2010 OFS Initiation

For professional investors only. This document has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Please refer to important disclosures and analyst certification at the end of this document.

SLAVA BUNKOV +7 (495) 777‐66‐77 (ext 2642) [email protected] ELENA SAVCHIK +7 (495) 777‐66‐77 (ext 2643) [email protected]

Initiation of coverage: With this report we initiate coverage of three Russian oil‐field services (OFS) companies: Eurasia Drilling (EDC), Integra and C.A.T. oil. Russian OFS market contracted 24% in 2009 (Aton estimates) as a result of oil majors’ capex cuts and a drop in prices for oil‐field services. At the same time, the number of service jobs performed actually showed growth in certain OFS segments despite the financial crisis. In our view, this relative demand stability reflects OFS’s importance to the oil industry. Although stock choices are limited, the investment cases remain compelling. There are only three large, listed, independent OFS companies’ stocks on the Russian market. However, each of these has its own unique profile, strengths and disadvantages. The economic downturn has affected each differently in 2009, however, as we are entering 2010 all three are financially stronger and more efficient operationally. All three stocks have been star performers in 2009, but further potential upside still exists, in our view. EDC’s shares quadrupled in price in 2009, C.A.T. oil’s stocks tripled in value, while Integra was the sector laggard, despite seeing 165% growth. In the midst of the financial crisis, investors were attracted by first two companies’ healthy balance sheets and relatively stable cash flows. We believe that EDC and C.A.T. oil still have sufficient cash balances, no major debt issues and robust order books, while Integra’s underperformance in 2009 is primarily explained by its debt issues. However, with most of its financial troubles behind it, we believe Integra’s stock represents the best investment opportunity in the Russian OFS sector. Ratings: We are fairly optimistic about Integra’s future, despite its weaker financial profile vs its local peers. Our fair value of $5.68 per share implies 83% potential upside and we put it forward as our sector favourite. Alternatively, relative to its international peers’, its valuation ratios suggest an even higher potential upside of 113%. With a fair value estimate of €9.04 per share, C.A.T. oil is our second choice. With respect to EDC, we believe most of the stock’s advantages have already been priced in and as such we rate the share a HOLD (fair value: $17.94).

Valuation summary Company Ticker Current price Fair value, 12M Potential upside Rating

Integra (GDR), $ INTE LI 3.10 5.68 83% BUY

EDC (GDR), $ EDCL LI 16.8 17.94 7% HOLD

C.A.T. oil, € O2C GR 7.21 9.04 25% BUY

Note: Prices as of close 15 Jan 2010 throughout the report Source: Bloomberg, Aton estimates

MARKETING MATERIAL

OIL AND GAS

20 January 2010

OIL-FIELD SERVICES Two is company, three is a crowd

‐120%

‐100%

‐80%

‐60%

‐40%

‐20%

0%

20%

Nov‐07

Jan‐08

Mar‐08

May‐08

Jul‐08

Sep‐08

Nov‐08

Jan‐09

Mar‐09

May‐09

Jul‐09

Sep‐09

Nov‐09

Jan‐10

INTE LI Equity O2C GR Equity EDCL LI Equity

Source: Bloomberg

1M

7.6%

4.7%

4.4%

0% 2% 4% 6% 8%

C.A.T. oil

EDC

Integra

3M

‐16.4%

4.7%

‐16.0%

‐20% ‐15% ‐10% ‐5% 0% 5% 10%

C.A.T. oil

EDC

Integra

2009

246%

386%

165%

0% 100% 200% 300% 400% 500%

C.A.T. oil

EDC

Integra

Stock performances Nov 2007 – Dec 2009

Relative stock performances

Source: Bloomberg

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Contents

Investment summary .................................................................................................. 3

Russian OFS market trends ........................................................................................ 4

Unique profiles........................................................................................................... 4

Segmental information .............................................................................................. 5

Market forecast ......................................................................................................... 7

Sensitivity to oil prices ............................................................................................. 10

Stocks’ performance ................................................................................................ 13

Company pages

Integra...................................................................................................................... 15

Eurasia...................................................................................................................... 26

C.A.T. oil ................................................................................................................... 36

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Investment summary Higher oil prices and the degree of oil field depletion are likely to lead to increased OFS demand in Russia, in our view. We believe that the OFS sector is well positioned to benefit from the global and domestic economic recovery: the Russian oil and gas industry requires substantial investment into new reserves development in the coming years as well as spending on modern technology services to support dwindling output from mature oil fields. We believe that this requirement guarantees strong demand for OFS in the future. Further, being one of the core strategic industries in Russia, the oil and gas sector enjoys strong support from the Russian government, which is pushing for new field development in frontier regions and providing additional tax incentives for companies venturing further a field from the mature oil producing regions. Financial difficulties are no longer a theme for OFS companies. EDC and C.A.T. oil, with their healthy balance sheets and limited financing requirements, experience only minor financial constraints even at the depth of the financial crisis. Integra has not been quite as fortunate and most investors remember its recent brush with bankruptcy. The 45% fall in the company’s revenue and its margins collapse at the beginning of 2009, coupled with short‐term debt of $395mn falling due in Jan 2009, stretched the company to its financial limits. However, Integra managed to buy itself time and consequent survival with debt refinancing. Following an equity placement and repayment of almost half of its debt, Integra has, in our opinion, emerged a strong and efficient, diversified OFS provider ready to take full advantage of the sector recovery. Integra is our top pick with a fair value of $5.68 per GDR and 83% growth potential. Our fundamental view is that the company’s share price does not yet reflect its improvements and achievements in 2009, detailed in this report. Additionally, although the company has the weakest financials vs its two peers, we believe the company will show strong financial results, particularly since we understand that Integra’s aggressive M&A policy has come to an end. This is implied by the company’s 2009 capex, which totalled only $40mn, vs $199mn and $335mn in 2008 and 2007, respectively. We thus forecast Integra to generate free cash flow of about $90mn in 2010, the first time in its history. C.A.T. oil’s main potential catalyst is assets acquisition. As one of the leading providers of hydrofracturing services in Russia, the company’s focus is expansion into other business segments with side‐track drilling first on its agenda. C.A.T. oil has a strong financial position with negligible debt and €17.4mn cash at 9M09. During 9M09 the company generated €38.4mn of operating cash flow, but spent €24.9mn on early debt repayment. With its debt repayments out of the way, the company should have more cash to spend on further business expansion in 2010. Additionally, 3Q09 margins were higher than annual figures for the past five years which leads us to conclude that the company looks even healthier now than before the crisis. EDC’s stock trading close to its fair value. During the crisis investors sought out the stocks of stable companies with strong financials. We believe this is why EDC, with its cash position of $279mn at the beginning of 2009, relatively small total debt of just $190mn (Debt/EBITDA of 0.6x) and stable demand for its services, was the top performer in the OFS sector, not only in Russia, but worldwide. Furthermore, the company successfully conducted a stock repurchase programme, acquiring 12.6mn of its own shares at an average price of $4.7 per share vs the current price of $16.8, having a positive effect on the stock price and unrealised profit of about $152mn. The repurchased stock may be used for acquisitions in future years. That said, we believe that most of EDC’s strengths are already priced in.

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Russian OFS market trends The Russian OFS market was non‐existent a decade ago. For years, in‐house service companies from oil majors and industry giants such as Schlumberger, Halliburton and Baker Hughes dominated the OFS industry in Russia. Even now, the three listed independent OFS providers maintain approximately 22% market share (see Figure 1).

Figure 1: Market shares of Integra, C.A.T. oil and EDC (in dollar terms)

Foreign

companies 15% Russian

companies 85%

C.A.T. oil 2%Integra 8%

Other 63%

EDC 12%

Source: Aton estimates

Russian OFS companies’ stocks have a very short history. C.A.T. oil went public in 2006, with Integra and Eurasia Drilling concluding their IPOs only in 2007. Moreover, they have all only recently finalised their target asset structures, after a period of aggressive M&A activity. As a result, we pay significant attention to the performance of the international OFS companies in our analysis in this report when plotting the future of the Russian OFS sector players.

Unique profiles

The three listed, independent Russian OFS companies are hardly a homogenous group and represent a fairly diverse range of activities. Each covers a very specific set of OFS (see Figure 2 for industry structure): EDC is primarily focused on exploration, production drilling and auxiliary services. C.A.T. oil’s main business segment is hydrofracturing services. Integra is the most diversified of the three, involved in drilling, workover, integrated project management, technology services, formation evaluation and OFS equipment manufacturing. The high interdependence of the upstream oil industry and OFS companies means that, while the OFS companies have been directly affected by cuts in oil companies’ capex in 2009, we argue that their business retains a certain safety cushion. In other words, oil majors cannot in our view cut investment altogether due to the high level of oil field depreciation and the need to maintain production levels.

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Figure 2: Overview of OFS industry processes

Source: “Petroleum production in nontechnical language” Forest Gray, Aton interpretation

Segmental information

Based on our assessment of Russian OFS companies’ data, the effect of the crisis on each major business segment has varied widely. Exploration drilling, as one of the most expensive services, and offering slow returns on invested capital, has suffered the most. According to our estimates, exploration drilling volumes decreased 41% YoY in 2009 to 0.51mn meters. On the contrary, the largest OFS business segment – development drilling – should have fallen only slightly (‐0.4% on our numbers) to 14.6mn meters. Therefore total drilling volumes decreased only 2.6%. This is very important for all segments of the OFS industry as many services (for example, workover and integrated project management) are closely related to drilling. According to our estimates, the drilling business accounts for about 40‐45% of the whole Russian OFS market in terms of revenue. Four of the six largest Russian oil companies are major customers of all three analysed OFS companies: Rosneft, LUKOIL, TNK‐BP and Gazprom neft. These companies’ shares of OFS companies’ revenues are presented in Figure 4. Surgutneftegas and Tatneft mostly use in‐house service companies.

Geophysical survey

Exploration drilling

Well logging

Cementing

Searching for hydrocarbon reservoirs

PROCESS SHORT DESCRIPTION

Drilling an exploration well to confirm the presence of a hydrocarbon reservoir

Evaluation of formation properties

Cementing is used in both cases: plugging the well and completing the well

Results of well logging. If the well is commercially viable, the company decides to:

Convert the well into a production well Plug the well as a dry hole

Continue Plug it

Perforation Perforation of casing to create a connection between the well and reservoir

Continue

Workover Maintenance, repair and enhancement of well production

Well is completed and ready for operation

Hydro‐fracturing Used to increase a well’s productivity

POST‐PRODUCTION OPERATIONS

Sidetracking Used to increase a well’s productivity

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Drilling volume declines differ from company to company. While most companies decreased exploration drilling volumes in 2009, Rosneft and Surgutneftegas expanded these operations by 26.8% and 17.7% YoY, respectively (Figure 3). At the same time TNK‐BP and Gazprom neft increased the volume of development drilling operations by 8.2% and 11.9%, respectively. The latter is particularly important for EDC and Integra with 23% and 27% (TNK‐BP – 22%; Gazprom neft – 5%) of their respective revenues derived from these companies.

Figure 3: Exploration and production drilling by company Exploration drilling Development drilling

(Thousand meters) 2008 2009E YoY 2008 2009E YoY

Rosneft 55.4 70.3 26.8% 2,489 2,407 ‐3.3%

LUKOIL 118.9 35.9 ‐69.8% 2,974 2,704 ‐9.1%

TNK‐BP 114.9 32.1 ‐72.0% 1,319 1,427 8.2%

Surgutneftegas 169.2 199.2 17.7% 3,127 3,665 17.2%

Gazprom neft 67.8 21.9 ‐67.7% 2,036 2,279 11.9%

Tatneft 62.1 56.4 ‐9.2% 449 458 2.0%

Bashneft 34 14.0 ‐58.8% 426 288 ‐32.5%

Russneft 24 7.2 ‐70.0% 370 176 ‐52.3%

Slavneft 56.9 15.3 ‐73.1% 743 801 7.9%

Other 148.5 58.5 ‐60.6% 671 337 ‐49.8%

Total 851.7 510.8 ‐40.0% 14,603 14,543 ‐0.4%

Source: NGV, Aton estimates

Figure 4: Russian oil majors’ share of OFS companies’ 2010E revenue Integra EDC C.A.T. oil

Rosneft 20% 12% 36%

LUKOIL ‐ 63% 10%

TNK‐BP 22% ‐ 32%

Gazprom neft 5% 23% ‐

Total 47% 98% 78%

Source: Companies’ data, Aton estimates

It is difficult to estimate volume changes in other business segments such as well workover, equipment manufacturing, technology and geophysics services given the lack of data, but we can try to assess market changes by using Integra’s activity as a proxy. As the most diversified company and with 8% OFS market share, Integra’s data fairly accurately represents the situation in other segments of the OFS business, in our view. However, we recognise that this still provides only a high‐level perspective and that the segment profile of each independent Russian company differs significantly. As such, we analyse the changes individually on the company pages later in this report.

