Dividing up the cake INA-MOL’s regional ambitions
THE CROATIAN GOVERNMENT has announced the continuation of the privatization of INA, the national oil company, by inviting bids to act as financial adviser for an initial public offering of 15% of the company’s shares.
The IPO constitutes the second stage in INA’s privatization. The first was the sale of 25% plus one share in October 2003, in which Hungarian oil company MOL made the winning bid of $505 million. That valued INA at just over $2 billion.
Damir Polancec, Croatia’s vice-president and a member of INA’s supervisory board, was appointed head of the special commission to oversee the continuation of the privatization. Polancec told Euromoney that bids were delivered by late August and that the IPO itself was targeted for December but he is careful to state that the “quality of the work is much more important than the deadline – we won’t be held as slaves to the deadline”.
The financial adviser will have four tasks. It will assess the value of INA, make the necessary preparations for the IPO, advise on the best models for the privatization of further INA shares (see box) and take part in negotiations with potential strategic investors interested in these further shares. Also to be decided is whether the issue will be placed on the Zagreb Stock Exchange, a foreign securities exchange or a combination of the two.
A bigger stake for MOL
Whichever model is selected, it seems certain that MOL will be looking to be involved. “MOL would like to become the majority shareholder as soon as possible,” says Tamas Pletser, central and east European oil and gas analyst at Erste Bank. “With a 25% stake, MOL is not really interested in making INA a more efficient company or a better company because 25% is not consolidated fully in its results.”
If it were to increase its INA holding MOL, which already owns the Slovakian oil company Slovnaft and acquired Shell’s Romanian operations, would cement its position as one of the four main industry players in the CEE region, along with Austria’s OMV, Russia’s LUKoil and Poland’s PKN.
Polancec states that the Croatian government is satisfied with the INA-MOL strategic partnership to date. In particular, Polancec recognizes the experience and know-how that MOL brings to the partnership as well as its financial muscle. “INA’s retail network is changing considerably [for the better], the quality of finished products has been standardized and INA alone could not make investments of such amounts as planned in its investment plan, particularly as regards the refineries,” he says.
This investment in modernizing its two refineries is one of INA’s most vital tasks and will amount to about $870 million by 2010. Lack of investment following Croatia’s independence and consequent war has left the refineries inefficient. They produce fuel that sells at less than the cost of producting and distributing, and falls short of European quality standards. These were made more stringent this year and are due to be tightened even further in 2009.
The Croatian refineries, which have an annual capacity of some 8 million tonnes, are one of the main reasons for MOL’s interest in INA and would add 60% to MOL’s existing 13 million tonne refining capacity. Their geographical position is also important. Rijeka is on the Adriatic coast and Sisak is centrally located, close to the capital Zagreb and to the Bosnian border. “Refinery locations are crucial – that’s how you control your market,” says a Budapest-based analyst.
Logistics constraints
“Transport is pretty costly so for landlocked refineries the rule of thumb is that you don’t transport fuel more than 300km to 400km from your refinery,” the analyst adds. “Beyond that distance, it’s just not economic. Locations and logistics are the name of the game when it comes to market shares and margins.”
Another big issue for INA is the supply of crude oil for its refineries. Although it has its own oil fields in Croatia, it has always needed to import additional supplies of crude oil to cover its full requirements.
Traditionally, imports have been sourced from the Middle East and delivered by tanker to the deep-sea port at Omisalj near INA’s Rijeka refinery then pumped inland to Sisak via the Adriatic pipeline. The pipeline is owned by Janaf, a company in which INA holds a 16.7% stake. From Sisak it connects to Hungary and Serbia.
However, with a plentiful supply of Russian crude, it would be cheaper to import by pipeline directly from Russia, as MOL does. Investment is necessary to upgrade the pipeline to allow flow in both directions and INA has stated its wish to buy Janaf and so control the pipeline. INA would also like to build a further pipeline to link Rijeka to the Trans Alpine pipeline in Trieste that supplies Germany and Austria.
Polancec considers Janaf and the pipeline “strategically important” but says that there needs to be discussion before any decision is made as to INA’s wish to buy Janaf. However, he agrees that “modernization is necessary and will receive our absolute support; [the pipeline] should be used to transport oil in both directions.”
Completion of this upgrade would not only enable Russian crude to be piped to Croatia but also give it an outlet on the Adriatic from where it can be exported farther afield. This latter issue caused a storm with environmentalists fearful of the risk of an oil spillage on Croatia’s stunning Adriatic coast, so vital for its booming tourism industry, and has caused the government to handle the issue with some caution.
Upstream potential
INA’s upstream activities are also valuable. Oil exploration is conducted in mainland Croatia and offshore in the Adriatic as well as abroad in Syria, Egypt and Albania. Oil is produced mainly in Croatia but also in Egypt and Angola. Confirmed reserves of oil and gas at the end of 2003 were 222 million barrels of oil equivalent (boe).
“At a $65 crude price these assets are very important – they are like a cash cow,” says an oil industry analyst. “Even though downstream activities are strategically more important, value-wise I can imagine INA’s upstream activities are worth more than its downstream operations.”
He states that at valuations of $10 per boe, which have risen in line with the oil price, INA’s reserves alone are more valuable than the $2 billion valuation given to the whole company by MOL’s bid in 2003.
Pletser takes a more cautious view, valuing the reserves at between $5 and $10 per boe. He points out that MOL paid a premium in 2003 to take a stake in INA and gain management positions. However, he adds that “the environment for oil refining improved significantly in the world and valuations are at least twice as high as 2003” although this might not apply in full measure to INA whose refineries have not yet been modernized. “Valuation is a tricky issue,” he admits, but he expects INA to be valued at around $2 billion.
The timing of this privatization is important for the Croatian government, which needs to raise revenues to help finance its deficit. “Oil is hot,” says one analyst. “There is plenty of liquidity on the market. It’s very good timing. I would be happy to recommend it to my clients.”
