of JNOS comprise a fraction of the theoretical refining margins, which means 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
20 18 16 14 12 10 8 6 4 2 0 2005 2006 2007 Reported processing margin (l.h.s.) Theoretical refining margin (l.h.s.) Urals export netback (r.h.s.) 2008 2009e Reported processing fee (l.h.s.) Urals (r.h.s.), $/bbl $/bbl $/bbl 100 90 80 70 60 50 40 30 20 10 0

Source: JNOS, Bloomberg, Transneft, OLMA estimates.

High JPY-denominated debt is a source of financial risk

JNOSs modernization program was financed via massive debt issuance. As of 1Q09 JNOSs total borrowings accounted for $545 m with about 29% of the debt is denominated in Japanese Yens (JPY). In 2000 JNOS attracted a $230 m JPY-denominated loan from the Japanese Eximbank via the Bank of TokioMitsubishi. On top of that, since 2003 the refinery has been actively exploiting the virtually non-interest rouble loans from Slavneft parent holding and affiliated companies. The Japanese loan (VEB loan) was granted as part of the Russia-Japan cooperation agreement and guaranteed by the Russian government via Vnesheconombank (VEB). Unsurprisingly, the original loan agreement implied extremely attractive terms: the principal repayments were scheduled for a 10-year period staring from 2005, and the effective annual interest rate was less than 3%, according to our calculations. The JPY-denominated debt was an advantage to JNOS during the recent wealthy years when Russian rouble was appreciating together with oil prices. However, the same loan became a material negative factor for the companys financial performance during the dramatic rouble devaluation in 4Q08-1Q09. According to our estimates, 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 our macroeconomic projections implying further rouble depreciation, we regard the large amount of JPYdenominated 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 of debt 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. We believe the refinery will simply re-finance the debt when it comes due via the new interest-free or low-interest loans from the parent company (de-facto from TNK-BP and Gazpromneft). JNOS debt structure, 1Q09
Slavneft& "VEB" affiliates - loan - ST LT portion portion 9% 5%

JNOSs scheduled debt repayments

400 350 300 $m

"VEB" loan - LT portion 24%

250 200
Slavneft& affiliates ST portion 62%

150 100 50 0 2009e 2010e 2011e 2012e 2013e 2014e 2015e "VEB" loan Interest-free loans from Slavneft

Source: JNOS, OLMA estimates

3

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

30 July 2009

OLMA Investment Company

Slavneft-YaNOS

Valuation
Our valuation of JNOS is based on comparing its market value per unit of its Equivalent Distillation Capacity (EDC)4 to 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 tolling practices. Since JNOSs RAS statements are estranged from reality, the DCF model based on the reported numbers would produce totally misleading results and would significantly underestimate the true value of the company. At the same time, applying a DCF model based on the theoretical refining profitability that JNOS could earn as an independent entity would not be a fair approach either since we have no grounds to assume that transfer pricing vanishes in the foreseeable future. We do not apply financial-based multiples for the same reason considering them unrealistic and hardly comparable to peers. We estimated the target EV/EDC multiples for JNOS using three comparison methodologies: Peer Comparison, M&A Deals Comparison and Replacement Cost. Peer Comparison is the only way allowing us to trace the current relative premiums/discounts to peers. 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 the recent 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, because greenfield refinery construction projects substantially differ by their size, complexity, geographic location etc. We estimated the replacement cost for JNOS based on its reported asset impairment data 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. Having studied the oil refining sectors across the world, we considered European oil processing plants the most similar 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 the European 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-based refineries unpz, ufnc, nunz), due to its high-quality asset base, favourable geographic location, high capacity utilization and the huge unrealized upside sealed by transfer pricing. The peer comparison table containing the full foreign peers list (including US and developing markets refineries) is provided in Appendix 3. JNOSs peer comparison summary table
Distillation capacity, m bpa 111 47 44 89 67 86 104 32 491

JNOS OrskNOS Saratov NPZ Moscow NPZ Ufaneftekhim Ufimsky NPZ Novoil Khabarovsk NPZ Average: Russian refinerie*s Average: European refineries

Holding company Slavneft Russneft TNK-BP Gazpromneft JSFC Sistema JSFC Sistema JSFC Sistema Alliance (WSR)

