Russia's Rosneft approves $17bn worth of borrowing

By bne IntelliNews November 25, 2016

Russia's state-controlled oil giant Rosneft has approved borrowing RUB1.07 trillion ($16.6bn) in 10-year foreign currency bonds, Vedomosti daily reported on November 25.

The size of the borrowing plan raises two concerns: that the company will use the funds to buy out 19.5% of its own shares planned for privatisation, and that tapping the domestic currency market with a large foreign currency issue could disrupt the ruble rate.

Reportedly the domestic foreign currency denominated exchange bonds could be bought by Gazprombank and Rosneft subsidiaries. Analysts surveyed by Vedomosti claim that RUB1 trillion is too big for the domestic borrowers to absorb on the open market. Russia's three largest state-controlled banks Gazprombank, Sberbank, and VTB declined to comment whether they would participate in the issue. 

In December 2014 Rosneft allegedly disrupted the local currency market and triggered a ruble meltdown by converting to dollars a RUB625bn bond raised from Russian state banks in December 2014.

Similar risks could exist this time around should the banking system be drained of the RUB700bn ($11bn) that 19.5% of Rosneft is estimated to be worth.

In such case banks will have to seek other sources of refinancing, with short-term central bank instruments bearing higher interest rates of about 10% and over, Sberbank CIB warned in the beginning of November.

However, in such a scenario eventually the funds passing from Rosneftegas (the state-holding controlling Rosneft) to the federal budget would return as banking deposits in the form of state spending, thus limiting the liquidity deficit effect to the short-term, Sberbank CIB believes.

Unconfirmed reports of Rosneft having to borrow in order to buy out 19.5% of its own shares from the state for $11bn already appeared earlier in November.

The successful privatisation of 19.5% in Rosneft in 2016 is crucial for the government to meet its target of a 3.7% of GDP federal budget deficit. Earlier reports said Rosneft would help the government achieve the revenues this year by taking the shares on its balance sheet and transferring the money to the budget and re-selling to investors in the first quarter of 2017.

As of the end of September cash on Rosneft's accounts declined by $2bn quarter-on-quarter to $20.2bn. The company has to pay $5.3bn for the controlling stake in Bashneft oil company and 49% in Indian Essar Oil for an estimated $3.5bn-$3.8bn, both with its own funds.

Another $1bn is to be spent on a minority buyout offer to Bashneft shareholders, with $3.6bn worth of investment to be made in the fourth quarter, and a negative cash flow of $1.5bn, according to Vedomosti estimates.

Meanwhile, the company has recently closed a number of major asset sales deals worth at least $5.1bn, the daily notes. Rosneft's net debt as of the end of September went up by 6.5% yo $26.1bn with net debt to ebitda up by 30bp to 1.5x.

Should the company fail to resell (or decide to keep) the 19.5% of own shares bought from the state in 2017, it might have to borrow up to an additional $3bn-$10bn, according to the estimates of Vedomosti.

  2014 2015E 2016E 2017E
Financials, $ mln      
Revenues 145,887 83,665 53,357 70,691
EBITDA 28,699 17,305 13,147 17,912
EBITDA margin 20% 21% 25% 25%
Net income 9,238 8,299 8,619 6,688 3,291 6,265
EPS (adj), $ 0.87 0.63 0.31 0.59
Div/share, $ 0.13 0.12 0.08 0.15
Valuation, Gearing and Yield        
EV/EBITDA 3.5 6.2 8.2 5.8
P/E 4.3 6.9 14 7.4
P/CF 0.9 3.9 4.3 3.3
Net debt/EBITDA 2.1 3.5 4.7 3.2
Dividend yield 3.50% 2.70% 1.80% 3.40%
Revenues 0% -43% -36% 32%
EBITDA -3% -40% -24% 36%
EPS (adj) -28% -28% -51% 90%
Sector Valuation      
EV/EBITDA 2.3 3.4 5.6 4.8
P/E 4 5.2 11.2 8.6
P/CF 1.6 2.9 4.5 4.2
Sector Growth      
Revenues -7% -35% -42% 25%
EBITDA -17% -29% -40% 20%
EPS -28% -28% -56%  
Main Shareholders      
Russian government (Rosneftegaz) 69.50%      
BP 19.80%      
Strategic investors (Petronas, CNPC) 2.00%      
Other (free float) 8.70%      

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