Rosneft (MM:ROSN) Becomes Largest Crude Producer

Brian Hicks

Written By Brian Hicks

Posted March 22, 2013

Rosneft (MM:ROSN), Russia’s state oil giant, completed the buyout of TNK-BP (MM:TNBP) from the U.K.’s BP (NYSE:BP) yesterday, in a move that both handed out $40 billion in cash to the sellers and put Rosneft in top position as the world’s biggest publicly traded oil producer.

The total deal is worth $55 billion, inclusive of payments made to BP and four private businessmen who held stakes in TNK-BP. BP also gets an 18.5 percent stake in Rosneft.

As Reuters notes, this deal is a major coup for Rosneft’s chief, Igor Sechin, who is already a close friend of Russian’s President, Vladimir Putin. It also means the Russian state now has an even stronger control over the nation’s energy sector at more than 50 percent.

bp oil rig 600x450Rosneft, post-deal, can claim yearly production figures of around 4.6 million barrels of oil equivalent, well ahead of Exxon Mobil (NYSE:XOM).

It also means Rosneft can benefit from BP’s technical and administrative expertise and gets access to extra oil output revenue which can be recycled into exploring and developing Russia’s untapped reserves. Overall, Rosneft could see $10 billion annually in cost savings alone.

Reuters reports:

“This is a historic day for BP in Russia,” BP Chief Executive Robert Dudley said in a statement. “BP has invested in Russia for more than 20 years and for a decade we have been Russia’s largest foreign investor through our involvement with TNK-BP.”

BP hasn’t had a very good few years, but it gets $12.48 billion from the deal, which should help things somewhat. It has set aside some of that sum for shareholders, with the rest likely going toward covering its liabilities for the Deepwater fiasco. BP has already set aside $4.87 billion to buy 5.66 percent in Rosneftegaz.

TNK-BP was born back in 2003 as a result of a merger between BP’s Russian operations and the Alfa-Access-Renova consortium, and the company currently produces oil to the tune of 1.5 million barrels per day. Since then, it has paid BP around $19 billion in dividends, against BP’s original investment of $8 billion.

As part of the deal, Rosneft borrowed around $40 billion, largely from Western banks, while a syndicated loan and $10 billion in financing from Vitol and Glencore allowed the company to address immediate needs.

The AAR consortium received $27.7 billion in cash, per Bloomberg Businessweek.

Businessweek also quotes Igor Sechin, Rosneft’s CEO:

“We welcome BP as the major shareholder of Rosneft, which will take part in shaping the company’s strategy.”

Rosneft, for its part, emerged out of the bankruptcy (engineered by the state) of Yukos Oil, and once it begins producing its new high of 4.6 million barrels a day, will exceed both Canada and Iraq for production volume.

Also of interest is the fact that this deal completed well ahead of schedule, which may mean earlier recording of earnings than anticipated.

From Bloomberg:

“The most significant thing is that the deal completed almost three months before we had expected it to,” said Jason Gammel, an analyst at Macquarie Capital Europe Ltd. in London. “That means they may start recording earnings from Rosneft in the second quarter.”

After news of the deal emerged, Rosneft’s stock went up by 2.1 percent in Moscow, edging to a close at 242.44 rubles, which is the highest since February 13. Rosneft is now valued at nearly $83 billion, which allows it to exceed Asia’s biggest oil company, PetroChina Co. (NYSE:PTR).

The Rosneft/TNK-BP deal had been in the works since last October, and the new entity has oilfields, reserves, and other assets spread out over Eastern Europe, through Siberia, all the way to the Pacific Coast.

The Global Post reports that Rosneft had already taken care of the Russian stakes earlier, which were owned by the four Russian businessmen. That acquisition was an all-cash deal.

However, the Rosneft/TNK-BP deal did experience some rough patches due to public disagreements between various BP executives and Mikhail Fridman, the former chief of TNK-BP.

In terms of the oil tonnage that can be expected from this newly-formed giant entity, Sechin has stated that the new Rosneft should produce up to 206 million tons of oil annually, while Exxon Mobil currently produces around 115 million tons a year.

Nasdaq reports that Robert Dudley, BP Group’s Chief Executive, is expected to join the Rosneft Board of Directors; he had been a crucial steering figure throughout the Rosneft/TNK-BP deal.


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