Ticker jnos ru orfe ru krkn ru mzpz ru ufnc ru unpz ru nunz ru hnpz

MCAP, $ mn 295 210 226 191 763 408 574 28 2 504

EV, $ mn 840 255 226 189 773 269 492 338 3 193

NCI 5.4 4.7 3.8 5.3 6.0 4.5 5.2 3.4 4.9 8.7

EDC 603 223 167 469 407 382 536 108 2 427

EV/EDC, $/bbl/NCI 1.4 1.1 1.4 0.4 1.9 0.7 0.9 3.1 1.3 3.3 6%

JNOS's premium/(Discount) to domestic refineries

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
4

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

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OLMA Investment Company

Slavneft-YaNOS

Step.2. We tracked the recent M&A history in the European refining sector, having analysed 13 deals completed in 2006-1H09. Again, JNOS appears heavily discounted compared to the average asset acquisition multiples in Europe. If a refinery of the same size and complexity was put on sale in Europe, the implied 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 value estimate 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.
Average implied EV/Capacity, $/bbl Average implied EV/EDC

Region

Europe 28.1 JNOS current multiples 7.6 Implied premium/(discount) to European M&A valuations Source: Bloomberg, Companies, Oil&Gas Journal, OLMA estimates

3.7 1.4 -62%

Comments Average multiples are calculated based on 13 refinery acquisitions that have taken place in 20052009

Step 3. We studied the recently announced greenfield projects across the world to calculate the average replacement 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 have reliable data on the complexity of the announced projects, we decided to use the replacement cost estimate only to cross-check our peer-based valuation results. In order to be conservative we assumed that the new oil cracking plants will be high-complex facilities with an average NCI equal to 10. Greenfield refinery projects
Company Petrovietnam CNPC and Rosneft Kuwait Petroleum and Sipnopec SOCAR (via Petkm) Saudi Aramco and Total Rosneft KazMunaiGaz, Oil India, Calik Enerji, Eni Total/average: Target EV/Capacity, $/bbl Assumed NCI for new refineries Target EV/EDC for JNOS JNOS's EDC Gross replacement cost for JNOS, $ m Depreciation Net replacement cost for JNOS, $ m EV/Capacity/NCI EDC EV/EDC*EDC Dep EV/EDC*EDC*(1-Dep) Location Vietnam Tianjin, China Guangdong, China Turkey Jubail Vladivostok Jeihan, Turkey Expected completion date 2009 2012 2013 2010 2015 2014 Project put on hold Capacity, bpd 142 000 200 000 300 000 160 000 400 000 400 000 300 000 1 902 000 Capacity, m bpa. 51.8 73.0 109.5 58.4 146.0 146.0 109.5 694 Cost, $b 3.0 3.1 8.5 3.0 10.0 7.0 5.0 39.6 Cost, $/bpa 58 42 78 51 68 48 46 57 57 10 5.7 603 3 438 34% 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/EDC multiple by JNOSs estimated EDC. We further compared the resulting fair value to the M&A-based fair value and estimated replacement cost. Both M&A-based ($2.21 b) and replacement cost ($2.28 b) valuation results 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 fact that 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 discount reasonable. 2) Corporate governance discounts 30 July 2009 7

OLMA Investment Company

Slavneft-YaNOS

In addition, we applied a corporate governance discount to reflect our subjective view on JNOSs corporate governance practices and the minority mistreatment risks related to the Slavneft parent company. We decided to assign JNOS the same 20% discount for corporate governance, which we earlier applied to Slavneft upstream subsidiaries (mfgs, slme, obne). We note that JNOSs majority owners have to collect less than 1% from the market to reach the 95% minority squeeze-out threshold. However, we have no reason to assume that a minority buyback or a squeeze-out will take place until the ultimate single ownership of JNOS is defined. Step 6. We assigned a 20% preferred to common shares discount to estimate the target share price for both stock types. We intentionally lowered the conventional 30% pref-to-common discount taking into account the absence of liquidity in commons, and the voting rights the prefs possess after not paying 2008 guaranteed dividends. JNOS target price calculation
JNOS data Capacity, m bpa EDC, m bpa*NCI MCAP, $m Net debt, $m EV, $m Peer-based valuation Current multiples: JNOS European refineries average: JNOS premium/(discount) M&A multiples Average JNOS premium/(discount) Replacement cost Average for greenfield projects JNOS assets impairment* Target EV, $ m Peer-based valuation M&A-based EV Replacement value Less: Net debt Target MCAP, $ m Peer-based valuation M&A-based EV Replacement value Target MCAP (weighted average) Liquidity discount Corporate governance discount Adjusted target MCAP, $ m Implied upside # Common shares, m #Preferred shares, m Target Pref/Com discount Current price - comm, $ Target price- comm, $ Upside Current price - pref, $ Target price- pref, $ Upside * Accumulated depreciation/replacement value (according to the 1Q09 RAS statements) Source:OLMA estimates 111.0 603.1 294.6 545.7 840.2 Formula

