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. Last Updated: 07/27/2016

Berezovsky Has Inside Track on Sibneft

When the auction for Sibneft, one of Russia's best oil companies, goes ahead later this month, there's a good bet that there won't be many new names among the winners.


The company is one of two that will go on the block in what amounts to a relaunch of the government's privatization drive after the elections.


A 19 percent stake in Sibneft, the Siberian Oil Company, will be auctioned off in an investment tender expected to take place Sept. 19. A 34 percent stake in another big oil company, Sidanko, will also be sold.


On the block will be 858.12 million Sibneft shares, with a starting price of 82.38 billion rubles ($15.4 million). The winner of the auction must agree to invest the ruble equivalent of at least $43.48 million in the company and pay off Sibneft's debts of 14 billion rubles to the federal budget.


At that asking price, Sibneft looks attractive indeed. It amounts to only about 1.7 cents per share, compared to 4.4 cents per share at last year's shares-for-loans auction. This drop in price is all the more extraordinary considering that the value of the company's main subsidiary, Noyabrskneftegaz, has more than doubled this year. The stock is thinly traded but a Sibneft spokeswomen said recent market transactions valued the stock at 10 cents a share.


The 1.7 cent per-share asking price, according to James Fenkner, the director of research at CentreInvest Securities, is less than the price Sibneft went for in last year's shares-for-loans auction. "It's a bargain on a bargain," he said.


Noyabrskneftegaz, Fenkner said, exported one-third as much oil in 1995 as Russia's biggest oil concern, LUKoil. "There's a lot of value there," he said.


But analysts agree that competition at the auction is likely to be limited and the most likely winner is a consortium called NFK, headed up by businessman Boris Berezovsky and backed by Stolichny Savings Bank and the Menatep group.


"It's speculation at the moment," said Stephen O'Sullivan of MC Securities Limited, but the most likely candidate to win the auction "would be an organization connected to Berezovsky."


Berezovsky, a colorful businessman most closely associated with the Logovaz auto retailer, is regarded as the ultimate Kremlin insider who was instrumental in everything from last year's shares-for-loans deals to moves by a group of businessmen to cancel this year's presidential elections.


The reason a Berezovsky consortium has a lock on the deal is that it already controls an estimated 65 percent of the shares in Sibneft, obtained in two rather opaque privatization sales.


NFK won a shares-for-loans auction held in December for 51 percent of stock and earlier this year it picked up another 14 percent in a little publicized auction.


"I'd wonder what's in it for me if I bought 19 percent of a company" that's controlled, in majority, by another group, O'Sullivan said. "In terms of capital growth, there must be better opportunities for putting their money at work in Russia."


One possible contender that appears to be bowing out of the deal is Inkombank, which tried and failed to win the 51 percent of Sibneft on offer in the December shares-for-loans auction.


It was excluded from that auction -- unfairly, it charges -- for not having its paperwork in order. The bank appealed, and in June an arbitrations court ruled in Inkombank's favor and overturned the results of the auction. Inkombank's celebrations were short-lived, however, as two months later a higher-level arbitration reversed the earlier decision in favor of the Berezovsky consortium.


After that loss, Inkombank vowed to take the matter to court again. But on Monday an Inkombank spokesman said the company would not go to court. "The administration of Inkombank has withdrawn its case from arbitration," the spokesman said.


But a source within Sibneft, who asked not to be identified, said Inkombank is still wrangling for shares in the company, and expected to see the bank turn out for the auction. Sibneft expressed doubt that NFK will be a bidder.


The Inkombank spokesman, however, said the bank is unlikely to participate in September's tender. "I doubt we'll take part," he said.


The likely lack of competition in the auction is all the more surprising in that Sibneft is one of the most attractive of Russian oil companies. Created in September 1995 when it was carved out of the state oil enterprise Rosneft, Sibneft is based upon the crude oil producer Noyabrskneftegaz and the Omsk Refinery, two of the most promising concerns from the Rosneft portfolio.


"The potential of Sibneft is tremendous, primarily because [its component pieces] have been assembled quite successfully," said Slavneft president and former first deputy fuel and energy minister Anatoly Fomin. "We [at the ministry] supported the foundation of Sibneft as early as 1993."


Specialists single out Sibneft subsidiary Noyabrskneftegaz, located in northwestern Siberia about 1,300 kilometers east of Moscow, as a promising enterprise. Crude output at Noyabrskneftegaz has been sharply cut over recent years, dropping from 41.2 million tons in 1989 to 20.4 million in 1995.


But the company has the advantage of being relatively close to the Omsk Refinery, the largest and one of the most technologically advanced in the country, and it also has a strong reserves position.


Thanks to Noyabrskneftegaz, Sibneft is the sixth largest Russian oil concern in terms of volume of oil output and eighth in terms of reserves.