Figure 5: Integra’s 9M09 revenue change by segment Change ($) Change (RUB)

Drilling, Workover, IPM ‐46.8% ‐27.9%

Technology services ‐35.2% ‐12.2%

Formation evaluation (geophysics) ‐42.7% ‐22.4%

OFS equipment manufacturing ‐61.3% ‐47.5%

Total ‐47.4% ‐28.7%

Source: Company data, Aton estimates

Figure 6: Integra’s 9M09 operating data 9M08 9M09 YoY

Drilling operations, meters 301,000 141,000 ‐53.2%

Workover operations conducted 2,542 2,877 13.2%

Seismic shot point (geophysics) 704,183 601,970 ‐14.5%

Source: Company data

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The workover segment has increased 13.2% YoY as it is an essential operation, with its effect on production almost immediate. The geophysics segment is assessed according to the number of seismic shot points, which contracted only 14.5% in volume terms and 22.4% in roubles. The rouble devaluation has, however, led to lower numbers for those companies reporting in dollars and euros, thereby distorting the analysis. On the positive side, devaluation turned out to be beneficial to some extent for Russian OFS companies as it increased their competitiveness vs international giants like Schlumberger and Baker Hughes. Ironically, Integra and EDC’s dollar‐denominated reporting and C.A.T. oil’s euro‐denominated results now look worse because of the Russian currency’s depreciation.

Market forecast

According to our estimates, after dramatic declines in 1H09 and the subsequent recovery in the sector’s activity towards the end of the year, the total OFS market volume declined by about 24% in 2009 in rouble terms, (41% in dollars). Going forward, we expect a strong recovery in 2010, boosted by oil‐price stabilisation.

Figure 7: Russian OFS market forecast

10.613.0

16.017.9

20.022.4

25.1

28.2

40.3

35.8

31.8

45.622.8%

11.7% 11.9% 12.0% 12.2% 12.3% 12.5%

12.6%

12.9%12.8%

‐41.5%

23.4%

0

5

10

15

20

25

30

35

40

45

50

2009E

2010E

2011E

2012E

2013E

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2018E

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2020E

$ mn

‐45%

‐35%

‐25%

‐15%

‐5%

5%

15%

25%

35%

OFS market volume (LHS) % change in market volume (RHS)


The dynamics of Russian OFS public companies’ revenues reflect the market’s general trend (see Figure 8 below). We should point out that our revenue forecast for each company is based not on the general trend, but on the individual business segment and the respective customer breakdown.

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Figure 8: Change in market volume vs change in total revenues of the three analysed companies (% of dollar change)

22.2%

‐41.5%

22.8% 23.4%

11.7%

35.1%33.0%

‐36.9%

24.1%

13.6%

‐50%

‐40%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%

2008 2009E 2010E 2011E 2012E

Change in market volume Change in total revenues of analysed companies


Our market forecast is primarily based on oil prices as we have identified that OFS revenues are correlated with the oil price via oil companies’ capex, but with a one‐year lag (see detailed overview below). The second important factor determining our forecast is the cost of OFS services. According to our estimates based on EIA figures, production costs in the former Soviet Union (FSU) grew at a CAGR of 16.3% from 1993 to 2007. We should note, however, that our estimate for the overall OFS market based on the EIA’s numbers looks overcautious given that oil production cost inflation has accelerated in recent years and was running at a CAGR of around 36% over 2002‐2007.

Figure 9: Breakdown of our OFS market forecast

‐20%

30%

80%

130%

180%

230%

280%

330%

380%

430%

480%

2003 2004 2005 2006 2007 2008Е 2009E 2010E

0

10

20

30

40

50

60

70

80

90

100

FSU oil production cumulative growth, % (LHS) Average Urals price, $/bbl (RHS)

Source: Energy Information Administration, Bloomberg, Aton estimates

We note that our forecast is more bullish than consensus estimates (Bloomberg) with respect to 2010 as we believe that a low‐base effect should produce a larger swing in revenues this year.

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Figure 10: Total OFS companies’ revenue change, Aton vs consensus

58.4%

33.0%

‐36.9%

35.1%24.1%

6.1%

19.2%

‐19.2%

‐60%

‐40%

‐20%

0%

20%

40%

60%

80%

2007 2008 2009E 2010E 2011E

History Aton Consensus


We prefer to err on the side of caution when making our oil price forecasts and assume that prices will remain around the current level of $80 per barrel in 2010 and 2011. Stable oil prices provide a fairly healthy environment for OFS companies and we believe that we will see a rapid recovery of the OFS market in the next two years. Recent meetings with representatives of Russian OFS companies underline our expectations: according to the executives we met, in 1H09, OFS companies’ margins improved substantially and almost all those we spoke with expect margins in their main business segments to recover to pre‐crisis levels in 2010, with further potential for growth thereafter. The companies expect this will be achieved by decreasing capex on new asset purchases, lower interest expenses (particularly important for highly indebted companies such as Integra) and increasing demand for OFS. In contrast to the international OFS market, the Russian market is not particularly transparent with only a few public companies and limited data on the sector’s economics or the segment’s historical development. We therefore relied heavily on international industry data to analyse Russian market trends and prospects. Although margins have already started to recover, the international OFS’ equity analyst community agrees almost unanimously that the segment is likely to see visible growth in sales, EBITDA and net income only from 2012 onwards. According to Bloomberg consensus estimates the total volume of the international OFS market (encompassing the major international listed companies) should reach some $284bn in 2010, stay roughly flat throughout 2011, and grow by about 10% in 2012. The Bloomberg consensus also expects the industry’s EBITDA margin to average 23‐24% in 2010 and remain approximately flat until 2012, when margins may recover beyond 25%. Similarly, the net margin is anticipated to stay stable in 2011 and grow to about 12‐13% in 2012. (see Figure 11).

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Figure 11: The consensus expects both the market ($bn) and margins (%) to recover shortly

24.6% 23.7% 24.3%25.5%

12.1% 11.5% 11.4%12.5%

0

50

100

150

200

250

300

350

2008 2010E 2011E 2012E

0%

5%

10%

15%

20%

25%

30%

Sales EBITDA Net income

EBITDA margin Net margin

Source: Bloomberg, Aton estimates

Our forecasts for Russian OFS companies’ suggest a greater swing in financials than for international companies. We consider the primary reason for this being the rapid rouble devaluation from 4Q08 to 2Q09 which distorted companies’ financials. Integra and EDC report in dollars, C.A.T. oil in euros, while their revenues and costs are rouble‐denominated. The appreciation of the rouble in 2H09 together with improved market conditions have led to a restoration of margins.

Figure 12: Russian OFS companies’ EBITDA margin

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 2009E 2010E 2011E

Integra EDC C.A.T. oil

Figure 13: Russian OFS companies’ net margin

‐25%

‐20%

‐15%

‐10%

‐5%

0%

5%

10%

15%

2005 2006 2007 2008 2009E 2010E 2011E

Integra EDC C.A.T. oil

Sources: Companies’ data, Aton estimates

The quarterly margins breakdown is analysed in the companies’ section.

Sensitivity to oil prices

In order to assess OFS companies’ sensitivity to oil price movements we have compared annual changes in the average oil price with yearly changes in international OFS companies’ average revenue (the 15‐largest international OFS companies). The correlation coefficient was close to zero (‐0.087). However, shifting the change in annual revenue one year forward vs the oil‐price change produces a very significant correlation of 96%. Therefore, as can be clearly

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seen from Figure 15, the OFS industry’s revenues reflect changes in oil prices with a one‐year time‐lag as major oil companies conservatively determine their exploration and production capex for the next year on the basis of the current year’s oil prices. Most of the contracts for oil‐field services are concluded in November to March, so their prices are based mostly on the previous year’s figures. This leads us to conclude that the benefits of the oil price recovery will be clearly visible only towards the second half of 2010, when they should translate into expanding revenues and earnings for OFS companies.

Figure 14: Change in OFS companies’ revenues vs change in oil price (1998‐08)

‐40%

‐20%

0%

20%

40%

60%

80%

‐40% ‐20% 0% 20% 40% 60% 80%

Change in oil price, %

Change

in revenue, %

Figure 15: Shift in change in OFS companies’ revenues vs change in oil price (1998‐08)

‐40%

‐30%

‐20%

‐10%

0%

10%

20%

30%

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50%

‐40% ‐20% 0% 20% 40% 60% 80%


Change

in revenue, %


A similar situation can be seen in the Russian OFS sector, but the history of the Russian independent OFS market is too short, and as such the regression cannot be considered significant, despite fairly visible trends (see Figures 16 and 17).

Figure 16: Change in Russian OFS companies’ revenues vs change in oil price (2006‐2008)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40%


Change

in revenue, %

Figure 17: Shift in change in Russian OFS companies’ revenues vs change in oil price (2006‐2008)

0%

10%

20%

30%

40%

50%

60%

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0% 10% 20% 30% 40% 50%


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in revenue, %


Despite the various negative consequences of the crisis, we have already seen an improvement in OFS margins:

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EDC restored its EBITDA margin to the pre‐crisis level in 1H09. Integra has demonstrated margin recovery over the first three quarters of 2009. The EBITDA margin in the formation evaluation segment grew 34% YoY and 13% QoQ in 3Q09, returning to the levels of a year earlier in 9M09. Integra’s drilling segment was seriously impinged upon by lower operating volumes, the rouble devaluation and price decreases. EBITDA margin in this segment fell to 3% in 1Q09 but was restored to 13% by 3Q09. The company’s other business segment margins returned to pre‐crisis levels in 3Q09. C.A.T. oil’s effective cost cutting programme and stable demand for its services has resulted in a rapid 9M09 EBITDA margin increase to 22.7%. The EBITDA margin stood at 16.5% in 2008 and 22.3% in 2007. Restoration of margins has been the result of increasing demand for OFS services and much improved cost management. On a separate point, we believe that the sharp fall in capex in 2009 will pave the way for rapid growth in demand for OFS in the future, driven by the need for reserves replacement and output growth. Overall, we estimate the OFS market to expand over 2009‐15 at a CAGR of 15.6% in value terms. We also believe the crisis will increase the pace of industry consolidation. Currently, companies in the industry can be divided into three basic groups: branches of oil majors (in‐house services), large independent OFS companies and small companies. Small players are likely to face tough times and many of them may fall prey to larger companies. It is also our opinion that companies like Integra and EDC will increase their share in the drilling, workover and IPM segments significantly in later years through M&A activity. The latest trends in the international OFS market seem to confirm our hypothesis – there has been some notable M&A activity in the sector, highlighting the industry’s position at the core of oil sector developments. Below we briefly look at the details of the two transactions most relevant to our research. TNK‐BP spin‐off deal: In June 2009 TNK‐BP sold its OFS assets (10 separate companies) to Weatherford International in exchange for 3.5% (or 24.3mn common shares) of Weatherford. According to the purchaser’s spokesman, the company valued the deal at about $450mn (based on a share price of $18.50/share). The 10 former TNK‐BP OFS companies’ revenue was $613mn in 2008 and their total assets at the time of sale included more than 75 drilling rigs, 280 workover units, 150 cementation and pumping units and over 10 operating bases, including two central bases in Western Siberia and the Volga‐Urals region. According to our estimates, the deal price valued the company at 7.8x 2009 EBITDA and 1.1x 2009 revenue.

