Russia's largest oil company Rosneft said it will launch a $2bn share buyback program running from the second quarter of 2018 to 2020 -- the first share buyback since its IPO in 2006. The company’s capitalisation of $64.4bn as of May 1 makes $2bn worth 3.1% shares or about 25% of the freefloat of Russia’s largest crude producer.
The announcement is part of Rosneft’s recently announced 2022 strategy that aims to increase the investment attractiveness of the company and will reduce it debt. In April the company pledged to cut its record-high debt burden to investors in an effort to improve its valuation as compared to global peers.
The share buyback would be attractive for investors, but the company and the company’s stock jumped on the news. It only has 11% of shares as a freefloat, as compared to much higher free floats among other Russian blue chips such as Sberbank (48%) and Lukoil (46%), analysts surveyed by Vedomosti daily believe.
Rosneft plans to finance the buyback through "organic free cash flow and sales of non-core assets", with the free cash flow [FCF] and cash accounts estimated by Vedomosti at about $9.7bn. The announcement pushed share prices up by 2.4% in London and 5.4% in Moscow as of May 2.
"This [buyback announcement] comes on top of its recently proposed 2018 dividend payment of $1.8bn (this should double in 2019, say analysts), with the new buy-back therefore representing a material part of future cash distribution to shareholders," Renaissance Capital commented on May 1
Rosneft-2022 strategy objectives "targeting specific 2018 performance in respect of improved cash-flow generation and increased levels of cash distribution to shareholders... are significantly better than our forecasts and support our BUY rating," the analysts believe.
Other investment makeover goals set by Rosneft include a minimum debt reduction target of RUB500bn ($8.4bn) by end-2018 (this includes prepayments), more than double of RenCap's RUB216bn estimate.
The debt cutting upside comes from a 20% lower capex guidance (making a cash saving of RUB130bn) and a RUB70bn higher-than-expected working capital release. Renaissance Capital currently estimates Rosneft’s 2028 FCF to equity of $9bn, a yield of 13%.
RenCap also notes that Rosneft’s buyback announcement comes shortly after a similar commitment by Lukoil, "with both companies’ new strategies confirming the superior cash-flow profile of Russian oil companies relative to the international peer group."
The investment case of private Lukoil oil major has previously been compared to Rosneft. The company's capitalisation caught up with that of state behemoth, closing the valuation gap although it extracts less than half of the oil and gas Kremlin-controlled Rosneft does.
Renaissance Capital's positive investment stance for Rosneft and Lukoil is associated with "unprecedented growth opportunities in Russia," along with a growing share of tax benefits, significant spare production capacity due to Opec+ output cuts, as well as additional dividend upside potentially expected by 2020.
Previously the head of state-controlled oil major and influential Kremlin insider Igor Sechin argued that the fair value of Russia's largest oil producer Rosneft is about half of what it should be thanks to sanctions on Russia.
As a world leader in terms of reserves and one of the leaders in terms of costs, Rosneft should be valued closer to or $130bn, Sechin argued in January when Rosneft's capitalisation stood at $65.8bn, since then declining further to $55bn.