Noyabrskneftegaz estimated its oil reserves at 4.9 billion barrels as of January 1996, MC Securities Limited reported. In world market terms, this places the unit's reserves on a level between those of Chevron and Mobil, it reported. No independent geological audits have been performed.


Another Sibneft subsidiary, the Omsk Refinery, underwent major reconstruction from 1992 to 1993, and is now the largest and one of the most technologically advanced in Russia.


"Money was invested on behalf of oil workers very rationally [then], and now it is one of the most modern plants in Russia," said Fomin. The depth of refining, a measure of how much crude oil gets turned into high-value refined product, at the Omsk plant is well above the Russian average at 65 to 85 percent.


In 1995, the refinery worked at 59 percent of capacity with an output of 16.53 million tons, compared to 26.2 million tons in 1985, when the factory was working at 95 percent of its capacity.


"The [Omsk] Refinery is probably the best performer in Russia and is one of the few which we believe would be profitable under world market prices," writes O'Sullivan.


Among other of Sibneft's advantages singled out by industry experts is a closely situated network of production and refining units, affording greater economy in transporting oil through a tight network of pipelines. Compared to distance and cost involved in transporting crude from Surgut in Western Siberia to Kirishi in the St. Petersburg region as Surgutneftegaz must do, the distance from Noyabrsk to Omsk, both in Western Siberia, seems short indeed.


If anyone were interested in contesting the auction for Sibneft in the face of Berezovsky's dominance, there could still be some hidden shoals. The structure of the Sibneft auction itself may guarantee the Berezovsky consortium nearly unbeatable chances to emerge the winner.


Special conditions have emerged which all but predetermine the winner of the auction for Sidanko scheduled on the same day. Uneximbank -- once presided over by Vladimir Potanin, now the country's deputy prime minister in charge of economics -- is already almost certain to win because it is the only company that can supply a share of a Sidanko subsidiary that is a condition for the tender.


"Undoubtedly there will be some conditions [for the Sibneft sale]," said O'Sullivan, "which may be along the same vein as in Sidanko. It wouldn't surprise me."


While Berezovsky looks certain to take a stranglehold on Sibneft, he does not appear to want to use his power. He has done little to influence sitting management, unlike Uneximbank, which has a reputation for hands-on restructuring both at Sidanko and Norilsk Nickel.


Immediately after winning the shares in the shares-for-loans auction in December, Berezovsky's consortium sent Sibneft President Viktor Gorodilov a letter in which it expressed "full agreement with the direction of policy at Sibneft" and promised it would neither use its voting rights on the board nor interfere in management.


Sibneft has announced plans to engage Western auditors and geologists to improve information available about the company, MC Securities reported, making it an attractive buy. But after the next auction, with NFK likely to control 80 percent of stock, outside investors will have little stock to trade.


Foreign bidders are prohibited from participating in the September auction and are prohibited from holding more than 15 percent in Sibneft.


One route for investment into Sibneft is through a bond issue expected to be approved by the Sept. 26 Sibneft board of directors meeting, according to Edward Roumanis, chief of research at Rye, Man and Gor Securities.


Roumanis said that, according to a source within Sibneft, the company will float a 500 billion ruble issue of two-year notes with nominal sizes of 5 million rubles, 25 million rubles, and 50 million rubles, with a proposed yearly interest rate of 15 percent to 18 percent. The interest rate seems low, Roumanis said, taking into account ruble inflation and considering the risk involved.


In the meantime, brokers are suggesting that investors interested in the company buy into its subsidiaries where some stock has been allowed to make it onto the open market. "We retain our positive recommendation on Noyabrskneftegaz as the entry route to Sibneft," MC Securities wrote in a recent briefing.


Sibneft Holding's subsidiaries (38 percent common shares, 51 percent voting shares in each):


?Noyabrskneftegaz


?Omsk Refinery


?Noyabrskneftegazgeofizika


?Omsknefteprodukt





Sibneft's privatization:


?51 percent, through loans-for-shares: Berezovsky consortium (NFK, Stolichny Bank Sberezheny)


?Majority of 14.28 percent floated in cash auction in early 1996: Berezovsky consortium


?19 percent Russian government stake: To be auctioned Sept. 19.


?15 percent Russian government stake: expected to be auctioned by end of 1996.





September 19 cash auction:


?Shares on offer: 19 percent


?Number of shares: 858.12 mn


?Starting price of shares: 82.38 billion rubles ($15.4 million)


?Price per share: 96 rubles (1.7 cents)


?Additional payments required of winner: invest ruble-equivalent of $43.48 million, pay off federal budget debt of 14 billion rubles.


Source: MC Securities, Reforma





-- Sergei Zharkov contributed to this report.