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. Last Updated: 07/27/2016

Cyprus Company Buys LUKoil Share

An obscure Cyprus-based company on Friday purchased 9 percent of LUKoil, Russia's largest oil company, through a government-run privatization auction.

Government privatization officials announced the results Friday, saying that Cyprus-based Reforma Investment Ltd. won with a bid of $200.005 million - or $5,000 above the government's asking price of $200 million.

A second, equally obscure Cyprus-based company, Cortinway Trading Ltd., was the only other participant in the auction. Its losing bid of $200.001 million was just $1,000 above the minimum offer.

Under the auction rules, the winning bidder must also invest about $240 million into LUKoil over the next six months. It was not clear how or from where the little-known Reforma shell company would come up with $440 million - an IMF-tranche-sized chunk of cash. But LUKoil officials announced themselves pleased.

"We are glad that the company will be receiving real investment," LUKoil vice president Leonid Fedun told Interfax on Friday.

Fedun told Reuters that European portfolio investors were "probably" behind Reforma. He said representatives of LUKoil and the Russian government had recently held a London roadshow to talk up the sale, and he suspected some in that audience of

investors went on to set up Reforma.

It is, of course, unlikely that LUKoil does not know exactly who is behind Reforma - otherwise, company officials would certainly be more concerned to see such an obscure company buying such a major role in LUKoil's future based on a pledge of future cash.

And oil market analysts interviewed late Friday evening were unanimous in saying that LUKoil was almost certainly behind the winning Cyprus-based company, and probably also behind the losing company as well.

"This stake was acquired by the management of LUKoil," said Dmitry Avdeyev, oil and gas analyst with the United Financial Group brokerage. Avdeyev said LUKoil would act through a shell company like Reforma to avoid allegations of having rigged the auction somehow. "It doesn't look good from a foreign point of view; it looks like an insider deal."

"I assume that LUKoil is behind the buy," agreed Ivan Mazalov, oil and gas analyst at Troika Dialog.

Fedun denied that to Interfax, saying, "The bidders in the tender have no relation to Lukoil."

Neither the Federal Property Fund nor the Fuel and Energy Ministry could be reached late Friday.

In addition to the $200.005 million paid to the Russian government for the stake, the auction winner will be obliged to invest about $240.42 million into LUKoil projects over the next six months.

Of that,

-$49.462 million will go to pay off LUKoil's purchase of a 15 percent stake in a Kazakhstan gas company, Karachaganak;

-$121.958 million will go to cover unanticipated financial losses at oil production subsidiaries that come about due to industrial accidents and emergencies;

-$50 million will go to finance oil exploration and production on the Caspian shelf;

-$16.5 million will go to pay off a loan LUKoil took out to finance development of oil and gas fields in Azerbaijan;

-$2.5 million will pay for the cost of administering the tender.

All told, the purchase price for 9 percent of LUKoil - about 67 million shares - and the investment obligations together equal $6.56 per share, against a price of $7.92 for LUKoil in Friday trading on Russia's stock market.

If LUKoil itself bought the 9 percent stake, however, then one way to look at the sale would be to consider the purchase price for the stock alone - since the investment projects mostly involve covering LUKoil's own debts and plans. That would put the tender's price per share at about $2.99.

If LUKoil is behind the sale, it would not be the first time it purchased a bargain from the government.

During the 1995 loans-for-shares privatizations, a LUKoil-led consortium bought 5 percent of itself from the government for $250.01 million, $10,000 over the minimum bid. Just weeks earlier, the Atlantic Richfield Co. had paid more than seven times that for a comparable stake.

In June 1997, a LUKoil affiliate again bought a 5 percent stake from the government. The Lukoil-Reserve-Invest company paid about $43.6 million, at a time when the stock market value was about 10 times that.

Russia sorely needs cash to pay off billions of dollars in debt and to finance both a war in Chechnya and an underfinanced national budget for 1999. The government has said this year it plans to raise about $750 million by year's end through sales of government stakes in oil and gas companies - though thanks to frequent government shuffles, auctions of stakes in Rosneft, Slavneft and Tyumen Oil Co. have been on-again off-again affairs.

Staff writers Igor Semenenko and Andy McChesney contributed to this report.