Figure 18: OFS companies’ valuation ratios vs TNK‐BP spin‐off deal (2009E) EV/Sales (x) EV/EBITDA (x)

International OFS 2.3 9.4

Integra 0.9 6.3

C.A.T. oil 1.4 6.0

EDC 1.7 7.7

TNK‐BP spin‐off deal 1.1 7.8

Source: Bloomberg, TNK‐BP, Aton estimates

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We believe that this transaction has the following implications for the sector: Firstly, despite the crisis, the transaction price (7.8x EBITDA) was relatively high (a 18 % premium to the average Russian OFS company), indicating, we believe, international companies’ interest in the Russian OFS market. Secondly, the deal confirmed that spin‐offs (as part of oil majors’ restructuring efforts) will continue in the foreseeable future. In our view, this opens up certain opportunities for the rest of the market. After a spin‐off, the newly established company (the former subsidiary of a large Russian oil company) may find it difficult to operate in the competitive market. Without arrangements with its former parent company, the new entity risks losing a portion of its market share. At the same time, mature independent OFS companies may seek to capture additional market share, often by offering higher quality services and taking advantage of the new entity’s lack of track record in operating in a competitive market. Every new oil‐major offshoot opens up an opportunity for independent participants to gain a new large customer. Baker Hughes and BJ Services deal: On 31 Aug 2009, Baker Hughes, the world’s third‐largest OFS provider, announced its acquisition of BJ Services for $5.5bn. On our estimates, Baker Hughes paid a premium for the asset (on an EV/EBITDA and P/E basis). However, more importantly, we believe the deal reflects high demand for OFS assets and that market participants have a positive view on the OFS market’s prospects.

Figure 19: OFS companies’ valuation ratios vs Baker Hughes/BJ Services deal (2009E) EV/Sales (x) EV/EBITDA (x) P/E (x)

BJ Services deal 1.3 8.9 38.6

International OFS 2.3 9.4 25.6

Integra 0.9 6.3 neg

C.A.T. oil 1.4 6.0 19.5

EDC 1.7 7.7 15.3


Stocks’ performance

Russian OFS stock performances have been similar to that of international OFS companies. We compared Russian OFS shares’ price changes with the AMEX OIL Service Holders Index which includes 16 major international OFS companies including Schlumberger, Halliburton, Weatherford and Baker Hughes. Only EDC outperformed its international peers over the past two years. Integra is an obvious outsider but that only creates greater growth potential for the stock, in our view.

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Figure 20: Russian OFS companies’ stock performance vs AMEX Oil Services HOLDERS Index (%)

‐80%

‐61%

‐33%

‐33%

‐120%

‐100%

‐80%

‐60%

‐40%

‐20%

0%

20%

Nov‐07

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Jan‐10

INTE LI Equity O2C GR Equity EDCL LI Equity OXH Index


EDC a star performer in 2009, quadrupling in value and outperforming all the constituents of the AMEX Oil Services Index. We believe the company’s strong financial position and stable operations in the midst of the global economic and financial turmoil were its main draws for investors: EDC entered the crisis with $279mn cash on its balance sheet and insignificant debt, while its drilling division experienced only a 7.1% decline in volumes in 2009. This helped the company to recoup the losses suffered in 2008 quickly. However, it is our view that the company’s outstanding performance in 2009 has already been reflected in the surge in its share price and that little further upside remains. We rate EDC a HOLD at current levels. Similarly, C.A.T. oil enjoyed relatively strong operational performance in 2009 and the stock regained the ground lost in the 2008 market crash. However, after tripling its share price over the past 12 months, the stock now looks less attractive to us from a valuation perspective, although we have confidence in the company’s long‐term prospects. Integra started 2009 with a heavy debt burden of $398mn (net debt of $335mn) and looming short‐term maturities but managed to deleverage and, on our estimates, should have been able to finish last year with net debt of only $176mn. Integra’s financial performance is still relatively weak and current valuation metrics are not particularly appealing. Nonetheless, we believe that current prices do not reflect the company’s turnaround potential.

1

5

Integra is an independent Russian oil‐field services company offering well drilling, workovers, integrated project management, equipment manufacturing and other services. It is one of the largest and most diversified players in the Russian oil‐field services market. Integra’s share of the Russian OFS market is estimated (Integra data, Aton estimates) at approximately 8%. We believe it will be able to maintain its total market share but that its portion of various segments will change as it increases its presence in those with high margins and reduces focus on low margin, non‐profiled segments. It has taken some time for Integra to finalise its company structure, with 2005‐08 characterised by aggressive M&A activity and therefore massive borrowings. The company plans to reduce its capex and repay the debt without external financing. Integra shares have plunged 80% since its IPO and the stock is currently trading as a company in deep distress, in our view. We, however, believe that the company is in much better health than the market price currently suggests. In 2009 Integra successfully converted its short‐term debt into long‐term liabilities using EBRD financing facilities and debt from an international banking consortium, and sharply reduced its overall debt level using proceeds from its new share issue. Furthermore, we believe that after three years of losses the company is likely to shift into the black from 2010 onwards, as high financing costs and share‐based compensation programmes are becoming something of the past. The company’s 2009 order book decreased only 16% YoY in rouble terms. Although the rouble devaluation makes the numbers appear much worse (a ‐40% order book fall in dollar terms), we argue that the rouble order book volume reflects the sustainability of the OFS market and Integra’s part thereof, in particular. We initiate coverage of Integra with a BUY rating and a 12‐month fair value of $5.68 per GDR based on a DCF model. A valuation of Integra based on international peers’ valuation ratios provides a slightly higher fair value of $6.58 per GDR. We therefore feel highly comfortable with our assessment of the stock’s potential.

Figure 1: Integra stock performance since IPO ($/GDR)

0

5

10

15

20

25

Feb‐07

Apr‐07

Jun‐07

Aug‐07

Oct‐07

Dec‐07

Feb‐08

Apr‐08

Jun‐08

Aug‐08

Oct‐08

Dec‐08

Feb‐09

Apr‐09

Jun‐09

Aug‐09

Oct‐09

Dec‐09

Source: Bloomberg

BUY Fair value $5.68

Bloomberg code INTE LI

Reuters code INTEq.L

Price (GDR, $) 3.10

GDR ratio (x) 0.05

Fair value GDR ($) 5.68

Potential upside (%) 83%

Share data

No. of GDRs (mn) 194.1

Daily t/o ($mn) 1.7

Free float (%) 82%

Market capitalisation ($mn) 602

Enterprise value ($mn) 776

Major shareholders

Management and board 18%

FINANCIALS 2008 09E 10E

Revenue 1,446 828 1,127

EBITDA 34 124 177

EBIT ‐193 3 52

Net income ‐272 ‐12 32

EPS ‐1.90 ‐0.06 0.17

CFPS 18.8 11.4 16.1

VALUATION

P/E (x) n/a n/a 18.5

PCF neg 0.3 0.2

EV/EBITDA (x) 27.8 6.3 3.9

EV/Sales (x) 0.6 0.9 0.6

P/B (x) 1.2 1.1 1.1

RoA (%) n/a n/a 3%

RoE (%) n/a n/a 6%

PERFORMANCE

1 month 4%

3 month ‐16%

12 month 244%

52‐week high 4.10

52‐week low 0.50


INTEGRA The black sheep comes into the light

16

Company background

Integra is an independent Russian OFS company offering well drilling, workovers, integrated project management, equipment manufacturing and other services. It is one of the largest players in the Russian OFS market with a market share of approximately 8% (Integra data, Aton estimates). The company was founded in 2004 by a group of executives with significant experience in the oil and gas industry. By concluding 17 strategic acquisitions Integra became one of the leading OFS providers. However, this aggressive M&A activity came at a price: a heavy debt burden placed the company in severe financial difficulty during the crisis.

Operations

Integra serves Russia’s largest oil and gas companies and values its 2009 order book at $909mn. Its 2010 order book already totals $426mn (company data), with the bulk of new contracts usually agreed towards the end of the first quarter of the financial year. It is interesting to note that at this point the structure of the 2010 order book differs significantly from 2009 in terms of customers and segments. However, a more reliable figure for annual orders will be available only in May when we should be able to make a more accurate comparison. Furthermore, we note that the timing and even the mechanics of order book formation differ significantly from year to year. As such, the 2010 order book figures may be treated only as very preliminary numbers.

Figure 2: 2009E order book breakdown by customer

Rosneft

30%

TNK‐BP

13%

NOVATEK

5%Gazprom

9%

Gazprom neft

8%

Surgutneftegas

5%

Other

30%

Figure 3: 2010E order book breakdown by customer

Rosneft

20%

TNK‐BP

22%

NOVATEK

19%

Gazprom

5%

Gazprom neft

5%

Tengizchevroil

3%

Other

26%


In the current 2010 order book Rosneft, NOVATEK and TNK‐BP are the company’s largest customers. We consider this a positive sign given these companies’ ambitious plans for production increases. TNK‐BP aims to boost its upstream capex in 2010 by 22‐30% to increase oil production by 2‐2.5%. Rosneft and NOVATEK plan to increase their hydrocarbons production by 4‐5% and 12‐15%, respectively which also assumes growth in upstream capex.

Integra’s operating assets: Drilling, Workover, IPM segment 22 drilling rigs 122 workover crews Technology Services segment 4 coil tubing units 10 directional drilling crews 8 cementing fleets 25 logging crews 3 drilling tools production sites Formation Evaluation segment 42 seismic crews 1 interpretation facility OFS Equipment Manufacturing 3 production sites 1 service business unit R&D facilities in Austin, Texas and Yekaterinburg

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Significant differences in the 2009 vs 2010 order books can also be seen in an order‐book breakdown by business segment.

Figure 4: Order book breakdown by business segment 2009E 2010E 9M09 EBITDA

Drilling, Workover, IPM 39.8% 48.2% 8.7%

Technology services 22.2% 1.2% 36.0%

Formation evaluation (geophysics) 17.9% 31.9% 31.3%

OFS equipment manufacturing 17.5% 12.9% 14.7%

Other 2.6% 5.9% n/a


Once again, it is too early to make any conclusions based on the current 2010 order book but we do already see certain positive and negative trends. According to the company’s representatives, Integra is to focus on segments with the highest margins. As such we view the increase in the share of the formation‐evaluation segment from 17.9% to 31.9% as a positive. At the same time the most profitable segment – technology services – shows a dramatic decrease from 22.2% to 1.2%. We believe that the situation is temporary and that we will see significant growth in technology services orders in upcoming months. Integra’s executives similarly project that the low figure in the formation‐evaluation segment is transitory and that we will see more representative figures by the end of 1Q10.

Assets

Integra has one of the most diversified asset bases among OFS companies in Russia, which allows it to offer a full range of services, thus increasing its competitive advantage.

Management and ownership

Integra’s main shareholders are the company’s managers and directors. According to the latest company data, they own 18% of Integra’s shares, while 82% of shares may be deemed free float.

Strategy

As was the case with many companies around the world, the crisis caught Integra off‐guard. Its first remedial step was to cost cuts, followed by cut in investment capex to $40mn in 2009 from $199mn in 2008. Integra is now biding its time and is not planning any significant acquisitions or aggressive investments, and instead focusing on the efficiency of its current operations and limiting investment to maintenance capex until market conditions stabilise.

Stock performance

Integra’s stock price has fallen 5x since its IPO in 2007 and, while the initial slide was largely a side‐effect of a high placement price, in our view, the collapse of the shares from Sep 2008 was a reaction to the crisis and the precarious state of the company’s finances.

Figure 5: Comparison of Integra's financials vs GDR price (Change over 2007‐09E) 2007 2008 2009E

GDR price (end of period, $) 16.92 1.13 3.00

Assets (end of period, $mn) 1,714 1,276 995

Revenue (for the period, $mn) 1,177 1,446 828

EBITDA (for the period, $mn) 178 34 124

Net debt (end of period, $mn) 303 335 175

*Actual price at 31 Dec 2009 Source: Company data, Aton estimates

Nonetheless, it is our strong opinion that the market is failing to adequately price in the greatly improved state of Integra’s financials and that it is only a matter of time before its performance catches up with that of its peers.

