Yukos and Sibneft agree to merge

By OGJ editors

HOUSTON, Apr. 22 -- OAO Yukos and OAO Sibneft Tuesday announced plans to merge into a new company that will be Russia's largest oil and gas company and also rank among the world's largest oil producers.

The pending merger signals the largest merger in Russia's economy, creating an international oil major that analysts predict will finance major development projects beyond Russia's borders.

Pending regulatory approvals, YukosSibneft Oil Co. is expected to be operating by Dec. 31, 2003, the two companies said in a joint statement. The transaction will result in a $35 billion entity, of which Yukos shareholders eventually will control 70% of the new company, analysts said.

Yukos was Russia's second-biggest oil producer behind OAO Lukoil, while Sibneft ranked fifth in that country's oil companies.

YukosSibneft will rank as the world's largest nongovernmental oil producer behind BP PLC, ExxonMobil Corp., and Royal Dutch/Shell Group.

The agreement calls for Sibneft's core shareholders to sell 20% for $3 billion in cash. It also outlines a complicated equity swap in which Sibneft core shareholders will exchange their remaining holdings in Sibneft at a ratio of 0.36125% of YukosSibneft for each 1% share in Sibneft.

YukosSibneft will make a fair offer to Sibneft's minority shareholders after receiving a fairness opinion from an investment bank, the joint statement said.

Prime Minister Mikhail Kasyanov praised the merger announcement, saying that Russia stands to gain from a Russian oil firm that figures among global oil and gas giants.

"It's obvious that both the state and the private owners benefit from a stronger company, which has staked new ground on the market," Kasyanov was quoted as saying by the Interfax news agency.

YukosSibneft details
The resulting company would have total proven reserves of 18.4 billion bbl of oil and 5.9 tcf of natural gas reserves based upon yearend 2001 reserves as calculated in accordance with the Society of Petroleum Engineers' methodology, the joint news release said.

Crude oil production would be 2.3 million b/d, or 29% of Russian oil production. The YukosSibneft figure includes Sibneft's share of Slavneft OAO production (OGJ, Jan. 6, 2003, p. 31). Using 2002 figures, this amounts to 754.2 million bbl/year.

YukosSibneft would include 6 principal refineries in Russia, the Mazeikiu Nafta complex in Lithuania, and additional interest in the Moscow and Yaroslavl refinery in Russia and Mozyr in Belarus. These assets in 2002 refined a total of 421.8 million bbl of oil. The new combined company also would have more than 2,500 filling stations¿by far the largest retail marking chain in Russia.

Yukos Chairman and CEO Mikhail B. Khodorkovsky will be responsible for the executive manager of the new company while Sibneft Pres. Eugene Shvidler will be proposed as chairman. Core shareholders want independent directors to constitute a majority of the board, the joint news release said.

"The new industrial giant, with its huge industrial and financial potential, will reach even higher business efficiencies, moving closer to our strategic goal of becoming a leader of the global energy market," Khodorkovsky said.

Shvidler called the merger "a superb alliance of progressive and like-minded companies with complementary strategic and management strengths, which effectively creates a new supermajor that will enhance value to its shareholders and better serve its millions of customers."

Consequences for integrated oils
"We view consequences of such a deal for the integrated oil group as mixed to negative," said Tyler Dann, analyst with Banc of America Securities LLC. "First, we would not be surprised to see the combined Yukos-Sibneft attempt to expand its base beyond Russia's borders in order to diversify and lock up key markets, such as the US."

Dann suggested "downstream-heavy" companies such as Marathon Oil Corp. would be potentially subject to acquisition" by YukosSibneft. "Second, it would appear to us that the game in Russia is getting more difficult for the western oil majors to win in light of less-favorable fiscal terms."

He referred to the elimination of production-sharing agreements for future oil development and also domestic consolidation of Russian oil companies.

"In particular, we would view the Yukos-Sibneft deal as a mild negative for BP. . .and Total," Dann said. YukosSibneft would be the biggest competitor to TNK-BP, a new joint venture firm expected to be finalized later this year (OGJ, Feb. 17, 2003, p. 34).

TotalFinaElf SA has been seeking to develop several fields in Russia, Dann said.