Rosneft reportedly set to clinch deal on TNK-BP

By bne IntelliNews October 18, 2012

Ben Aris in Moscow -

Russia's biggest oil company Rosneft is due to make a formal offer to buy British oil major BP's 50% stake in the Russian joint venture TNK-BP today, a deal which would make it the world's largest publicly traded crude oil producer, the Financial Times reports.

Without citing its source, the newspaper claims that Rosneft CEO Igor Sechin is in London today to meet with BP's board to discuss the details of the deal. BP is expected to receive a formal offer for its TNK-BP stake from Rosneft by 9am London time. BP's board is to meet on October 19 to consider the company's options.

The deal was only possible after a 90 day "goodwill negotiating" period with AAR - BP's Russian partner in the joint venture - stipulated by the shareholders agreement, expires.

Should it make the purchase, Rosneft will cement its role as the Russian oil national champion, accounting for 4m of the 10m barrels of crude the country produces a day - more than Exxon Mobil or Royal Dutch Shell. It will also increase the power of Kremlin-insider Sechin, who has said he wants to continue the expansion by buying stakes in utilities companies to create an energy national champion.

Sechin has already negotiated a deal to buy BP's stake in a cash-and-shares deal worth around $28bn that includes $15bn-$20bn in cash plus a stake of between 10% and 20% in Rosneft. "Taking into account TNK-BP Holding's market valuation of $41.5bn and non-public assets that we estimate are worth $5bn, the price of the deal may come with a 20% premium," Metropol said in a note.

AAR is not happy with a deal that would partner it with the Kremlin. It has been trying to raise funds to counter Rosneft's offer, and reportedly made a $25bn counter bid for the stake. However, it is claimed by unnamed sources that it has dropped out of the race as Rosneft dominated the bidding, reports Bloomberg. The state oil giant apparently locked banks into non-conflict agreements, leaving the group unable to raise funds for a bigger bid when the 90-day period ended.

Earlier this month AAR said it would exit TNK-BP if Rosneft buys the BP stake, either selling to a strategic investor or through an IPO. Rosneft is seen as the only serious candidate to buy it out, and Bloomberg reports that Deputy Prime Minister Arkady Dvorkovich said on October 17 that a non-binding agreement has been signed. AAR declined to comment.

However, analysts suggest it is unlikely Rosneft could afford to buy 100% of TNK-BP. Thet say that such a deal would take as long as three years to complete, given the financing needs it would pile upon the state company. Such a deal would also be at risk from the government. Dvorkovich warned that as Rosneft is a state-owned company any such deal must be approved by the cabinet and "no such request has been submitted."

Dvorkovich is nominally in charge of the oil sector whereas Sechin is only the director of a state-owned company. However, the pair is fighting an ongoing battle over which direction to take Russia's energy sector. Dvorkovich could seize on this deal to exercise his power and try to contain Sechin, who is a close personal friend of President Vladimir Putin.

Should Rosneft buy either (or both) partners out of TNK-BP, it will bring a long running boardroom feud between AAR and BP to an end. Despite that, BP has made a hansom return on the JV. It invested $8bn in TNK-BP when it was created in 2003 and has earned $19bn in dividends from the venture. The deal will also reverse BP's earlier failure to team up with Rosneft in an exploration deal in the Artic. It also represents the most significant reorganization of the Russian oil industry since the breakup of Yukos between 2004 and 2007.

However, uncertainty reigns. "BP and AAR have not officially announced the completion of the deal. It is still possible that BP could decide to retain its TNK-BP stake. Also, it has become known that TNK-BP management supports an interim dividend payment of $4.1bn," Metropol points out. "We think the simultaneous buyout of both stakes in BP and in ARR is improbable, although not impossible (as Rosneft's debt/EBITDA ratio would increase from the current 1 to 3, which we believe would be uncomfortable for the state company)."

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