EV/Capacity, $/bbl

EV/EDC, $/bbl/NI 1.4 3.3 -57% 3.7 -62%

EV/EDC(ER)

EV/EDC(MA)

EV/Cap Dep

57.0 34%

5.7 34%

EV/EDC(ER)*EDC EV/EDC(ER)*EDC EV/EDC*EDC*(1-Dep) Weighs 100% 0% 0%

1 972.1 2 208.0 2 275.2 545.7 1 426.5 1 662.3 1 729.5 1 426.5 50% 20% 570.6 94% 932.7 310.9 20% 0.285 0.483 69% 0.093 0.386 318%

Target EV-Net debt Target EV-Net debt Target EV-Net debt LD GD MCAP*(1-LD)*(1-GD)

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 offer a 318% upside potential and look dramatically undervalued compared to commons, especially considering the voting rights prefs possess.

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OLMA Investment Company

Slavneft-YaNOS

APPENDIX 1: RUSSIAN REFINING INDUSTRY DRIVERS Margins in the oil downstream business substantially expanded in Russia in the last several years. The major 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 (the Euro-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 netbacks5. 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 to different 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 fuel basket6 was 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 export netbacks for oil products compared to crude oil, and, consequently, results in higher domestic fuel prices and oils refining margins. The profitability of domestic downstream operations is positively correlated with the oil price, as the gap between oil- and oil products export duties expands with the oil price growth. Export prices for oil products vs Urals
$/bbl 160 140 120 100 80 60 40 20 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 Urals Diesel fuel Export fuel basket, $/bbl Motor gasoline Fuel oil
90 80 70 60 50 40 30 20 10 0 30 40 50 60 70 80 90 100 110 120 130 140 Oil price, $/bbl

Export duties for oil and oil products

Crude oil Export duty, $/bbl Light oil products Dark oil products

Source: Bloomberg, OLMA estimates

7

Source: Federal Customs Service, OLMA estimates

Downstream margins in Russia vs Europe and US

2006 2007 2008 1H09

20.0 18.0 16.0 14.0 12.0 $/bbl 10.0 8.0 6.0 4.0 2.0 0.0 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

Source: Bloomberg, InfoTEK, OLMA estimates

Export 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. 7 All margins are net of oil refining costs. The export refining margins for Russia are based on the export netbacks.

