Russia to see its first merger of oil majors

The merger and acquisition trend has moved into Russia with the planned consolidation of two integrated oil companies, both of which have already acquired former state-owned units.

Yukos Oil Corp. and Siberian Oil Co. (Sibneft) have signed a letter of intent to combine their management and operations. The firms say the new company, to be called Yuksi, will have the largest oil reserves holdings and the third highest oil production of any non-state oil company.

Discussions on the details of the merger are at an advanced stage, according to Energy Intelligence Group (EIG), Washington, D.C. The partners are even thought to have discussed the distribution of seats on the new company's board.

"Control would be split equally between the two partners," said EIG.

At first, Yukos and Sibneft will be operated as independent companies, as will the recently acquired firms, Eastern Oil Co. and East Siberian Oil & Gas Co. Eventually the four companies will be merged.

Yukos acquired 54% of Eastern Oil in December 1997 as the result of government privatization efforts (OGJ, Dec. 1, 1997, p. 36). Sibneft recently acquired a 37% controlling interest in East Siberian.

"The takeover (of Eastern) strengthened the position of Yukos, which had been struggling with a mountain of debts," said EIG.

Yukos

Yukos was established as an open joint-stock company in April 1993. Its shares were subsequently sold to private investors in a series of auctions, making it the first Russian oil company to be completely privately owned.

Yukos is Russia's second largest vertically integrated oil company (Lukoil is the largest). Yukos's subsidiaries include two exploration and production companies, three refineries, and nine distribution and marketing companies that operate about 1,000 services stations in European Russia. Yukos owns Yuganskneftegas, which produces 540,000 b/d of oil, and Samaraneftegas, which produces 160,000 b/d.

Yukos's short-term E&P strategy is to expand exploration and development of new fields, increase production in active fields through workovers, and consolidate Eastern Oil's producing regions with its own. The company is negotiating with Amoco Corp. on the possible development of Priobskoye, one of Russia's largest onshore oil fields.

Yukos also plans to start major upgrades shortly at its refineries at Novo-Kuibishev, Samara-Kuibishev, and Syzran, Russia. Planned capital expenditures for the upgrades in 1998 are $253 million. The completion of these projects will boost the company's light products yield to 67% of total refinery output by 2005.

Yukos is the fourth largest company in the Russian stock market. Its revenues for the year ending Dec. 31, 1997, were $5.2 billion.

Sibneft

Sibneft was created as an open joint-stock company in September 1995. In January 1996, private investors acquired 49% of the company. Last May, the government auctioned off the right to manage its 51% of the company's shares. As a result, 100% of the company's shares are now owned or managed by private investors.

The company plans to increase production through a program of workovers, conversion of non-operating production wells to injection wells, and continued selective development drilling. Sibneft's chief assets are Noyabrskneftegas, which produces 370,000 b/d of oil, and the Omsk refinery, Russia's largest.

Sibneft plans to improve utilization at the 566,000 b/d Omsk refinery and expand its retail network "significantly." The company's fiscal 1997 revenues were $3.13 billion.

Both Yukos and Sibneft have audited financial results for 1996.

The combine

The consolidation of Yukos and Sibneft is the first merger of two Russian majors. EIG says the merger will create the world's tenth largest oil producer among all companies, ahead of BP.

The combined, audited reserves of the new company (excluding Eastern's unaudited reserves) will be about 14 billion bbl (see table [60,753 bytes]). Production will be about 1.3 million b/d-about 22% of Russian oil production.

The partners' five refineries and four active producing areas are geographically close to one another. "The combination of Yukos's three refineries, Eastern's Achinsk refinery, and Sibneft's modern refinery at Omsk provides Yuksi with broader production capabilities of both high and low-octane fuels and the largest lube oil production capacity in Russia," said the companies.

Under terms of the deal, shares will be exchanged into the new holding company, Yuksi. Yuksi will be owned 60% by Yukos's controlling shareholders and 40% by Sibneft's.

Yukos Chairman Mikhail Khodorkovsky will head the new company. The deal is expected to close by the end of the first quarter.

Khodorkovsky said, "The objective of this combination is to create a world-class integrated oil company with strategically located operations throughout Russia."

Sibneft's Eugene Shvidler, who will be Yuksi's chief financial officer, said the transaction would dramatically improve the companies' access to international capital markets. "We anticipate improvements in operating margins due to the increased efficiencies that can be achieved in production and refining."

Driving forces

Khodorkovsky summed up the industry forces that prompted the merger: "The transactionellipsereflects a trend toward consolidation in the industry, creating a smaller number of better capitalized and more globally competitive Russian oil companies."

EIG agreed, saying that the merger was driven by a realization that Russia's oil industry will be dominated by several giant companies, which will gradually take over smaller ones.

"Lukoil has already taken a step in this direction by snapping up a 51% stake in reserve-rich Arkhangelskgeoldobycha, which could deliver sizable stakes in mega-projects in the Timan-Pechora region," said EIG.

EIG says the unification of Yukos and Sibneft also will have an important effect on the battle among Russia's financial magnates over the region's remaining oil assets.

In December, Lukoil beat Yukos in a bid for a 100% stake in Severny oil field in the northern Caspian.

"Khodorkovsky and Lukoil Pres. Vagit Alekperov have recently squared up over Lukoil's victory in the tender for acreage in the Russian sector of the Caspian Sea," said EIG.

The firm also believes that the formation of Yuksi will boost the status of Sibneft head, Boris Berezovsky. His status weakened recently when he was sacked as deputy secretary of Russia's Security Council.

Further privatization

Stakes in several other Russian state companies are on the auction block at this time. Among them are a 48% stake in Tyumen Oil Co. and a 19.68% interest in Slavneft. Rosneft is expected to be made available in the near future.

The bidding process is under way for Tyumen; bids will be accepted until Feb. 13.

"All the contenders now have their attention focused on the future sales of Rosneft and Slavneft," concludes EIG.

Yukos's merger with Sibneft may play a strategic role in further privatization. "The combination with Sibneft gives us a platform to participate in the upcoming privatizations of Rosneft, Onaco, and Slavneft," said Khodorkovsky.

According to EIG, "Rosprom-Yukos, a financial industrial group controlled by Bank Menatep, has already lined up alongside Sibneft boss Boris Berezovsky to bid jointly in the upcoming privatization of Rosneft. Berezovsky had initially hoped to bid alone, but he was unable to raise the necessary financing.

"By way of contrastellipseKhodorkovsky has become well practiced at wooing Western bankers and last month succeeded in wrapping up a whopping $800 million loan to help fund his takeover of VNK (Eastern Oil). Berezovsky will be hoping that Khodorkovsky can pull off the same stunt to fund a bid for Rosneft, which could cost upwards of $1 billion."