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November 2001

Gas float that’s not for foreigners





Itera began life as little more than a bill collector for Gazprom, Russia's state-owned gas monopoly. Many think its real purpose was simply to siphon cash out of Gazprom and into management's pockets. Now Itera plans to float on the German stock exchange. Will investors be tempted? Probably not, but that is not the point of the IPO.
Registered in Florida (and re-registered in the Dutch Antilles), Itera was set up to collect Ukraine's gas bill. Ukraine is almost entirely dependent on Russia for power, but ran up $1.4 billion in unpaid debt. Every time Gazprom tried to cut it off then-president Boris Yeltsin would trade political favours for resumed gas deliveries. Later Itera played a similar role in brokering gas payments between Ukraine and Turkmenistan.
But Itera quickly expanded its operations and is now the second-biggest gas producer in Russia. Thanks to Gazprom's dominance, it is hard to break into the business. Surgutneftegas has been trying to develop its gas assets for most of the past 10 years and produces about 10 billion cubic metres (bcm) a year. After less than five years in business Itera produced 20bcm last year.
Itera's rapid rise has led to assumptions that Gazprom's management is behind the company - accusations that have never been proved. Earlier this year a government-ordered audit by both the state audit commission and PwC failed to find links between the two.
Itera is actually a sprawling group of companies registered in tiny offshore havens around the world. When the company released its shareowner structure in April, it showed that two-thirds of the holding company was owned by trust funds - a legal status that masks the identity of shareholders.
Itera may have started life as a shell company, but it is more substantial these days. It holds production licences to gas fields (most of which used to belong to Gazprom) with estimated reserves of 1.1 trillion cubic meters (tcm). Its gas output this year is expected to reach 20bcm, against Gazprom's 500 bcm, and it made profits of $240 million on $5 billion in sales last year.
Last month Itera president Igor Makarov said the group planned to float a 10% stake in German-registered production subsidiary Tarkosalneftegas (TNG) Energy AG on the Frankfurt Stock Exchange at the start of next year and hoped to raise about $120 million. Itera owns 52.5% of TNG, which operates four Siberian fields. SWGI Russian Growth Fund, registered in the Bahamas, owns the rest of the company.
       

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The IPO has been greeted with incredulity by foreign investors in Moscow.
If Itera's ownership structure is opaque, that of TNG and SWGI is even more so. The offer documents address the ownership issue, but raise more questions than they answer.
TNG Energy AG is a joint venture of Itera Group NV and SWGI Russian Growth Fund. Each of the participants in the venture holds 50% of the voting rights. Ownership of TNG is realized through Tiwoods Enterprises BV of the Netherlands, which acts as a holding company. The rest of TNG is owned by SWGI Russian Growth Fund, a Bermuda listed closed-end investment fund.
No more details are given and no-one has heard of either SWGI or Tiwoods before. The fact that they are registered in Bermuda and the Netherlands respectively - both favourite havens for Russian businesses - leads investors to assume that Russians connected to Gazprom management are behind it all.
"The question you have to ask is: what are you buying into? The company's structure diagram is one of the most complicated I have ever seen," says John Haskell, chairman of the Vostok Fund, a Russia-based equity fund. "Investors who have bought minority shares in companies with this kind of ownership structure in the past have almost always walked away blowing on burnt fingers."
Another cause for concern is that the IPO is not a particularly good deal; particularly if you include ownership risks. Analysts say investors wanting exposure to the Russian gas sector would do better with Gazprom.
The offer values TNG at $1.2 billion, giving the company a profit-to-earnings ratio of 5 against Gazprom's 3.6.
Finally if Itera is serious about selling off some assets to raise capital, why are they doing it now? Following the terrorist attacks on the US this September the stock markets are in turmoil. Surely it would be better to wait until things calm down?
"Why would anyone want to launch an IPO in current market conditions? Both the commodity and capital markets are in disarray. By advancing the IPO timetable, Itera achieves two goals - it legitimizes its shareholders and it protects its assets in Russia from either restitution by Gazprom or attacks by the oil oligarchs," says Steve O'Sullivan of United Financial Group.
The consensus in Moscow is that Itera is trying to hang on to the assets handed it by its patrons, the former Gazprom senior management. Following president Putin's surprise success in ousting long-serving Gazprom CEO Rem Vyakhirev - who one investor called "the most encrusted of Russia's vested interests" - Itera has been attacked by other Russian oil companies and has lost control of one of its best gas companies.
This year Itera clashed with Tyumen Oil Company (TNK), over Rospan. Itera owns 51% of Rospan, which has 230bcm of reserves, but the company was put into bankruptcy earlier this year because of unpaid debts.
In 1999 Itera paid Gazprom a mere $300 for a 51% stake in Rospan, a Siberian gas company with reserves worth $9 billion. Gazprom had invested $135 million in the company, but sold it after it became bankrupt.
Now the Alfa Group, which owns TNK, claims it owns these debts and so gets to choose the external management installed by the bankruptcy courts. In several cases Alfa has made deft use of bankruptcy laws to take over companies; the best known example was Chernogorneft, partly owned by the UK's BP.
Then in October Russia's press reported that Itera was going to lose Purgaz, which owns the licence for the Gubkinskoe field with reserves of 347 bcm of gas.
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