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Financials performance review

In July 2009, Integra faced debt difficulties, violating several covenants on its $250mn loan from the EBRD. Nevertheless, the bank allowed the temporary deviation from covenants. The loan was extended by the EBRD in Feb 2009 for five years with the company's total debt in June 2009 amounting to $375.9mn. The company also faced the threat of a put option on its RUB3bn ($100mn) bond issue in Dec 2009. For that purpose Integra accumulated about $66mn by the end of August. In September the company conducted an SPO placing 38mn GDRs (1.9mn shares) at $2.5 per share and raising $95mn. However, in December only 12% of bondholders exercised their put option and the company paid out only RUB361mn ($12mn). The remaining cash was spent redeeming $90.2mn of the EBRD loan. As a result debt restructuring actions in 2009 the majority of Integra’s debt ($126mn) is due to mature in 2011. We do not anticipate the company incurring problems with debt payments as we forecast the company’s cash flow from operations to rise to $228mn in 2011 from $111mn in 2009. Furthermore, we believe that Integra will be able to borrow again. On our estimates, the company’s total debt/EBITDA ratio could improve to 0.8x in 2010 from 1.77x in 2009.

Figure 6: Integra’s debt maturity schedule

0

20

40

60

80

100

120

140

2009E 2010E 2011E 2012E 2013E

$mn

EBRD Sberbank Bonds Other


We calculate that the company’s total debt at YE09 amounted to approximately $219mn, given that over the course of the year Integra was able to reduce its liabilities by $179mn. At the same time positive operating cash flows and decreased capex (only $40mn in 2009 vs $199mn in 2008) should have resulted in free cash flows by YE09, in our view. We estimate Integra’s YE09 net debt dipped to $143mn vs $335mn at the beginning of the year. In Integra’s 3Q09 interim financial report, among other risks the company again mentioned a possible covenant breach on its EBRD loan. The risk seems to have appeared due to preliminary interest‐expense recognition after the pre‐term maturity of part of the loan in 2009. Though this is problematic, given that the EBRD has already allowed a violation once, we believe it is likely to show lenience again given that Integra proved itself as a relatively reliable creditor with respect to debt and interest payments.

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Integra’s 9M09 free cash flows (cash flows from operations less capex) reached $48.1mn. While small at first glance, the figure compares favourably with ‐$23mn in 2008 and ‐$172mn in 2007.

Furthermore, we feel it is very important to note that the company’s losses in the past were primarily due to its substantial debt and high interest expenses. These liabilities have been reduced significantly in 2009. The end of the company’s substantial M&A programme should also mean that Integra will not be borrowing as extensively in the future and should finally reduce capex to reasonable levels. Share‐based compensation expenses were another factor pushing the company into the red. We understand that these are no longer a problem given that the stock option plan has been all‐but exhausted.

Figure 7: Interest expenses and share‐based compensation expenses: Impact on Integra’s financials ($mn) 2006 2007 2008 2009E

Share based compensation 15.2 35.3 30.5 3.0

Interest expense 46.8 59.2 49.4 22.0

Total Debt 586.5 413.2 397.6 218.9

PBT ‐20.2 ‐22.8 ‐258.8 ‐15.2

Current tax ‐25.2 ‐32.6 ‐52.0 0.0

Net income ‐42.1 ‐50.8 ‐271.9 ‐11.8


Income tax is another weak area in Integra’s financials. Due to RAS and IFRS differences, the company continued to pay income tax, despite reporting a PBT loss in its IFRS report.

New era for Integra

Integra is in the middle of a transition period right now: following the finalisation of its company structure, a period of high capex and negative free cash flows, we believe the company is shifting towards maturity, showing strong performance potential, moderate capex, low debt, positive net income and free cash flows. The end of the transition period should in our view set the stage for an improvement in company’s financial performance. Aggressive M&A policy had a positive effect on Integra’s financials. The impact is reflected in rapid growth of company’s revenues, EBITDA and cash flows from operations from 2005 to 2008. EBITDA margin was hit by the crisis in 2008 but restored to pre‐crises level already in 2009. Figure 8 shows our estimates for Integra’s financials improvements.

Figure 8: Expected improvement in Integra’s financials $mn 2005 2006 2007 2008 2009E 2010E 2011E

Cash flows from investing ‐116 ‐373 ‐334 ‐187 ‐40 ‐69 ‐160

Cash flows from operations ‐22 ‐31 ‐10 135 111 156 228

Free cash flows ‐139 ‐405 ‐344 ‐52 71 87 68

Revenue 98 547 1,177 1,446 828 1,127 1,530

Revenue growth rates, % n.a. 458% 115% 23% ‐43% 36% 36%

EBITDA 9 79 178 34 124 177 244

EBITDA margin, % 9% 14% 15% 2% 15% 16% 16%

Net income 4 ‐42 ‐51 ‐272 ‐12 32 91

Net margin, % 4% neg. neg. neg. neg. 3% 6%

Net debt 105 499 303 335 175 87 21


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In addition, we expect that the maturing of the company should allow it to take advantage of what we believe to be the start of an up‐cycle in the global OFS industry. We have analysed the dynamics of global OFS companies’ revenues from 1991 to 2009 and identified two major cycles over this period: 1991‐99 and 2002‐09. It is our opinion that the second cycle has come to an end and that the industry is at the beginning of a new growth period. It is worth noting that the culmination of both cycles coincided with an economic downturn (see Figure 9). Our analysis of Russian OFS companies’ revenues indicates that these tend to move in the same direction as their global peers.

Figure 9: Revenue changes of global OFS companies (i) and Russian OFS companies (ii)

58.4%

33.0%

‐36.9%

35.1%24.1%

‐19.2%

19.2%

6.1%

‐40%

‐20%

0%

20%

40%

60%

80%

History Aton Consensus

15.8%

‐9.7%

34.0%

19.6%14.5%

40.3%

72.9%

3.7%

‐27.9%

32.2%37.0%

‐11.1%

7.5%

17.0%

33.7%38.5%

24.7% 24.4%

‐15.5%

3.3%

‐40%

‐20%

0%

20%

40%

60%

80%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009E

2010E

2011E

Source: Bloomberg, Companies’ data, Aton estimates

Given that the beginning of this new, expected global cycle coincides with the end of Integra’s transition period gives us further reason to believe that the company will show outstanding financial performance vs Russian OFS companies.

Figure 10: Russian OFS companies’ revenue growth 2008 2009E 2010E 2011E 2012E

Integra 23% ‐43% 36% 36% 18%

EDC 41% ‐36% 35% 16% 10%

C.A.T. oil 34% ‐19% 32% 30% 17%


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Rapid recovery in margins forecast

Integra’s margins fell significantly in 4Q08 yet bounced back in 1Q09 in all segments except drilling, workovers, and IPM. Formation evaluation and technology services are now Integra’s primary focus segments, owing to their high margins, with management expecting these areas to see a greater proportion of total revenue going forward (despite their current low shares of the preliminary 2010 order book).

Figure 11: Recovery in Integra’s EBITDA margins, by business segment

17%21%

‐22%

3%

10%13%

36% 35%

18%

35%39%

34%

43%

11%15%

22%

32%

45%

13% 13%16% 18%

11%15%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

2Q08 3Q08 4Q08 1Q09 2Q09 3Q09

Drilling, Workover, IPM Technology Services Formation Evaluation Equipment Manufacturing


Figure 12: Integra’s key financial indicators Segment data 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Sales from Drilling, Workover, IPM 615 836 493 667 938 1,109 1,313 1,548 1,816

Sales from Formation evaluation 272 334 194 307 383 436 497 567 647

Sales from Manufacturing 330 290 130 178 241 295 357 400 449

EBITDA from Drilling, Workover, IPM 128 15 88 136 193 229 273 323 381

EBITDA from Formation evaluation 70 78 62 75 95 109 124 142 162

EBITDA from Manufacturing 74 44 21 30 43 56 71 80 89

Income statement ($mn)

Total revenue 1,177 1,446 828 1,127 1,530 1,801 2,122 2,464 2,852

EBITDA 178 34 124 177 244 291 347 404 470

EBITDA margin (%) 15.1% 2.3% 15.0% 15.7% 15.9% 16.2% 16.3% 16.4% 16.5%

Net profit ‐51 ‐272 ‐12 32 91 109 138 186 204

Net margin (%) ‐4.3% ‐18.8% ‐1.4% 2.9% 5.9% 6.1% 6.5% 7.5% 7.1%

Abridged funds flow and Balance sheet ($mn)

Cash & equivalents 110 62 44 58 ‐3 40 111 236 412

PP&E 562 511 441 394 431 502 586 676 768

Receivables 405 357 245 278 341 358 370 370 428

Other assets 637 345 266 264 274 284 298 324 303

Total assets 1,714 1,276 995 995 1,043 1,184 1,365 1,605 1,910

Gross debt 413 398 219 146 18 9 0 0 0

Non‐current liabilities 84 39 35 36 36 36 36 37 37

Current liabilities 325 347 214 277 356 397 441 481 557

Shareholders funds 892 492 528 537 633 743 888 1,088 1,317

Total liabilities & equity 1,714 1,276 995 995 1,043 1,184 1,365 1,605 1,910

Cash flow from operations ‐10 135 111 156 228 265 330 395 453

Cash flow from investments ‐334 ‐187 ‐40 ‐69 ‐160 ‐213 ‐250 ‐270 ‐277

Cash flow from financing 347 33 ‐90 ‐73 ‐128 ‐9 ‐9 0 0

Net cash flow 3 ‐19 ‐19 14 ‐60 43 71 125 176


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Figure 13: Integra’s key per share indicators 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

EPS ($) ‐0.37 ‐1.90 ‐0.06 0.17 0.47 0.56 0.71 0.96 1.05

BV per share ($) 6.48 3.44 2.72 2.77 3.26 3.83 4.57 5.60 6.79


Valuation

We have derived a valuation of $1.1bn or $5.68 per GDR ($114 per share) using a DCF model, the details of which are presented in Figure 14. The terminal growth rates used for Integra are lower than those applied for EDC and C.A.T. oil as we do not believe that all Integra’s business segments will grow at the same pace. We are confident that the strongest, high‐margin segments like formation evaluation and technology services will grow, but segments such as equipment manufacturing and drilling are likely to be an obstacle to the company’s development due to Integra’s lack of competitive advantage in these areas.

Figure 14: Integra DCF model ($mn) 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

EBIT 22 (193) 3 52 110 139 170 224 236

Tax rate 24% 24% 20% 20% 20% 20% 20% 20% 20%

After tax 17 (147) 3 42 88 111 136 179 188

DD&A 154 225 121 125 133 152 177 180 234

Unleveraged cash flows 171 154 123 167 221 263 313 359 423

Terminal value 3,594

Capex (334) (199) (40) (69) (160) (213) (250) (270) (277)

Change in working capital 53 (176) (13) 18 23 (4) (5) (7) 26

Unleveraged free cash flows (110) (221) 70 116 84 46 58 82 172


Equity value

NPV unleveraged FCF, $mn 906 996 1,106 1,291 1,522 1,796

Price year‐beginning, $/share 93 103 114 133 157 185

Share price appreciation,% 65 84 115 153 198

WACC, %

Base cost of equity 12.70

Company‐specific ERP 1.89

Cost of equity 14.59

Weight of equity 86

Cost of debt 10.24

Weight of debt 14

LT nominal growth rate 2.0

WACC 14.00


Valuation ratios

Integra looks slightly cheaper vs its two Russian peers on an EV/EBITDA basis and much cheaper on EV/sales. This reflects the company’s lower profitability and continuous losses which, we believe, are becoming a thing of the past.