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OLMA Investment Company

APPENDIX 2: JNOSS FINANCIAL STATEMENTS
Income Statement Revenues y-o-y Crude Processing y-o-y Oil Products Other services Operating costs y-o-y Crude Processing y-o-y Oil Products Other Services Commercial Expenses Operating Income y-o-y EBITDA Interest Income Interest Expenses Income from Investments Non-operating incomes Non-operating expenses Net Income Bfr Taxes Provision for Income Taxes Net Income After Taxes Net Income y-o-y Preferred Dividends Balance Sheet Inventories Prepaid expenses Prepaid taxes Receivables Other ST Investments Cash and Equivalents Total Current Assets Intangible Assets, net Tangible assets, net Construction in Progress Long-term Investments Deferred taxes Total Non-curr. Assets Total Assets Short-term loans Payables Deferred Income Total Current Liabilities Long-term loans Deferred Income Tax Total Liabilities Equity capital Reserve Capital Retaine earnings Total Equity Total Liabilities&Equity Margins Crude processing margin Operating margin EBITDA margin Net margin Depreciation, % of revenues Debt indicators Interest coverage ratio Debt/EBITDA Source: JNOS, OLMA estimates 2005 $m 226.7 19% 220.9 19% 0.1 5.8 -193.4 18% -189.7 20% -0.1 -3.8 0.0 33.2 20% 76.6 0.0 -2.2 0.0 42.0 -33.2 39.8 -10.4 29.4 29.4 273% -0.1 $m 28.9 2.0 25.2 63.9 0.3 3.5 123.8 645.1 113.0 6.8 0.1 765.0 888.9 46.5 36.5 0.0 83.0 600.2 6.4 689.6 105.6 5.9 87.9 199.4 889.1 2005 14% 15% 34% 13% -19% 2005 2.3 9.5 2006 $m 339.3 50% 317.0 44% 0.1 22.2 -304.4 57% -285.5 51% -0.1 -19.3 0.0 34.4 4% 127.4 0.2 -9.2 0.0 42.6 -38.4 29.6 -9.0 20.6 20.6 -30% -0.1 $m 51.8 2.0 1.8 54.6 0.3 4.1 114.5 786.4 22.2 6.6 0.2 815.4 929.9 0.9 31.6 0.0 32.6 656.4 7.0 696.0 113.8 6.3 113.9 234.1 930.1 2006 10% 10% 38% 6% -27% 2006 3.7 5.6 2007 $m 411.6 21% 384.4 21% 0.2 27.1 -371.5 22% -346.2 21% -0.2 -25.4 0.0 39.9 16% 154.3 0.6 -8.0 0.0 34.7 -52.1 15.0 -4.7 10.3 10.3 -50% -0.1 $m 54.8 2.9 1.2 84.6 0.3 6.6 150.4 768.8 60.4 6.8 0.1 836.1 986.5 40.0 70.9 0.0 110.9 609.6 8.3 728.7 120.5 6.7 130.6 257.9 986.6 2007 10% 10% 37% 3% -28% 2007 3.9 4.6 2008 $m 498.4 21% 466.2 21% 0.3 31.8 -422.9 14% -391.8 13% -0.3 -30.9 0.0 75.4 89% 195.3 1.1 -8.5 0.0 24.5 -115.9 -23.3 4.3 -19.0 -19.0 -284% 0.0 $m 55.9 2.8 2.4 92.1 0.7 14.0 167.9 682.4 119.0 6.3 4.0 811.7 979.6 380.7 120.0 0.0 500.7 238.7 7.4 746.8 115.8 6.5 110.5 232.8 979.6 2008 16% 15% 39% -4% -24% 2008 2.6 3.7 1Q09 $m 102.5 33% 97.2 37% 0.1 5.3 -80.3 8% -75.5 9% -0.1 -4.9 0.0 22.0 700% 44.5 0.3 -2.0 0.0 20.9 -42.9 -1.7 0.2 -1.5 -1.5 -81% 0.0 $m 64.9 3.7 3.6 68.6 0.5 2.3 143.7 567.9 152.9 5.6 3.5 729.9 873.6 328.2 119.7 2.0 449.9 217.4 6.3 673.7 100.2 5.6 94.1 199.9 873.6 1Q09 22% 22% 43% -1% -22% 1Q09 2005 RUB m 6 419 6 253 2 164 -5 480 0 -5 371 -2 -108 0 939 2 168 1 -61 0 1 189 -941 1 127 -296 832 832 -3 RUB m 917 64 801 2 033 10 111 3 936 6 20 505 3 592 216 4 24 322 28 258 1 479 1 161 0 2 639 19 076 205 21 920 3 358 187 2 794 6 338 28 258 2006 RUB m 9 208 8 603 2 603 -8 273 1 -7 748 -2 -523 0 935 3 458 5 -249 0 1 155 -1 042 803 -244 559 559 -3 RUB m 1 526 58 52 1 609 7 120 3 373 4 23 162 655 196 5 24 022 27 395 28 932 0 960 19 335 206 20 500 3 352 187 3 356 6 894 27 395

Slavneft-YaNOS

2007 RUB m 10 518 9 822 4 691 -9 499 0 -8 846 -4 -649 0 1 019 3 942 14 -205 0 887 -1 331 384 -120 264 264 -3 RUB m 1 522 81 33 2 348 7 183 4 175 3 21 332 1 677 188 3 23 202 27 377 1 109 1 967 0 3 076 16 915 230 20 222 3 345 187 3 624 7 155 27 377

2008 RUB m 12 397 11 598 7 792 -10 522 0 -9 746 -7 -769 0 1 875 4 858 29 -211 0 611 -2 883 -580 108 -472 -472 0 RUB m 1 608 81 68 2 651 19 404 4 832 1 19 640 3 426 182 115 23 364 28 196 10 959 3 454 0 14 413 6 870 213 21 496 3 333 187 3 180 6 700 28 196

1Q09 RUB m 3 501 3 319 2 180 -2 748 0 -2 580 -2 -167 0 753 1 520 10 -69 0 713 -1 466 -58 6 -52 -52 0 RUB m 2 160 123 121 2 282 18 76 4 778 1 18 883 5 083 185 118 24 269 29 048 10 914 3 981 65 14 960 7 230 210 22 400 3 331 187 3 130 6 648 29 048

