In FY2000, SGTZY will generate an estimated US$6 billion in revenues, US$3.4 billion in EBITDA and US$2.5 billion in net profits. Show me an Internet company that generates 56% EBITDA margins (not to mention US$2.7 billion in after-tax cash flow)! Since the 1998 Russian crisis, SGTZY has increased sales by 130% and earnings by 520% (on 2000E). Despite this outstanding growth in profitability, SGTZY has a depressed P/E ratio of 6.

SGTZY has been able to generate such outstanding results by maintaining ruthless control over all expenditures. In 1998, SGTZY invested more in CAPEX than the rest of the Russian oil industry combined. And SGTZY is one of the few companies in any industry in Russia that allows cash to accrue on the balance sheet (managers at more than a few other companies have found creative ways of transferring cash to their own personal offshore bank accounts).

Recently, SGTZY management consolidated its holding company into its production subsidiary (SGTZY). This action cleaned up SGTZY's capital structure and created tremendous value for all minority shareholders.

Russian brokers criticize SGTZY for being too stingy (of course, these are the same brokers who heaped praise on GLDN for paying through the nose for worthless Internet portals). According to the market consensus, SGTZY should either make a large acquisition with its cash balance or return the cash to shareholders in the form of dividends. While I agree that SGTZY should be more generous with dividends if it cannot find large enough investments, it is not in the interest of shareholders to go on a spending spree for oil reserves when crude oil is US$33 per barrel.

With over 8 billion barrels in reserves and massive refining capacity, SGTZY is one of the largest oil companies in the world. Given its super-low cost structure and highly disciplined management, SGTZY will continue to prosper — even in an environment of lower oil prices.

The formula for comparing Lukoil Preferred ADR (LUKPY:OTC) to Lukoil common ADR (LUKOY:OTC) is 2 LUKPY = 1 LUKOY. You need to multiply LUKPY's price by 2 to compare it to LUKOY. LUKPY *2 = US$45. LUKOY is currently trading around US$53. This means the current discount between Lukoil preferred and Lukoil common is 15%.

When I recommended LUKPY, the discount between the preferred and common shares was a ridiculous 60%. As I predicted, the discount contracted as irrational Russophobia dissipated. While the discount has experienced a massive one-time contraction, there is still some upside leverage to the preferred.

The only big downside to owning the preferred stock is the lack of voting rights. But in Russia voting rights mean almost nothing. Furthermore, the preferred will be converted into de facto common stock if Lukoil neglects to pay 10% of the holding company profits to preferred shareholders.

Lukoil is one of the largest oil companies in the world. Estimates for 2000 sales exceed US$18 billion. Despite the high oil price, Lukoil is valued at just 4x 2000E earnings. There are rumors that Lukoil will convert the preferred shares into common shares on a one-for-one basis — an optimal outcome for LUKPY holders (since, in this scenario, every two shares of LUKPY would be converted into one share of LUKOY, resulting in an immediate gain of 18%).

While there is an outside chance that Lukoil management will attempt to force conversion on unfavorable terms, the underlying common shares are cheap enough to compensate for this risk. If Lukoil doesn't convert the preferred shares into common, it will have to pay out a huge dividend (10%+) to shareholders based on estimated holding company profits.

I rate LUKPY as a Hold.

While the ADR is still languishing, AOMOY is an intriguing turnaround story. Shareholders elected new management in May 2000. EDF, France's largest utility, has announced that it intends to invest US$160 million in a joint venture with AOMOY to produce electricity for the Moscow market. This is clear vindication both of AOMOY's growth potential and the strengths of its new management.

As a regional Russian aviation company, TYAVY is unlikely to attract a flow of funds from Western portfolio managers in the near term. But the unique nature of TYAVY's assets (including a massive fleet of the world's largest helicopters) should draw retail investors into the ADR as the positive macroenvironment in Russia becomes clearer to mainstream investors.

Recently, TYAVY announced that it won a US$8 million contract with the UN. TYAVY will provide 24-hour helicopter service in the Republic of Eritrea with 2 helicopters and 32 personnel. The company estimates that international business will account for 31% of total sales in FY2000.

Unfortunately, Ventspils' management does not appear to be interested in building shareholder value. In fact, management appears to be outright hostile towards minority shareholders. Ventspils' revenues account for 20% of Latvia's GDP. If the Latvian government wants to join the EU, than it will have to clean up Ventspils Nafta.

If Ventspils ever gets cleaned up, the stock could appreciate 10x. Consequently, I regard VNFT as a Hold.

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