Ukrnafta (UNAF: BUY) Speeds Up Downstream Expansion

On June 15, Ukrnafta acquired an additional 25 gas stations for the fourth time this month, paying an average price of USD 1.3 mln per unit. This has made for a total of 514 gas stations in the company?s retail chain. Ukrnafta has already spent USD 152.6 mln for the acquisition of 123 gas stations in June 2005. Concorde Capital: While this is positive for the company’s business, the aggressive acquisition pace also raises concerns of a possible shareholder conflict. Specifically, this could signal that Ukrnafta’s minority shareholder, Privat Group (which owns ~42% and controls its management) fears it will lose control after the EGM on June 20. This would result in freezing the UNAF?s acquisition policy in favor of constructing new gas stations. Prime Minister Yuliya Tymoshenko has said that Ukrnafta should construct 1,000 new gas stations, in order to give the state control over the oil product market. State-controlled Naftogaz, Ukrnafta’s majority shareholder, will likely follow Tymoshenko’s guidelines. If the new stations are built, rather than acquired, and control over the company is transferred from Privat to the state, Privat will lose in two ways. Not only will it no longer have control of the company, it will also be prevented from selling its gas stations to Ukrnafta, as it is currently doing, at transfer prices. Thus, we believe Privat will attempt to block the EGM on June 20 and continue instructing Ukrnafta’s management to acquire more gas stations. This potential shareholder conflict notwithstanding, we remain positive about Ukrnafta’s future operations in the medium term and maintain our Buy recommendation. We believe the two key shareholders will reach a common ground without negatively affecting Ukrnafta’s operations.