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OLMA Investment Company

APPENDIX 3: RUSSIAN REFINERIES VS DOMESTIC AND GLOBAL PEERS
Holding/ Country YaroslavNOS OrskNOS Saratov NPZ Ufaneftekhim Ufimsky NPZ Novoil Khabarovsk NPZ Average: Russian refineries* European refineries Slovnaft (MOL Group) Tupras Grupa Lotos PKN Orlen Neste Oil Hellenic Petroleum Saras SpA ERG SpA Motor Oil (Hellas) Petroplus Average: European refineries United States refineries Frontier Oil Holly Sunoco Tesoro Valero Energy Average: US refineries Other developing markets Bharat Petroleum Hindustan Petroleum Mangalore refinery Esso Thailand Thai Oil SK Energy S-Oil Corporation Average: Developing markets Slavneft Russneft TNK-BP JSFC Sistema JSFC Sistema JSFC Sistema Alliance (WSR) Ticker jnos ru orfe ru krkn ru ufnc ru unpz ru nunz ru hnpz MCAP, $ mn 295 210 226 763 408 574 28 2 504 2 184 3 116 976 3 833 3 748 3 129 2 726 2 195 1 280 1 057 24 244 1 498 1 059 2 898 1 811 10 193 17 460 3 478 3 034 2 328 2 250 616 7 532 5 293 24 530 EV, $ mn 840 255 226 773 269 492 338 3 193 2 130 3 321 1 945 8 063 5 166 4 092 3 196 3 805 1 941 2 636 36 296 1 365 1 340 4 821 3 402 15 829 26 758 6 857 3 247 5 707 3 470 1 595 12 506 5 594 38 975 Distillation capacity, m bpa 111 47 44 67 86 104 32 491 42 206 77 240 75 116 110 80 40 283 1 269 66 79 332 241 949 1 668 208 95 91 100 65 420 212 1 191 NCI 5.4 4.7 3.8 6.0 4.5 5.2 3.4 4.9 9.9 7.6 10.0 8.9 11.1 6.4 9.9 9.0 12.0 8.3 8.7 11.0 11.8 8.7 8.5 13.4 11.6 7.1 6.0 7.5 9.5 6.5 4.5 7.0 6.3 EDC 603 223 167 407 382 536 108 2 427 416 1 565 770 2 135 835 743 1 084 723 482 2 348 11 100 731 930 2 892 2 048 12 717 19 317 1 470 569 684 954 420 1 889 1 482 7 468 EV/EDC, $/bbl 1.4 1.1 1.4 1.9 0.7 0.9 3.1 1.3 5.1 2.1 2.5 3.8 6.2 5.5 2.9 5.3 4.0 1.1 3.3 1.9 1.4 1.7 1.7 1.2 1.4 4.7 5.7 8.3 3.6 3.8 6.6 3.8 5.2 Premium/ (discount) to Russia avg. 6% -13% 3% 44% -47% -30% 138% -5%

Slavneft-YaNOS

Premium/ (discount) to Europe avg. -57% -65% -59% -42% -78% -72% -4% -60%

Premium/ (discount) to global avg. -48% -58% -50% -29% -74% -66% 16% -51%

Slovakia Turkey Poland Poland Finland Greece Italy Italy Greece Switzerland

slovn sk tuprs ti lts pw pkn pw nes1v fh elpe ga srs im erg im moh ga pphn vx

United States United States United States United States United States

fto us hoc us sun us tso us vlo us

India India India Thailand Thailand South Korea South Korea

bpcl in hpcl in mrpl in esso tb top tb 096770 ks 010950 ks

Average: Global 66 234 102 029 4 127 9.2 37 885 2.7 *The Russian refineries average numbers were calculated without Moscow NPZ (mnpz), trading at just 0.4 EV/EDC. The extremely cheap mnpzs valuation is attributed, in our view, to its shareholders turmoil. Source: Bloomberg, Companies, Oil&Gas Journal, OLMA estimates

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OLMA Investment Company

APPENDIX 4. 2005-2009 M&A DEALS IN THE EUROPEAN OIL REFINING

Slavneft-YaNOS

Date Europe September 2005 November 2005 January 2006 December 2006 May 2007 March 2007 July 2007 August 2007

Acquired Refinery

Buyer Multiple investors ConocoPhilips PKNOrlen Russneft Petroplus BP MOLGroup Basell

The refinery's home country

EV, $m

Distillation capacity, m bpa

NCI

EDC

EV/ Capacity , $/bbl

EV/EDC, $/bbl/NI

Comments

Tupras Wilhelmshaven ABMazeikiuNafta Orskrefinery(ORFE) CorytonRefinery Nerefco IES(Mantovarefinery) Berre-l'Etang