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Figure 15: Integra vs international peers: EV/Sales and EV/EBITDA (x)

2.3x

9.4x

0.9x

6.3x

3.0x

7.5x

2.0x

9.1x

0x

1x

2x

3x

4x

5x

6x

7x

8x

9x

10x

EV/Sales EV/EBITDA

International OFS companies Integra Oil&Gas Drilling OFS machinery&equipment


Figure 16: Sector comparison on valuation ratios EV/Sales EV/EBITDA P/E

2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E

Oil‐field services companies 2.3x 2.1x 1.9x 9.4x 8.0x 6.6x 25.6x 18.0x 3.3x

Oil&Gas Drilling 3.0x 2.9x 2.5x 7.5x 7.2x 6.0x 18.4x 13.7x 3.2x

Oil Field Mach&Equip 2.0x 1.9x 1.7x 9.1x 8.8x 7.4x 17.2x 16.6x 2.6x

Geophysics companies 1.6x 1.6x 1.6x 6.7x 5.9x 4.8x 70.4x 68.8x 1.1x

Other OFS companies 1.4x 1.4x 1.2x 8.0x 6.9x 5.5x 45.8x 26.8x 3.1x

Integra 0.9x 0.6x 0.4x 6.3x 3.9x 2.6x neg. 18.5x 6.6x


It wouldn’t be correct to directly compare Integra on valuation ratios with other OFS companies as each OFS business has its own segment profile. We therefore split Integra into three main business segments and evaluated each of these separately. Integra’s main business segments are: Drilling and associated services (including technology services) Equipment manufacturing Formation evaluation (geophysics) We then calculated Integra’s business segments’ value based on international peers’ ratios:

Figure 17: International peers’ valuation ratios by business segment EV/Sales, 2009E EV/EBITDA, 2009E

Oil&Gas Drilling 3.0x 7.5x

Geophysics companies 1.6x 6.7x

Oil Field Mach&Equip 2.0x 7.5x


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Figure 18: Integra valuation based on ratios Integra segments, 2009 Revenue ($mn) EBITDA ($mn) Weighted EV ($mn)

Drilling and associated services 493 64 968

Formation evaluation 194 45 307

Equipment manufacturing 130 15 183

Total 1,458

Valuation $ mn

Net debt (YE09E) 175

Equity value 1,283


We estimate Integra’s equity value based on our peers’ valuation at $1,283mn or $6.61 per GDR. While this figure supports our positive view on Integra’s value, our DCF model provides the foundation of our assessment.

25

INTEGRA DASHBOARD

INVESTMENT CASE We initiate coverage of Integra with a BUY rating and a 12M fair value of $5.68 per

GDR, implying 83% upside potential. The five‐fold drop in stock price since its maximum levels in 2007 does not in our

view reflect the relatively moderate deterioration in the company’s fundamentals and Integra’s turnaround potential.

BULL POINTS

The company is well diversified among all major OFS segments and maintains a very strong market position in Russia

We believe the Russian OFS market

will revive itself rapidly due to an increase in oil companies' capex and strong demand for OFS services

Positive turnaround in company’s

financial performance due to the end of transition period

BEAR POINTS

High level of dependence on oil companies' investments in production

Covenants on EBRD loan Oil prices remain volatile and hopes

for an imminent global demand recovery may be premature

POTENTIAL CATALYSTS

Securing a larger share of the Russian OFS market due to the weakening of smaller companies which could not survive the crisis

Oil price growth; increases in oil companies' capex

EV/Sales (x) EV/EBITDA (x) P/E (x)

Ticker 2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E

Integra INTE 0.9 0.6 0.4 6.3 3.9 2.6 neg. 18.5 6.6

C.A.T. oil O2C 1.4 1.1 0.8 6.0 4.4 3.2 19.5 12.4 7.9

Eurasia Drilling EDCL 1.7 1.2 1.0 7.7 5.7 4.3 15.3 11.1 8.2

Average international OFS 2.3 2.1 1.9 9.4 8.0 6.6 13.5 11.8 0.9


Figure 20: Stock performance vs sector (%, 3M)

Figure 19: Sector comparison on valuation ratios

4.6%

‐16.0%

1.1%

4.7%

‐16.4%

6.3%

‐18% ‐15% ‐12% ‐9% ‐6% ‐3% 0% 3% 6% 9%

SDAX Performance Index

AMEX Oil Serv Holders Index

MSCI Russia

Eurasia Drilling

C.A.T. Oil

Integra

Source: Bloomberg

INTE LI

0

5

10

15

20

Jul‐07

Sep‐07

Nov‐07

Jan‐08

Mar‐08

May‐08

Jul‐08

Sep‐08

Nov‐08

Jan‐09

Mar‐09

May‐09

Jul‐09

Aug‐09

Oct‐09

Dec‐09

Figure 21: Stock performance vs fair value

Source: Bloomberg

26

Eurasia Drilling Company (EDC) is the largest independent drilling company in Russia with over 26% market share in drilling. The company was established for the purpose of acquiring OOO LUKOIL Burenie and its subsidiaries. A strong relationship with LUKOIL, one of largest oil companies in Russia, should guarantee EDC stable demand for its services. In 2008 EDC performed about 95% of LUKOIL's drilling operations. At the same time the company has successfully diversified its client base, increasing its share of revenue from non‐LUKOIL operations. Currently EDC has low debt and a significant amount of cash on its balance sheet, facilitating further acquisitions and financial stability, in our view. We do not rule out that this cash may be spent on dividends to shareholders. Company drilling volumes decreased 7.1% YoY in 2009 in meter terms. We believe that drilling volumes will increase significantly in 2010 and thereafter due to reductions in drilling volumes in 2009 and the high rate of depletion of the majority of Russian oil fields. The stabilisation of oil prices should favour this. During 2008‐09 the company repurchased about 12.6mn (9.4% of issued and outstanding common stocks) of its shares at an average price of $4.7 per GDR (1 GDR = 1 share). This is 72% lower than the current price of $16.8. The net unrecognised gain from this operation could potentially amount to about $152mn, according to our calculations. We initiate coverage of Eurasia Drilling Company with a HOLD rating and a 12‐month fair value of $17.94 per GDR.

Figure 1: EDC’s outlook for meters drilled (mn meters)

0

1

2

3

4

5

6

2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Total meters drilled, mn


HOLD Fair value $17.94

Bloomberg code EDCL LI

Reuters code EDCLq.L

Price (GDR, $) 16.8

GDR ratio (x) 1

Fair value GDR ($) 17.94


Share data

No. of ordinary shares (mn) 134

Daily t/o ($mn) 1.7

Free float (%) 17.2%

Market capitalisation ($mn) 2,250

Enterprise value ($mn) 2,267

Major shareholders

Alexander Djaparidze, CEO 46.5%

Alexander Putilov 26.8%

Serik Rakhmetov 9.6%

FINANCIALS 2008 09E 10E

Revenue 2,102 1,337 1,809

EBITDA 449 294 372

EBIT 347 201 276

Net income 221 147 203

EPS 1.61 1.10 1.51

CFPS 2.26 1.80 2.01

VALUATION

P/E (x) 10.2 15.3 11.1

EV/Sales (x) 1.1 1.7 1.2

PCF 7.4 9.3 8.3

EV/EBITDA (x) 5.0 7.7 5.7

P/B (x) 2.6 2.9 2.3

RoA (%) 15% 12% 14%

RoE (%) 25% 19% 21%

PERFORMANCE

1 month 5%

3 month 5%

12 month 354%

52‐week high 18.00

52‐week low 2.85

EURASIA DRILLING COMPANY Pause before acceleration

27

Company background

Eurasia Drilling Company (EDC) is the largest independent drilling company in Russia with over 26% market share, providing integrated well‐construction and workover services. The company was established for the purpose of acquiring OOO LUKOIL Burenie and its subsidiaries. EDC looks more like a mono‐profile company, especially in comparison with Integra whose business is much more diversified. It would seem that concentrating on one business is a disadvantage, as the company is unable to switch to other business segments if drilling volumes drop. That said, drilling is one of the most stable segments of the OFS market, with volumes rising at a CAGR of about 10% over 2003‐2008.

Operational statistics

EDC’s drilling volumes decreased just 7.1% YoY in 2009, which to us is a fairly marginal decline against the background of an estimated 24% contraction in the overall OFS industry in 2009. We believe this was only an interim slowdown due to the financial crisis. High demand for drilling services, together with stable oil prices, should lead to significant demand improvements on the drilling market as soon as 2010. As a result, we expect EDC’s drilling volumes (in meters) to increase over the next five years at a 5% CAGR. Also note that we estimate the overall OFS industry to contract by 24% in 2009. Despite the drop in operating volumes, EDC managed to retain its 26% share of the drilling market during 9M09.

Figure 2: EDC’s drilling market share with 1H09 industry breakdown

16.8%

20.3%

22.3%

26.0% 26.4%

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 1H09

26.4%

24.8%

6.7%

3.2%

1.2%

37.6%

EDC Surgutneftegas SSK SGK Integra Other

Source: Company data, Neftegazovaya Vertical

Assets ‐205 drilling rigs ‐1 offshore jack‐up rig (ASTRA) ‐237 workover rigs The average age of the company’s drilling rig is 15 years (the average lifetime of a drilling rig is about 25 years).

28

Assets

The major component of the company’s assets is its on‐shore drilling fleet which consists of 205 drilling rigs. EDC anticipates the delivery of three additional rigs in the near future. Another important asset is an ASTRA offshore jack‐up rig operating in the Caspian Sea region, one of only three such rigs presently available in that region. The demand for these rigs is very high and supply is limited. Jack‐up rigs are quite expensive, with a current cost of $200‐250mn and a $100mn delivery fee. EDC is considering the purchase of one or two jack‐up rigs in the future to increase its presence in the region. The share of revenues from off‐shore drilling operations performed by ASTRA was about 2.8% of total revenue in 2008.

Figure 3: EDC revenue breakdown ($mn) On‐shore drilling operations 2007 2008 2009E

Revenue ($mn) 1,451 2,042 1,267

Net income ($mn) 162 218 126

Net margin (%) 11.2% 10.7% 9.9%

Off‐shore drilling operations 2007 2008 2009E

Revenue ($mn) 41 60 70

Net income ($mn) 6 3 22

Net margin (%) 15.4% 5.5% 31.2%


Currently, EDC has 237 workover rigs. However, they contribute a small share of total revenue and are a complementary part of the business.

Strategy

The main trend over the past few years has been order book diversification. In 1H09 the share of non‐LUKOIL operations increased to 36% (from 24.3% in 1H08) in metre terms and to 31.8% from 26.5% in revenue terms. Non‐LUKOIL revenue reached 38% of total revenue in 9M09. We believe this tendency will persist and by 2011 the share of non‐LUKOIL operations should exceed 44%, on our estimates.

Figure 4: Breakdown of EDC’s drilling volumes between LUKOIL and other companies

61.5%

81.5%

76.0%

73.0%

60.6%

58.2%

55.8%

55.5%

55.9%

56.0%

56.1%

38.5%

18.5%

24.0%

27.0%

39.4%

41.8%

44.2%

44.5%

44.1%

44.0%

43.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

LUKOIL's share of operating volume Other companies' share of operating volume

Source: LUKOIL, EDC, Aton estimates

29

EDC performed drilling operations for LUKOIL over 2005‐2009 in accordance with a five‐year framework agreement. At the conclusion of this agreement at YE09, the two companies signed a new three‐year contract with LUKOIL likely to remain EDC’s major customer in the foreseeable future.

From private to state‐owned

LUKOIL, Russia’s largest private oil company, presented its long‐term strategy on 8 Dec in which the company stated a change of focus from oil production to company value growth. This strategic shift means that we do not foresee any rapid growth in LUKOIL’s upstream capex in the next several years. While this outlook may appear negative for EDC in light of the latter’s dependence on LUKOIL for a significant proportion of its revenue, we emphasise that EDC has in recent years been diversifying its customer base. We therefore expect growth in EDC’s drilling operations for other Russian oil companies to compensate any pullback in the volume of projects derived from LUKOIL. We thus believe that EDC’s other major customers Rosneft and Gazprom neft will become the key driver of EDC’s revenue growth in 2010 and later years. In contrast to LUKOIL, Rosneft and Gazprom neft are almost entirely focused on upstream operations and should consequently provide additional orders for EDC. In 1H09 23% and 12% of EDC’s activity was Gazprom neft and Rosneft‐related, respectively (vs 17% and 10% in FY08). We estimate that in 2010 EDC’s drilling volumes for both companies will increase by 13.5%.

Figure 5. EDC’s operations breakdown by customers

82% 76% 73%63%

8% 10%12%

17% 15% 17% 23%

1% 1% 1% 1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 1H2009

LUKOIL Rosneft Gazprom neft Other


Rosneft plans to increase its oil production 4‐5% in 2010, and Gazprom neft 2%. Unlike LUKOIL, both companies have ambitious plans for further production increases and we therefore expect stable growth of their upstream capex and as a result, stable demand for drilling and other OFS. Although at present EDC is not planning an expansion programme which would require extensive investment (preferring to focus on organic growth) we believe the company may revise its investment plans on the back of oil‐price stabilisation and strong demand for drilling services.

30

Financials

1H09 financials confirm company stability

At the beginning of September EDC released 1H09 financial results. The company’s revenue decreased 34.5% YoY due to rouble depreciation and lower prices for drilling services.

