Yukos Makes Statement About Financial Situation

On July 20, 2004 the Ministry of Justice of the Russian Federation announced the forthcoming evaluation and sale of Yuganskneftegas as a part of its ongoing enforcement procedures. The significance of this announcement and other actions recently undertaken by the government, which will have a material impact on the future of YUKOS Oil Company, makes it necessary that the Company clarify, for its many stakeholders, the current situation.

YUKOS believes that it fully complied with all tax laws and common business practices in effect at the time but reiterates that, as a law-abiding company, it will comply with the now effective ruling of the Arbitration Court regarding the collection of taxes, surcharges and penalties in the amount of RUR 99.4 due for the year 2000. The Company has further appeals processes available to it, which it is pursuing.

At current crude oil and product prices the company averages cash receipts of about $1.8 billion a month on a consolidated basis. Normal consolidated cash disbursements for the month of July are expected at approximately $1.7 billion. The same level of cash receipts and disbursements is forecasted for the month of August. Currently blocked accounts of the Company receive, on a monthly basis, approximately $900 million of the Company's total consolidated cash receipts and the amounts going into those accounts will, most probably, be collected by the authorities to repay the tax debt. That means that in July and August the Company needs about $1.7 billion each month to meet cash disbursements while not having access to about one half of its cash receipts. The Company has been able to cover its cash deficit in July and may not be able to continue this beyond, at the latest, mid-August.

YUKOS has to date made payments for part of the year 2000 tax liability to the amount of about $300 million out of current cash receipts from business operations.

The actions of the Bailiffs Service and the latest statement of the Justice Ministry have made it virtually impossible for the Company to raise debt financing and because of the freeze of its assets it is unable to raise funding through the disposal of assets. In such a situation, a liquidity deficit might occur which would require a stoppage of operations. Such a stoppage would have a significant impact on crude oil and product exports from the Russian Federation, severe shortages of refined products for domestic fuel markets, and a large reduction in the taxes and duties that are paid to the Russian Federation. YUKOS currently pays about $500 million in taxes and duties to the Russian Federation every month.

Contrary to the statements of some Russian government officials, the Company has no cash reserves anywhere within the consolidated group with which to pay the full amount of the tax bill. The Company management is currently making every effort to raise additional funds in order to repay, as soon as possible, the tax liability and to finance current operations. However, should those efforts prove unsuccessful and Yuganskneftegas is sold, in the present circumstances, the management of the Company would be compelled to announce the bankruptcy of Russia's largest oil company.

The sale of Yuganskneftegas, as announced under the ongoing enforcement procedures, would materially decrease the Company's cash receipts. Even if the current liquidity crisis were to be overcome, the Company, as a result of the forthcoming sale of its main production asset, may still be forced to file for bankruptcy and it may not be able to fulfill the export contracts, which have been concluded with YUKOS Oil Company.

The Company is fully capable of repaying the outstanding tax obligations within a reasonable period of time, provided it retains its main production units and can dispose of other assets, not involved in YUKOS' core activities, subject to those assets being released from arrest. Certainty with respect to a resolution of all past or potential tax claims against the Company would also allow it to access significant amounts of financing.

The Company is of the opinion that the likely sale of Yuganskneftegas would constitute a grave violation of the legislation of the Russian Federation currently in effect. The Court Bailiffs Service, without presenting any reasons, rejected YUKOS Oil Company's proposal to take assets that would not materially affect Company's production operations and would fully set off the outstanding taxes for 2000. Instead, under the ongoing liquidation procedure, it is planned to dispose of YUKOS Oil Company's main production asset which, in accordance with law, is supposed to be the last to be realized.

Moreover, the choice of Yuganskneftegas as the first object for liquidation is perplexing taking into account that the value of the reserves of that company alone, according to the appraisal by DeGolyer and MacNaughton as of 31 December 2003, is worth at least $30.4 billion, i.e., almost 9 times more than the total amount of tax claims for 2000.

The Company has no knowledge of any potential buyers who, within the very limited time allocated by law for asset sales under court enforcement procedures, could become owners of such a substantial asset at an appropriate fair market value. Meanwhile, an express sale of Yuganskneftegas, at a significantly understated price, would be perceived by investors and shareholders of the Company as an attempt at forced bankruptcy. In the latter case, YUKOS Oil Company would have to consider the actions of the buyer as contributing to such a forced bankruptcy.

YUKOS Oil Company is confident that the scenario of forced bankruptcy of one the largest and the most successful of all Russian companies does not meet the interests of any of the stakeholders and such an outcome is completely contrary to prior statements of the Russian government. Accordingly, YUKOS is continuing to try to find ways acceptable to the Government of the Russian Federation, the Court Bailiffs Service, the Russian Federal Property Funds and the appropriate ministries to prevent the bankruptcy of the Company through restructuring and the avoidance of the confiscation of the Company's producing assets.

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