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. Last Updated: 07/27/2016

Deal Leaves Sidanko Far From Financial Health

The long-awaited amicable agreement reached Monday by the creditors of Sidanko oil company set the scene for the battling oil giant to emerge from bankruptcy, but the company still faces an extended, difficult path back to financial health.

The settlement restructures the company's registered debt of $431 million and effectively clears the decks for arch-rivals BP Amoco and Tyumen Oil Company, or TNK, giving them space to make their own peace deal work.

For the creditors' agreement to be activated, the Moscow region arbitration court will have to approve it at a scheduled hearing Friday. Sidanko has a history of unfavorable court decisions regarding its bankruptcy, even when the agreements were broadly backed by the creditors.

If the court approves the plan, an almost immediate payment is required on some 7 percent of the total debt, or $30 million, owed to the regional and federal budget, BP Amoco spokesman Howard Chase said. Another 23 percent, or $99 million, will be paid to creditors within three to nine months.

The remaining debt has been restructured over a longer period, with 40 percent - some $172 million owed on a syndicated loan provided by a group of Western banks -to be paid over three years, and the final 30 percent - $129 million owed to company shareholders - to be paid off over the next five years.

Chase also said the new plan to pull Sidanko out of bankruptcy will not require injecting any additional funds, but instead envisions paying off the firm's obligations from its earnings.

Based on Sidanko's performance over the past six months or so, the oil holding has excellent prospects for coming up with the $160 million needed to meet initial payments this year.

Chase declined to give details of Sidanko's 1999 financials, saying that it was too early to be able to supply exact amounts.

Despite the glowing picture of Sidanko's mapped-out recovery, analysts were skeptical that TNK and Sidanko would be able to maintain the needed cooperation level.

"The whole thing requires a wait-and-see attitude. You sign it - fine. Bring back Chernogorneft. You brought back Chernogorneft - fine. Let's see how you guys are going to live together in one bed in Sidanko," said Steven Dashevsky, an oil analyst for Aton brokerage in Moscow.

"I don't see two arch-enemies like TNK and BP Amoco working together as major shareholders of Sidanko."

After a bitter tussle with Sidanko and BP Amoco, TNK bought Chernogorneft for about $176 million last November at a controversial bankruptcy auction.

But in the dying days of 1999, TNK and BP Amoco cut a peace deal whereby TNK would hand Chernogorneft back to Sidanko in exchange for a 25 percent plus one share blocking stake in Sidanko. The deal also allows for BP Amoco to be given voting rights equal to 25 percent plus one share, while maintaining its exposure at the existing level of 10 percent.

Pushing that deal through is likely to take some time, due to the need to resolve numerous technical issues, officials from both sides said.

Chernogorneft, which has continued to extract about 124,000 barrels per day, would double Sidanko's crude output if returned to the oil holding.

TNK officials were unable to say how long it is likely to take for Chernogorneft to be legally returned to Sidanko, saying only that a fair amount of paperwork would be required.

Chernogorneft remains under bankruptcy until TNK's purchase is legally finalized. The production unit has been functioning independently with profits accumulating to Chernogorneft's own account, said Sergei Lukyanov, an analyst with Petroleum Argus.

The agreement's success is also likely to be viewed differently for each player.

"Within Russia, it looks like TNK is the winner. By giving back Chernogorneft, TNK can now be a partner of BP [Amoco], which otherwise would have never been plausible," Lukyanov said.

BP Amoco, by preventing Sidanko's bankruptcy, succeeded on the international front by managing to stay in the rough but lucrative Russian oil industry, he said.

Stephen O'Sullivan, an oil analyst for United Financial Group, called Monday's agreement a pragmatic one.

"The incentives to cooperate are greater. TNK has learned that it doesn't do your capital raising or your credit rating much good if you are being sued by an international oil company. And BP have learned that maybe some element of compromise is not a bad thing in Russia," O'Sullivan said.

Chernogorneft should be returned to Sidanko clear of debt under the TNK-BP Amoco peace deal, Chase said.

TNK acquired Chernogorneft - making aggressive use of Russia's murky bankruptcy laws and often even murkier court system - because it hoped to consolidate its assets with those of TNK subsidiary Nizhnevartovskneftegaz, which shares the giant Samotlor oil field with Chernogorneft.

And even though TNK has now agreed to hand Chernogorneft back to Sidanko, the oil firm has yet to abandon its plans to bring the two production units together.

TNK is working on a proposal to create a joint venture with BP Amoco to incorporate both Nizhnevartovskneftegaz and Chernogorneft, TNK spokesman Dmitry Ivanov said.

BP Amoco acknowledges receiving such proposals, Chase said. A joint study into the Samotlor project is included in the peace agreement, and BP Amoco plans to provide technical support for that project, he added.

BP Amoco, which in 1997 purchased 10 percent of Sidanko for $571 million - an investment since downgraded to $371 million - has never shied away from its more extensive plans in Russia, even though company officials insist that Sidanko is important for BP Amoco in its own right.

The oil major's main focus in Russia has long been in Rusia Petroleum, a small exploration firm whose license for the enormous Kovykta gas field gives it control of an estimated 870 billion cubic meters of gas.

When BP Amoco - then simply BP - bought into Sidanko, it was primarily interested in the Russian firm's 60 percent stake in Rusia Petroleum. In the intervening period, the international oil major has been trying to tighten its grip on Rusia Petroleum, hoping to export gas from the eastern Siberian deposit to China and possibly on to South Korea.