Figure 6: EDC 1H09 US GAAP results ($mn) 1H09 1H08 YoY (%)

Revenue 666 1,017 ‐34.5%

EBITDA 147 212 ‐30.5%

Net income 78 133 ‐40.9%

EBITDA margin (%) 22.10% 20.90% 1.3%

Net margin (%) 11.80% 13.00% ‐1.3%

Operational statistics

Metres drilled ('000 m) 1,927 1,986 ‐2.9%

Market share (%) 26.40% 26% 0.4%

Number of land drilling rigs 201 205 2.0%

Number of drilling crews 107 124 ‐13.7%


It is worth noting that the company achieved EBITDA margin expansion in the midst of the crisis, highlighting management’s effectiveness. The company also reduced its total debt to $186mn from $263mn at the beginning of 2009. Its cash position has changed little, and amounted to $279mn as of end 1H09. Such a strong cash position is particularly important in a crisis environment. In our view, it not only assumes financial stability but also provides the opportunity to acquire new assets at favourable prices. In a 9M09 operational and financial update EDC disclosed that revenue for the period reached $1.01bn and the EBITDA margin was above 23%. The company has also stated that it expects its FY09 EBITDA margin to remain above 23%.

Share buy‐back programme

In Oct 2008 EDC announced its share repurchase programme. By Sep 2009, the company had repurchased about 12.6mn of its shares at an average price of $4.7 per share. We deem the share buy‐back programme very successful as the company used its ample cash balance to accumulate its own stock at very low prices, thus finding an efficient use for excess capital and achieving significant gains for its shareholders. Net unrealised profit from that operation reached $152mn, given that the current GDR price of $16.8 is 3.6x higher than the average purchase price. In Nov 2009 EDC tried to sell the accumulated shares back to the market but cancelled the operation after bids failed to match management’s expectations. The primary purpose of a placement was to free up cash for a special dividend and, we believe, the company will make another attempt later this year.

31

Dividends may become an additional incentive

We believe that stable cash flows from operations will allow the company to continue paying dividends to its shareholders. In Jan 2009 EDC paid out $34.3mn in dividends to its shareholders, or $0.25 per share for 2008 (15.5% of 2008 net income). The 2009 payout was unaffected by the crisis and also amounted to $0.25 per share, yielding some 1.5% as of the record date price (15 Dec 2009). We believe that dividends helped maintain investors’ confidence in the company, while its current strong balance sheet suggests a stable future dividends stream. At the end of 2009, EDC acquired 2 service companies from “LUKoil – Western Siberia” and thus increased its number of workover units by 150 to 237. The details of the deal are not known. We estimate the price of the purchase at $80‐100mn based on the average price of a workover unit. In addition, EDC acquired two more service companies (“Bitas” and “Techgeoservice”) for RUB1.1bn ($37mn). Following these deals, we estimate EDC’s cash balance at YE09 at $174mn, leaving scope for further acquisitions, in our view. Moreover, taking into consideration that EDC does not intend to make significant asset acquisitions in the near future, we believe the company may therefore increase dividends to its shareholders in 2010.

Management compensation plan

In March 2008 the company introduced a management compensation plan to incentivise top executives. The grant‐date fair value of the plan was estimated by an independent consultant at $21mn. We do not believe the management compensation plan will have any significant impact on the company’s financials, with it more likely to have a positive effect on management’s performance.

32

Financials

Figure 7: EDC’s key financial indicators 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Total meters drilled (mn) 3.27 4.04 3.78 4.21 4.40 4.52 4.76 5.02 5.34

for LUKOIL 2.03 2.48 2.95 2.29 2.45 2.45 2.50 2.65 2.80

for other companies 0.78 1.09 1.49 1.76 1.94 2.02 2.11 2.22 2.35

Total sales to LUKOIL ($mn) 1,189 1,556 837 1,023 1,148 1,257 1,427 1,607 1,814 Sales to other companies ($mn) 279 516 487 660 814 910 1,018 1,140 1,279

Share of LUKOIL in revenue (%) 79.7% 74.0% 62.6% 56.5% 54.9% 54.7% 55.4% 55.8% 56.2%

Income statement ($mn)

Total revenue 1,492 2,102 1,337 1,809 2,091 2,295 2,576 2,881 3,230

EBITDA 314 449 294 372 466 530 615 693 787

EBITDA margin (%) 21.0% 21.4% 22.0% 20.6% 22.3% 23.1% 23.9% 24.1% 24.4%

Net profit 169 221 147 203 276 302 346 379 422

Net margin (%) 11.3% 10.5% 11.0% 11.2% 13.2% 13.1% 13.4% 13.2% 13.1%

Abridged funds flow and Balance sheet ($mn)

Cash & equivalents 343 279 174 299 331 476 563 629 723

PP&E 572 609 596 619 732 925 1,161 1,437 1,741

Receivables 231 230 180 236 264 280 304 327 354

Other assets 214 327 236 271 309 336 374 415 461

Total assets 1,360 1,446 1,186 1,425 1,635 2,017 2,402 2,808 3,278

Gross debt 284 263 190 165 71 127 133 140 147



Shareholders’ funds 822 881 765 966 1,240 1,541 1,884 2,243 2,661

Total liabilities & equity 1,360 1,446 1,186 1,425 1,635 2,017 2,402 2,808 3,278

Cash flow from operations 173 310 242 270 350 420 490 561 640


Cash flow from financing 450 ‐23 ‐129 ‐26 ‐95 55 4 ‐13 4

Net cash flows 317 ‐37 ‐106 131 37 146 90 70 99


Figure 8: EDC’s key per share indicators 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

EPS ($) 1.15 1.61 1.10 1.51 2.05 2.25 2.57 2.82 3.14

DPS ($)* 0.25 0.51 0.33 0.45 0.62 0.67 0.77 0.85

BV per share ($) 5.60 6.41 5.69 7.19 9.23 11.47 14.02 16.70 19.81

*We assume a 30% payout ratio from 2010 onward Source: Company data, Aton estimates

33

Valuation

Our financial model is based on a six‐year detailed forecast. Our revenue forecast is based on two major factors: 1) LUKOIL’s capex 2) Our expected OFS market growth rates in Russia

In the absence of significant acquisitions, our model also foresees significant excess cash accumulation and we assume a minimum 30% dividend payout ratio throughout the forecast period.

Figure 9: EDC DCF model ($mn) 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

EBIT 255 347 201 276 356 394 447 489 542

Tax rate 24% 24% 20% 20% 20% 20% 20% 20% 20%

After tax 194 264 161 221 284 315 358 391 434

DD&A 59 102 93 96 111 136 168 204 244



Capex (320) (327) (219) (118) (224) (330) (404) (480) (548)

Change in working capital (73) (5) 2 (29) (36) (18) (26) (25) (29)

Unleveraged free cash flows (140) 34 37 170 135 103 96 91 101


Equity value

NPV unleveraged FCF ($mn) 1,981 2,195 2,420 2,687 2,965 3,307

Price year‐beginning ($/share) 12.4 15.0 16.6 18.3 20.3 22.4

Share price appreciation (%) ‐2 8 19 32 47

WACC (%)




Weight of equity 85

Cost of debt 5.87

Weight of debt 15


WACC 13.97


Valuation ratios analysis

We have compared EDC’s valuations with those of international OFS companies and international drilling companies. Our analysis shows that in spite of a stratospheric rise in EDC’s share price, the stock is still trading at a discount to its international peers on all of the valuation metrics observed. Using a 2009 average sector EV/EBITDA ratio, we arrive at a proxy valuation of EDC of $18.2 per share, which is close to the price derived from our 12M DCF model.

34

Figure 10: Peer group comparison MktCap ($mn) EV/Sales (x) EV/EBITDA (x) P/E (x)

Diversified oil‐field services 2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E

