The fizz surrounding the auction of Slavneft, one of only two big oil companies still owned by the Russian state, turned into a froth as nearly all of Russia’s oil majors have scratched together the $2 billion Slavneft is expected to fetch when it is sold this month.
The auction is the first real test of president Vladimir Putin’s government’s ability to privatize in a fair and transparent manner. It is also an opportunity for Russia’s oil companies to rationalize their structures, with a string of side deals agreed ahead of the auction.
The state decided to sell Slavneft because it is short of money. Sovereign debts suspended for five years during the financial crisis in 1998 come due next year. It had hoped to raise cash by selling off 5.9% of LUKoil this summer. The sale was expected to raise about $800 million but was cancelled at the last minute because of the weak state of the London stock market.
Cash aplenty at home
Instead, it was decided to put 74.95% of Slavneft under the hammer at home. Rocketing oil production and sustained high international oil prices for most of the last year mean that Russia’s blue-chip oil producers are cash-rich and keen to extend their reach.
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The industry was expecting Slavneft to be sold off in bits, so the chance to buy a controlling stake has got Russia’s oilmen excited. Nearly all of Russia’s oil majors are expected to bid and the initial asking price of $1.3 billion was quickly increased to $1.7 billion, just below analysts’ fair value figure of $1.8 billion. Analysts expect the final price to pass $2 billion.
“Oil assets valuations have gone up so much in price in the last year that buying them is no longer a no-brainer,” says Stephen O’Sullivan, head of research at United Financial Group, a Moscow-based investment bank. “At the end of the day we expect the companies to act rationally. The auction underlines that all the oil companies are increasingly focused on not just boosting production but return on invested capital.”
Most of Russia’s oil companies were privatized in the loans-for-shares deal of 1995-96, when well-connected businessmen, the oligarchs, bought Russia’s industrial jewels for pennies on the dollar.
Russia’s first real sale of an oil asset was that of oil minor Onaco to Tyumen Oil Company (TNK) in September 2000. TKN paid about $1 billion for an 85% stake.
“A fair price would go some way to exorcising loans-for-shares, as well as flattening the finance ministry’s debt hump next year,” says Roland Nash, head of research at Renaissance Capital. “There are rumours of a foreign company participating. This would draw a final line under BP’s tribulations with Sidanko. And a demonstrably open auction would again signal Putin’s determined aloofness from the economic gluttony of the post-Yeltsin industrial magnates.”
Russia’s sixth-largest oil company, Sibneft, owned by oligarch Roman Abramovich, is the front runner to win, thanks to three trump cards: it controls Slavneft’s management, exports and minority equity stake.
With about $1.2 billion in cash, Sibneft has been trying to raise more money. Among other credit lines, it has organized one from Yukos, Russia’s second-largest oil company, which has more than $3 billion in cash. “It is a normal financial transaction,” says Hugo Erikssen, head of Yukos’s corporate relations. “Have no doubt that we will be handsomely paid if we make the loan.”
Yukos is not bidding, as Slavneft would be an ill fit with its other assets. But Slavneft has assets in eastern Siberia that Yukos has its eye on. Analysts are sure that the two oil giants have come to a quid pro quo arrangement as part of the loan terms.
The other two contenders are Surgutneftegas and LUKoil, both of which can buy Slavneft outright with the $4.1 billion and $3.1 billion cash they have respectively. While other companies have been snapping up smaller oil producers, Surgutneftegas’ participation in the auction is a new tactic for Russia’s third-largest producer.
“LUKoil could be bidding, as it is irked that Yukos is poised to overtake it as Russia’s biggest oil producer,” says O’Sullivan. “And Surgutneftegas looks like it has had a change of heart. With strong organic growth in the past, management might have finally woken up to the fact that it can also grow through acquisitions.”
At the time of writing TNK was considering a joint bid with Sibneft, as both have minority stakes in Slavneft subsidiaries. In the run-up to the auction, Sibneft and TNK reorganized joint holdings into a trust company that would make dividing up the spoils easier. In another quid pro quo agreement, Sibneft owns part of TNK’s Onaco and its main production subsidiary Orenburgneft. Analysts are speculating that TNK has stood back from the Slavneft auction and will swap its share of Slavneft, should the joint bid win, for full control of Onaco in another quid pro quo agreement.
