Russian oils consolidation: Start of round three

Author: us-russia
Comments: 0
Russian oils consolidation: Start of round three
Published 22-10-2012, 05:18
New M&A wave starting. We expect a possible deal between Rosneft and BP to be followed by more deals in the Russian oil sector as it enters the next phase of development. Russia urgently needs to replace depleting barrels from old legacy fields with new volumes from much more challenging reservoirs in terms of their geology and geography. This creates the scope for international companies to bring in the much-needed technology, project management skills and capital. As the oil sector has historically been central to social prosperity and the strength of Russia's political power, we think the most likely partners to cooperate with global majors will be state and state-backed companies.
Implications for the sector. It remains to be seen whether a new model of cooperation between NOCs and IOCs promoted by Russia will be successful. To avoid the mistakes of countries such as Venezuela or Mexico, the Russian state needs to create incentives for state companies to learn from their global partners, which will happen naturally if the former's strategy is based on shareholder value rather than scale and power. In that case, investors can also remain confident that their interests are well protected. Following a multi-year de-rating of Russian oil companies, the Russian oil sector is now back at valuation levels which were last seen at the start of the 2000s when the previous M&A wave started. Therefore we see a good opportunity to recapture almost $500bn of lost value through a new M&A wave, but the ability of minority investors to share this upside may be less in Russia than in western markets as the protection of minority rights and the general level of corporate governance in Russia are lower.

Our preferred exposure to the new trend would be through what we see as undervalued private companies with strong balance sheets such as Lukoil (BUY, TP: $88/GDR) and Surgutneftegas preferred shares (BUY, TP: $1.3/preferred share). While we see upside potential for Rosneft in a future deal with TNK-BP (from up to $15bn value of potential synergies and simple 20-30% earnings accretion in 2013), first we think that the 17% jump in the share price over the past two months largely reflects potential gains and second we are not fully convinced how much value Rosneft can eventually extract from this deal and more importantly how much of this value will be shared with minorities. The recent expansion of its presence in Venezuela, its commitment to at least four new refineries in Russia and China, and the fact that its core assets are peaking and may face various operational issues in the near term, indicate to us that the company may prioritise scale over anything else which is a typical factor determining strategies of state-owned companies. We also maintain our cautious view on TNK-BP Holding (HOLD, TP $2.3/share) as we see risks that future capital allocations will have to prioritise servicing debt over dividends. We also think that the change in ownership and possibly corporate structure at TNK-BP may lead to operational issues at the company due to a possible lack of focus of the new management team.

Ildar Davletshin
Mikhail Rotaev 

Artem Kvas

 

Renaissance Capital

Comments: 0
Experts' Panel
Are the U.S. and Russia...
The Sunday, February 24 edition of Russian state television’s...
Are the U.S. and Russia...
Top
popular in the journal
Remembering ‘Elbe Day’

Remembering ‘Elbe Day’

Seventy three years ago on April 25, American and Soviet soldiers met as wartime allies against Nazi Germany in the closing days of World War II near Torgau, an obscure ...
Relax America: Putin Controls the...

Relax America: Putin Controls the...

When did you first wake up from the collective sleep? For me, it was right before the Sochi Olympics of 2014. The roll-up blinds turned loose and snapped open, letting ...
OPINION Americans are told every...

OPINION Americans are told every...

Russians can be forgiven for believing that the United States wishes their country neither prosperity nor stability
Американист: На фоне коронавируса...

Американист: На фоне коронавируса...

Президент Американского университета в Москве Эдуард Лозанский в эфире НСН отметил, что ни один самолет с «помощью» не может отправиться без ...
RUSSIAN FEDERATION SITREP 19 MARCH...

RUSSIAN FEDERATION SITREP 19 MARCH...

PUTIN 4EVER. (Russian Constitution text.) In January Putin suggested some amendments to the Constitution to be discussed and put to national vote in a referendum. Which ...