Baker Hughes Inc 14,729 1.6 1.4 1.2 9.3 7.8 5.8 28.4 24.0 3.0

BJ Services Co 6,328 1.7 1.5 ‐ 11.5 8.3 ‐ 53.3 21.2 1.1

Fred Olsen Energy ASA 22,357 3.1 3.0 3.0 5.1 4.8 4.9 6.5 5.5 41.7

Calfrac Well Services Ltd 935 2.0 1.5 1.3 16.8 8.8 6.7 108.2 36.5 1.5

Core Laboratories NV 2,825 4.2 4.0 3.5 13.8 13.2 11.3 24.6 23.3 6.3

Cal Dive International Inc 737 1.1 1.2 1.1 4.2 5.0 4.0 12.0 10.8 1.0

Global Industries Ltd 893 0.8 0.9 0.8 3.8 4.3 3.6 16.9 12.1 0.9

Halliburton Co 30,945 2.2 2.0 1.7 10.9 10.0 7.7 27.0 23.8 2.1

Helix Energy Solutions Group Inc 1,347 1.6 1.7 1.4 5.5 3.9 3.4 16.0 11.2 1.8

Oceaneering International Inc 3,320 1.8 1.7 1.6 8.0 7.6 6.6 17.8 17.1 4.1

Oil States International Inc 2,058 1.1 1.1 1.0 7.2 7.0 5.7 19.2 17.9 3.3

Smith International Inc 7,563 1.3 1.3 1.1 11.8 10.3 7.6 37.9 27.9 1.9

Schlumberger Ltd 85,602 3.9 3.7 3.1 13.0 12.4 10.2 26.3 24.9 3.7

Superior Energy Services Inc 2,013 1.7 1.7 1.5 6.2 5.8 5.0 18.2 15.4 2.2

Trican Well Service Ltd 1,756 2.5 2.0 1.7 27.0 11.9 8.0 93.6 39.4 0.8

Tetra Technologies Inc 926 1.5 1.4 1.3 5.1 4.6 4.1 13.5 12.9 1.1

Weatherford International Ltd 14,103 2.4 2.0 1.7 11.6 9.0 7.1 25.8 19.7 1.5

Acergy SA 3,230 1.3 1.3 1.2 7.1 8.4 6.8 27.0 25.0 1.0

Fugro NV 4,960 1.9 2.0 1.8 7.3 7.9 7.2 ‐ 15.7 3.3

Bourbon SA 2,500 3.5 3.2 2.7 9.7 9.1 7.5 11.8 12.9 3.3

Petrofac Ltd 5,631 1.4 1.1 1.0 10.1 6.4 5.7 16.1 12.5 1.5

Petroleum Geo‐Services ASA 2,750 2.4 2.9 2.5 5.5 7.5 5.6 20.6 21.9 1.3

ProSafe SE 1,429 5.9 4.5 4.6 8.5 6.5 7.0 6.3 6.0 1.0

SBM Offshore NV 3,568 1.8 1.9 1.9 9.1 8.6 7.8 22.4 15.2 1.6

Saipem SpA 15,528 1.3 1.4 1.3 8.7 8.5 7.5 18.2 17.1 1.7

Technip SA 8,185 0.6 0.7 0.6 4.7 5.6 5.1 17.0 16.9 3.6

TGS Nopec Geophysical Co ASA 16,982 3.8 3.4 3.1 4.7 4.2 3.8 13.6 12.9 1.8

John Wood Group PLC 2,968 0.7 0.7 0.6 7.6 8.1 7.1 ‐ 15.2 0.4

Offshore Oil Engineering Co Ltd 5,612 3.1 2.6 2.1 16.4 12.2 9.9 16.2 18.1 0.8

China Oilfield Services Ltd 2,057 5.6 5.0 4.4 12.5 11.0 9.6 13.5 11.8 0.9

Max 5.9 5.0 4.6 27.0 13.2 11.3 108.2 39.4 41.7

Min 0.6 0.7 0.6 3.8 3.9 3.4 6.3 5.5 0.4

Average 2.3 2.1 1.9 9.4 8.0 6.6 26.0 18.1 3.3

Oil&Gas Drilling

Parker Drilling 638 1.3 1.4 1.3 5.8 5.0 4.2 47.8 28.5 0.4

Pride International Inc 5,759 3.5 3.8 2.9 9.2 9.9 6.0 23.7 16.7 3.5

Precision Drilling Trust 2,541 2.7 2.3 1.9 7.9 7.1 5.7 18.4 14.6 0.8

Patterson‐UTI Energy Inc 2,797 3.2 2.7 2.1 11.3 10.0 6.7 ‐ ‐ 0.3

Rowan Cos Inc 2,836 1.7 1.8 1.7 4.4 5.3 5.3 11.2 11.6 1.9

Transocean Inc 29,651 3.5 3.6 3.4 6.3 6.7 6.2 9.3 8.7 11.7

Helmerich & Rayne 5,128 3.4 2.9 2.4 8.6 7.9 6.6 22.7 19.5 3.3

Hercules Offshore Inc 617 1.8 1.8 1.7 8.5 7.8 6.5 ‐ ‐ neg

ENSCO International Inc 6,409 2.9 3.1 2.8 4.9 5.9 5.2 10.0 10.8 4.8

Ensign Energy Services 2,494 2.2 1.8 1.5 8.5 7.4 5.7 20.3 17.1 1.4

Nabors Industries Ltd 7,360 2.8 2.7 2.3 7.8 7.6 6.4 29.7 23.7 1.7

Noble Corp 11,722 3.2 3.3 3.3 4.8 5.3 5.3 7.6 8.0 5.4

Diamond Offshore Drilling Inc 14,443 4.2 4.1 4.0 6.7 6.7 6.5 10.8 10.6 9.9

Seadrill Ltd 9,964 5.2 4.5 4.1 9.8 8.2 7.4 8.8 8.6 3.3

Max 5.2 4.5 4.1 11.3 10.0 7.4 47.8 28.5 11.7

Min 1.3 1.4 1.3 4.4 5.0 4.2 7.6 8.0 0.3

Average 3.0 2.9 2.5 7.5 7.2 6.0 18.4 14.9 3.7

Average International OFS 2.3 2.1 1.9 9.4 8.0 6.6 26.0 18.1 3.3

Average International Oil&Gas Drilling 3.0 2.9 2.5 7.5 7.2 6.0 18.4 14.9 3.7

EDC 2,250 1.7 1.2 1.0 7.7 5.7 4.3 15.3 11.1 8.2


35

EURASIA DRILLING DASHBOARD

INVESTMENT CASE A strong relationship with LUKOIL, one of Russia’s largest oil companies, should

secure EDC stable demand for its services. In 2008, EDC performed about 95% of LUKOIL's drilling operations. At the same time the company has successfully diversified its client base, increasing its share of revenue from non‐LUKOIL operations over the course of 2009. EDC’s major customers (after LUKOIL) are state‐owned Rosneft and Gazprom neft, which have the most ambitious plans for further oil production growth among the Russian oil majors.

EDC currently has low debt and a significant amount of cash on its balance sheet

which, we expect, should facilitate further acquisitions and financial stability, respectively. The company also holds 12.6mn of treasury shares on its balance sheet, which is equivalent to $206mn at current GDR prices.

BULL POINTS

A significant amount of cash on its balance sheet and low debt

Potential for M&A activities Growing production base, customer

base diversification Expected stable dividend stream due

to substantial cash generation

BEAR POINTS

Dependence on LUKOIL's investment programme

High correlation with the oil price

POTENTIAL CATALYSTS

Potential acquisitions of smaller OFS companies which cannot survive in the crisis. EDC has about $174mn of cash which could be used for acquisitions. Treasury stocks (equivalent to $206mn) may also be used for this purpose.

Further oil price advances; rising oil company capex



EDC EDCL 1.7 1.2 1.0 7.7 5.7 4.3 15.3 11.1 8.2

Integra INTE 0.9 0.6 0.4 6.3 3.9 2.6 ‐50.8 18.5 6.6

CAT Oil O2C 1.4 1.1 0.8 6.0 4.4 3.2 19.5 12.4 7.9

International drilling companies 3.0 2.9 2.5 7.5 7.2 6.0 18.4 14.9 3.7


Figure 12: Stock performance vs sector (% 3M)

Figure 11: Peer group comparison summary

1.1%

4.7%

6.3%

‐16.4%

‐16.0%

4.6%

‐18% ‐15% ‐12% ‐9% ‐6% ‐3% 0% 3% 6% 9%



MSCI Russia

Integra

C.A.T. Oil

Eurasia Drilling

EDCL LI

0

5

10

15

20

25

30

35

Nov‐07

Jan‐08

Mar‐08

Apr‐08

Jun‐08

Aug‐08

Oct‐08

Dec‐08

Feb‐09

Apr‐09

Jun‐09

Aug‐09

Oct‐09

Dec‐09

Figure 13: Stock performance

Source: Bloomberg

Source: Bloomberg

36

C.A.T. oil is an independent OFS company operating in Russia and Kazakhstan, providing fracturing, cementing, workover inclined drilling (side‐tracking) and coil tubing services. C.A.T. oil is also one of the leading providers of hydro‐fracturing services in Russia. Its share of this segment was about 26% in 2008, rivalled only by that of Schlumberger – the leading global provider of OFS. C.A.T. oil primarily focuses on fracturing services, but in recent years the company has diversified its business, increasing its share of revenue derived from sidetrack drilling and coil‐tubing services. Side‐track drilling has become the second‐largest segment of C.A.T. oil’s business and in 2008 the job count in this segment increased 166% due to a major capacity expansion. C.A.T. oil estimates its 2008 share of the Russian side‐tracking market at 18%. The company again competes with world OFS giant Schlumberger in this field (estimated share of Russian market: 26%). Effective cost cutting programme. During 2009 the company cut 25% of its staff and tightened control over its operating expenses. This resulted in the 9M09 operating margin stabilising at the 9M08 level of 11.5%. The 9M09 EBITDA margin of 22.7% was 2.8% higher than the 9M08 figure, approaching the 2006‐07 pre‐crisis level. C.A.T. oil’s 9M09 results were indicative of the company’s resilience to deteriorating business environment: the job count grew 6.4% YoY; revenue fell 16.6% but mostly due to the euro’s appreciation vs the rouble. In rouble terms, 9M09 revenue increased 1.2%. 9M09 EBITDA and net income both decreased by only 4.8% YoY. For 2009 we expect the company’s revenue to exceed the 2007 level and for EBITDA to rise 22% YoY. That said, in spite of a stellar performance in 2009 the shares still appear attractively priced vs international OFS peers. We initiate coverage of C.A.T. oil with a BUY rating and a 12‐month fair value of €9.04 per share.

Figure 1: Market structure for Russian independent fracturing (left) and sidetrack drilling markets (right)

C.A.T. oil

26%

Schlumberger

26%

Trican

19%

Halliburton

9%

BJ Services

9%

Other

11%

C.A.T. oil

18%

Schlumberger

26%

OTO

13%

Eurasia

8%

Integra

8%

Other

27%


BUY Fair value €9.04

Bloomberg code O2C

Reuters code O2C.DE

Price common (€) 7.21

Fair value (€) 9.04


Rating BUY Share data

No. of ordinary shares (mn) 48.85

Daily t/o (€mn) 1.8

Free float (%) 29.0%

Market capitalisation (€mn) 352

Enterprise value (€mn) 373

Major shareholders

Anna Brinkmann, COO 11%

C.A.T. Holding (Cyprus) 60%

FINANCIALS (€mn)

2008 09E 10E

Revenue 276 238 305

EBITDA 46 56 74

EBIT 31 41 58

Net income 4 25 41

EPS 0.05 0.37 0.58

CFPS 0.52 1.02 0.88

VALUATION

P/E (x) 137.2 19.5 12.4

EV/Sales (x) 1.4 1.4 1.1

PCF neg 8.1 40.2

EV/EBITDA (x) 8.2 6.0 4.4

P/B (x) 1.7 1.6 1.4

RoA (%) 0.9% 6.7% 9.5%

RoE (%) 1.2% 8.1% 11.2%

Earnings yield 0.7% 5.1% 8.0%

PERFORMANCE

1 month 8%

3 month ‐16%

12 month 255%

52‐week high 9.2

52‐week low 1.7

C.A.T. oil Taking on the big hitters

Note: All prices and financials in this section are quoted in euros.

37

Company background

C.A.T. oil is an independent OFS company operating in Russia and Kazakhstan, providing fracturing, cementing, workover inclined drilling (side‐tracking) and coil tubing services. C.A.T. oil is also one of the leading providers of hydro‐fracturing services in Russia. Its share of this segment was about 26% in 2008, rivalled only by that of Schlumberger – the leading global provider of OFS. C.A.T. oil’s auxiliary services (workovers, well cementing and coil tubing) generate lower margins, yet allow the company to offer a full set of services thus providing additional competitive advantage.

Strategic focus on diversification

The company’s strategy assumes not only keeping the current share of the market in its primary segment but expanding other business segments, with side‐track drilling first on its agenda. The increase in its side‐track drilling capacity should help the company to become one of the leading providers of these services in Russia (18% share of the market in 2008). From 2006‐2009 C.A.T. oil increased the number of side‐track drilling fleets from two to 14. The job count in 2008 grew 166% YoY in this segment.

Figure 2: C.A.T. oil revenue breakdown forecast (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Fracturing Remedia l cementing Workovers Side‐track dri l l ing Gas fracturing Coi l ‐tubing


Prior to the crisis the company had ambitious expansion plans which were then temporarily suspended. We believe that with the stabilisation of the global financial markets and an improvement in the company’s financials, C.A.T. oil will continue with its expansion aspirations. At the depth of the crisis, Russian OFS companies became more competitive vs their international peers thanks to the rouble’s devaluation. As a result, the services of Russian contractors became relatively cheaper, while oil companies’ budgets decreased on the back of lower oil prices, forcing them to dedicate greater focus to the cost of services provided. We also believe that C.A.T. oil further benefitted from oil companies attempting to improve well productivity through cheaper hydrofracturing works, rather than via drilling new wells. The 6.4% YoY increase in total jobs performed in 9M09 is an indication of this, in our view.

C.A.T. oil has an impressive asset base which allows it to dominate its primary business segment. Operating assets include: ‐ 15 fracturing fleets at an average age of 5 years (one of the most modern fleets in industry). ‐ 14 side‐tracking rigs (massive expansion from 2 rigs in 2006) ‐ 5 coil tubing fleets ‐ 6 cementing fleets and 35 workover crews ‐ 4 seismic crews

Management and ownership C.A.T. oil is an Austria‐incorporated company. 60% of its shares are owned by CAT Holding (Cyprus) Ltd. Anna Brinkman, the company’s COO, is another large shareholder with an 11% stake. Approximately 29% of the shares are in free float

Side‐tracking In 2008 C.A.T. oil undertook massive investment into its side‐tracking business, increasing the proportion of revenue from these projects. Consequently, the job count in this segment increased 166% YoY.

38

C.A.T. oil’s most significant customers are Rosneft and TNK‐BP. As we noted previously with respect to Integra, Rosneft and TNK‐BP are excellent customers for any OFS provider in terms of potential demand for services. TNK‐BP plans to increase its upstream capex 22‐30% in 2010; while Rosneft sees production expanding 4‐5% in 2010 alone, which is generally accompanied by increased capex. According to Rosneft’s long‐term strategy the company intends to increase its oil production from 112.3mnt in 2009 to 170mnt in 2020, which assumes a CAGR of 3.8% over the period.

Financials

C.A.T. oil’s 9M09 results were affected mostly by the rouble’s depreciation against the euro. In rouble terms the company’s revenue increased 1.2%, while in euro terms it fell 16.6%. Most importantly, the number of jobs performed reached a record 2,352 in 9M09 (+6.4% YoY). In general, the 9M09 numbers confirmed to us the company’s strong financial position and the stability of demand for its services.

Figure 3: C.A.T. oil revenue growth in EUR and RUB terms (% YoY)

46%

35%

23%

15%

24%

50%

32%

19% 18%

29%

5%

‐14%‐20%

‐10%

0%

10%

20%

30%

40%

50%

60%

2004 2005 2006 2007 2008 2009E

Revenues dynamics in EUR Revenues dynamics in RUB


During the first nine months of 2009 C.A.T. oil generated operating cash flow of €38.4mn. The majority of this was spent on early debt repayment (€24.9mn). As a result of the repayment, the company’s total debt fell to €7.5mn from €35.7mn at the beginning of 2009. At the same time, C.A.T. oil’s total cash position reached €17.4mn thanks to a residual YE08 cash balance of €14.4mn and 9M09 net cash inflows of €3mn.