Turkey Germany Lithuania Russia UK Netherlands Italy France

8100 1231 2778 338 1446 2903 671 700

205.1 94.9 73.0 47.5 62.8 146.0 19.0 54.8

7.1 5.1 9.0 4.0 11.8 5.1 8.4 6.3

1448.7 484.0 657.0 189.8 739.5 747.5 159.4 344.9

39.5 13.0 38.1 7.1 23.0 19.9 35.3 12.8

5.6 2.5 4.2 1.8 2.0 3.9 4.2 2.0

KocHolding, Aygaz, OPET, ShellGroup Deal value was estimated based on the ConocoPhilips 2006 annual report. PKN Orlen acquired an 84% stake from Yukos and Luthuanian government TNK-BP sold the refinery to Russneft BP acquired a 31% stake from Chevron for around $900m to top its interest in Nerefco to 100%

November 2007 March 2008 June 2008

RompetrolGroupNV Petit Couronne&Reichstett Vendenheim Refineries ISAB

KazMunaiGaz Petroplus Lukoil

Romania France Italy

2466 785 4287

44.5 56.2 116.8

8.7 7.6 9.3

386.0 427.2 1086.2

55.4 14.0 36.7

6.4 1.8 3.9

Total Rompetrol's EV was estimated at $3.6 bn. We allocated $2.5 bn to the Rompetrol's downstream business.

March 2009 June 2009 North America November 2006 June 2007 June 2009

MOL TRN NorthAtlantic Refining Giant Industries Tulsa refinery

Surgutneftegaz Lukoil HarvestEnergy WesternRefining HollyCorp

Hungrary Netherlands Canada USA USA

4838 1611 1439 1500 65

171.6 53.7 42.0 36.1 31.0

9.2 9.8 7.0 10.0 10.8

1586.8 525.8 293.8 361.4 335.1

28.2 30.0 34.3 41.5 2.1 28.1 27.5 28.0

3.0 3.1 4.9 4.2 0.2 3.7 3.0 3.6

Surgutneftegaz acquired 21.2% in MOL for $1.4bn. We calculated the total EV based on the reported YE08 net debt. The table shows the portion of total EV, which we allocated to the MOL's refining business. Lukoil has stated an intention to acquire a 49% stake in TRN, but the deal has not been completed yet.

Average for European refineries Average for American Refineries Global Average Source: Bloomberg, Companies, Oil&GasJournal, OLMA estimates

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OLMA Investment Company OLMA Investment Company

7/1 Maly Karetny Per. Moscow, Russia 127051 +7-495-960-3121

Slavneft-YaNOS

www.olma.ru

Sales and Trading

Head of Equities: Bob Saharov Tel: +7 (495) 960-3121, ext. 303 E-mail: bob@olma.ru Co-head of Equities: Alexei Bystrov Tel: +7 (495) 960-3121, ext. 301 E-mail: alex@olma.ru Managing Director Sales and Nicholas Betsky Tel: +7 (495) 960-3121, ext. 441 E-mail: betsky@olma.ru Head of Sales: Dmitry Lobanov Tel: +7 (495) 960-3121, ext. 308 E-mail: lobanov@olma.ru Trading: Sales: Roman Rassadin Tel: +7 (495) 960-3121, ext. 306 E-mail: rar@olma.ru Alexander Loktev Tel: +7 (495) 960-3121, ext. 309 E-mail: alexl@olma.ru Sergey Sheikov Tel: +7 (495) 960-3121, ext. 296 E-mail: sheikov@olma.ru Sergey Petrov Tel: +7 (495) 960-3121, ext. 320 E-mail: spetrov@olma.ru

Research
Head of Research: Vladimir Detinich, CFA Tel: +7 (495) 960-3121, ext. 414 E-mail: dva@olma.ru Equity Markets: Anton Startsev Tel: +7 (495) 960-3121, ext. 452 E-mail: sav@olma.ru Metals & Mining: Teimur Semenov Tel: +7 (495) 960-3121, ext. 478 E-mail: tas@olma.ru

Special situations: Maria Klimova Tel: +7 (495) 960-3121, ext. 477 E-mail: klimovamb@olma.ru Infrastructure: Artur Galimov Tel: +7 (495) 960-3121, ext. 480 E-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 construed as 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 with permission of OLMA.

30 July 2009

Maria Klimova