36.2%

31.7%

10.1%

9.3%

8.5%4.2%

Rosneft TNK‐BP LUKOIL

Kazmunaigas Gazprom Other


C.A.T. oil’s revenue breakdown by customer

39

Figure 4: C.A.T oil’s debt movement

18 176

08

36

715 13

‐74

‐7

21

‐10‐5

‐80

‐60

‐40

‐20

0

20

40

60

2003 2004 2005 2006 2007 2008 9M09

€mn

Total debt, €mn Net debt, €mn


We believe that the company’s cash position may have increased to €26.5mn (€0.54 per share) by YE09 on the back of operating cash flow generation and no significant expenditures on debt repayment or capex.

Effective cost cuts

Like many others, C.A.T. oil introduced a cost cutting programme to improve its financial stability. Together with lower prices for materials, fuel etc, this cost optimisation was manifested in CoGS decreasing 14.9% YoY in 9M09. SG&A costs fell 28.3% YoY. Wage and salary expenses declined 28.8% in 9M09 due to the combined effect of lower headcount and wages. During 2009 the company cut 25% of its staff. We believe, however, that the lower headcount will be short‐lived as increasing demand for fracturing, side‐tracking and other OFS services in the future is likely to stimulate an expansion in the number of personnel. The cost optimisation policy also helped to improve margins, which in 2Q09 returned to pre‐crisis levels and in 3Q09 exceeded them. It appears clear, therefore, that strict cost management features high on C.A.T. oil’s strategic agenda.

40

Figure 5: Improvement in C.A.T. oil’s margins

0%

5%

10%

15%

20%

25%

30%

35%

2003 2004 2005 2006 2007 2008 1Q2009 2Q2009 3Q09

EBITDA margin EBIT margin Net margin


Figure 6: C.A.T. oil’s key financial indicators Operating data (no. of jobs) 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Fracturing 1,614 1,942 1,830 2,375 2,695 2,818 2,974 3,131 3,287

Remedial cementing 495 495 540 518 558 558 558 558 558

Workovers 311 311 420 420 420 420 420 420 420

Inclined drilling 38 101 119 123 163 193 205 217 229

Coil tubing 14 14 20 36 49 65 83 106 133

Total number of jobs 2,473 2,864 2,929 3,472 3,885 4,054 4,241 4,432 4,627

Income statement (€mn)

Total revenue 223 276 238 305 386 449 503 561 622

EBITDA 50 46 56 74 99 117 131 147 159

EBITDA margin (%) 22.3% 16.5% 23.6% 24.4% 25.7% 26.2% 26.1% 26.2% 25.6%

Net profit 23 3 18 28 45 56 64 74 80

Net margin (%) 10.2% 0.9% 7.6% 9.3% 11.6% 12.4% 12.7% 13.2% 12.9%

Abridged funds flow and Balance sheet (€mn)

Cash & equivalents 15 14 26 26 36 60 95 136 180

PP&E 160 158 136 139 150 164 180 200 222

Receivables 46 51 46 59 74 85 94 103 113

Other assets 65 61 61 75 92 103 113 123 133

Total assets 285 284 270 299 351 412 481 562 648

Gross debt 8 36 7 1 1 1 1 1 1



Shareholders’ funds 235 209 224 253 298 354 418 492 572

Total liabilities & equity 285 284 270 299 351 412 481 562 648

Cash flow from operations 21 25 50 43 58 76 93 104 113


Cash flow from financing 8 28 ‐28 ‐6 0 0 0 0 0

Net cash flows ‐60 10 12 ‐1 10 23 34 40 44


Figure 7: C.A.T. oil’s key per share indicators 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

EPS (€) 0.46 0.05 0.37 0.58 0.92 1.14 1.30 1.51 1.64

BV per share (€) 4.81 4.27 4.59 5.18 6.10 7.24 8.55 10.06 11.71


41

Valuation

Our financial model is based on a six‐year detailed forecast while our estimates for future market volumes are based on our expectations for oil majors’ capex and oil price dynamics. As discussed above, we believe the OFS market reflects the average oil‐price change with a one‐year lag since the majority of a year’s order book is determined during the November‐March period. We used a relatively high WACC of 15.3% for C.A.T. oil compared to those of EDC and Integra as we added a 2% liquidity premium for the stock. C.A.T. oil’s free float in percentage terms is relatively high at 29%, but in value terms it is small at just €102mn.

Figure 8: C.A.T. oil DCF model (€mn) 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E

EBIT 37 21 30 40 63 78 89 104 113

Tax rate 24% 24% 20% 20% 20% 20% 20% 20% 20%

After tax 28 16 24 32 50 62 71 83 90

DD&A 13 25 26 34 37 39 42 43 47



Capex (89) (44) (10) (37) (48) (53) (58) (63) (69)

Change in working capital (16) (4) 3 (20) (24) (18) (13) (13) (14)

Unleveraged free cash flows (65) (8) 44 9 15 31 43 49 54

Terminal value 712

Equity value

NPV unleveraged FCF (€mn) 363 406 443 468 484 497

Price year‐beginning (€/share) 7.43 8.31 9.08 9.58 9.92 10.18

Share price appreciation (%) 15 26 33 38 41

WACC (%)




Weight of equity 100

Cost of debt 9.11

Weight of debt 0


WACC 15.30


C.A.T. oil maintains a conservative approach to its financial management and attempts to control its leverage. We therefore believe that the company is likely to opt to accumulate additional cash on its balance sheet for further expansion and to cushion any shocks resulting from future downturns in the industry.

42

Peer group comparison

We compared C.A.T. oil’s valuation ratios with a broad selection of OFS companies. C.A.T. oil does not have peers with an analogous business structure, and so our peer group analysis is based on a diverse range of global OFS companies which we consider to be fair, given that the majority of market trends are applicable to all.

Figure 9: Peer group comparison on valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x)

Company MktCap ($mn) 2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E

Baker Hughes Inc 14,729 1.6 1.4 1.2 9.3 7.8 5.8 28.4 24.0 3.0

BJ Services Co 6,328 1.7 1.5 ‐ 11.5 8.3 ‐ 53.3 21.2 1.1

Fred Olsen Energy ASA 22,357 3.1 3.0 3.0 5.1 4.8 4.9 6.5 5.5 41.7

Calfrac Well Services Ltd 935 2.0 1.5 1.3 16.8 8.8 6.7 108.2 36.5 1.5

Core Laboratories NV 2,825 4.2 4.0 3.5 13.8 13.2 11.3 24.6 23.3 6.3

Cal Dive International Inc 737 1.1 1.2 1.1 4.2 5.0 4.0 12.0 10.8 1.0

Global Industries Ltd 893 0.8 0.9 0.8 3.8 4.3 3.6 16.9 12.1 0.9

Halliburton Co 30,945 2.2 2.0 1.7 10.9 10.0 7.7 27.0 23.8 2.1

Helix Energy Solutions Group 1,347 1.6 1.7 1.4 5.5 3.9 3.4 16.0 11.2 1.8

Oceaneering International Inc 3,320 1.8 1.7 1.6 8.0 7.6 6.6 17.8 17.1 4.1

Oil States International Inc 2,058 1.1 1.1 1.0 7.2 7.0 5.7 19.2 17.9 3.3

Smith International Inc 7,563 1.3 1.3 1.1 11.8 10.3 7.6 37.9 27.9 1.9

Schlumberger Ltd 85,602 3.9 3.7 3.1 13.0 12.4 10.2 26.3 24.9 3.7

Superior Energy Services Inc 2,013 1.7 1.7 1.5 6.2 5.8 5.0 18.2 15.4 2.2

Trican Well Service Ltd 1,756 2.5 2.0 1.7 27.0 11.9 8.0 93.6 39.4 0.8

Tetra Technologies Inc 926 1.5 1.4 1.3 5.1 4.6 4.1 13.5 12.9 1.1

Weatherford International Ltd 14,103 2.4 2.0 1.7 11.6 9.0 7.1 25.8 19.7 1.5

Acergy SA 3,230 1.3 1.3 1.2 7.1 8.4 6.8 27.0 25.0 1.0

Fugro NV 4,960 1.9 2.0 1.8 7.3 7.9 7.2 ‐ 15.7 3.3

Bourbon SA 2,500 3.5 3.2 2.7 9.7 9.1 7.5 11.8 12.9 3.3

Petrofac Ltd 5,631 1.4 1.1 1.0 10.1 6.4 5.7 16.1 12.5 1.5

Petroleum Geo‐Services ASA 2,750 2.4 2.9 2.5 5.5 7.5 5.6 20.6 21.9 1.3

ProSafe SE 1,429 5.9 4.5 4.6 8.5 6.5 7.0 6.3 6.0 1.0

SBM Offshore NV 3,568 1.8 1.9 1.9 9.1 8.6 7.8 22.4 15.2 1.6

Saipem SpA 15,528 1.3 1.4 1.3 8.7 8.5 7.5 18.2 17.1 1.7

Technip SA 8,185 0.6 0.7 0.6 4.7 5.6 5.1 17.0 16.9 3.6

TGS Nopec Geophysical Co ASA 16,982 3.8 3.4 3.1 4.7 4.2 3.8 13.6 12.9 1.8

John Wood Group PLC 2,968 0.7 0.7 0.6 7.6 8.1 7.1 ‐ 15.2 0.4

Offshore Oil Engineering Co Ltd 5,612 3.1 2.6 2.1 16.4 12.2 9.9 16.2 18.1 0.8

China Oilfield Services Ltd 2,057 5.6 5.0 4.4 12.5 11.0 9.6 13.5 11.8 0.9

Max 5.9 5.0 4.6 27.0 13.2 11.3 108.2 39.4 41.7

Min 0.6 0.7 0.6 3.8 3.9 3.4 6.3 5.5 0.4

Average 2.3 2.1 1.9 9.4 8.0 6.6 26.0 18.1 3.3

C.A.T. oil 525 1.4 1.1 0.8 6.0 4.4 3.2 19.5 12.4 7.9


We regard the 2009 valuation ratios as reflecting the negative impact of the rouble depreciation on C.A.T. oil’s financials. As a result, we believe the 2010E figures are more relevant for valuation purposes and we highlight the still relatively sizable discount at which the stock is currently trading.

43

C.A.T. OIL DASHBOARD

INVESTMENT CASE We initiate coverage of C.A.T. oil with a BUY rating and a 12‐month fair value of

€9.04 per share. The company has strong positions in two main segments of its business with 26%

share in hydrofracturing and 18% in side‐track drilling in Russia C.A.T. oil has a strong financial position with negligible debt and €17.4mn cash at

9M09. 3Q09 margins were higher than annual figures for the past five years, leading us to

conclude that the company looks even healthier now than prior to the crisis

BULL POINTS

Low debt, strong financial position One of the leading providers of

hydro‐ fracturing and side‐track drilling services in Russia

Euro‐denominated revenue was only

slightly affected by the financial crisis, while in rouble terms, revenue continued to grow; EBITDA expanded in both currencies

BEAR POINTS

High level of dependence on oil companies' investments in production

Sensitivity to oil price fluctuations High sensitivity to currency volatility

POTENTIAL CATALYSTS

Increasing share of sidetracking services in revenue; business diversification Oil price advances; increases in oil companies' capex Potential acquisitions of smaller OFS companies



C.A.T. oil O2C 1.4 1.1 0.8 6.0 4.4 3.2 19.5 12.4 7.9

Integra INTE 0.9 0.6 0.4 6.3 3.9 2.6 ‐50.8 18.5 6.6

Eurasia Drilling EDCL 1.7 1.2 1.0 7.7 5.7 4.3 15.3 11.1 8.2

Average international OFS 2.3 2.1 1.9 9.4 8.0 6.6 25.6 18.0 3.3


Figure 11: Stock performance vs sector (% 3M)

Figure 10: Sector comparison on multiples

1.1%

‐16.4%

6.3%

4.7%

‐16.0%

4.6%

‐18% ‐15% ‐12% ‐9% ‐6% ‐3% 0% 3% 6% 9%



MSCI Russia

Integra

Eurasia Drilling

C.A.T. Oil

O2C GR

0

5

10

15

20

25

Jul‐07

Sep‐07

Nov‐07

Jan‐08

Mar‐08

May‐08

Jul‐08

Sep‐08

Nov‐08

Jan‐09

Mar‐09

May‐09

Jul‐09

Aug‐09

Oct‐09

Dec‐09

Figure 12: Stock performance

Source: Bloomberg

Source: Bloomberg

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2010 OFS Initiation

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