Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

State Quietly Floats a Stake in LUKoil

The Russian government took investors by surprise and quietly placed 5.9 percent of LUKoil on the London Stock Exchange on Monday. Fund managers on Tuesday estimated it could net up to $800 million in Russia's biggest privatization so far this year.

But by late Tuesday night, it still wasn't clear whether the government had given final approval to the sale, even though State Property Fund head Vladimir Malin said the placement closed at 4:30 p.m. London time. The government called off an earlier issue in August following a public offering that it said had not raised enough funds. That sale would have reaped $680 million.

The government's financial adviser for the placement, Morgan Stanley, had yet to reveal the results of the sale. But industry sources said initial demand looked very strong, and Malin appeared satisfied with the issue.

"Everything is going according to plan. Investors are showing great interest in LUKoil's shares, and demand is high," Malin, who was in London for the listing, was quoted by Interfax as saying.

A London fund manager, who declined to be named, told Reuters that the offering was going ahead at a price of $15.75 per share. That would raise some $750 million, well above the $600 million target price the government set in August.

Listings of LUKoil shares have long been surrounded by controversy. Plans to issue level 3 ADRs on the New York Stock Exchange were dropped in spring 2001 after U.S. Senator Jesse Helms lobbied to block the placement and accused LUKoil president Vagit Alekperov of "tax and currency fraud schemes."

Then, the August privatization on the London Stock Exchange was canceled because the government considered the sale price too low. That failure was in no small part due to Alekperov jumping the gun and announcing the sale a few weeks ahead of the placement. Investors drove the price down, hoping to make a quick killing on the share launch.

This time, the government took no chances and kept the date of the listing tightly under wraps, catching analysts and investors alike unawares when the issue began Monday.

"This is excellent timing," said Steven Dashevsky, oil and gas analyst at the Aton brokerage, noting that the LUKoil share price was near a 12-month high at $15.90 just before the placement.

At the issue in August the shares would have been sold at $13.60 to $14.

"The government has done a very smart thing by selling the stake before announcing it," Dashevsky said.

Analysts said the government might have been pushed into going ahead with the sale before uncertainty over a U.S.-led war in Iraq could send global oil prices down. It would also help the government build up a war chest of funds to pay off heavy foreign debt repayments next year.

"It makes sense for them to lock it in now," said Christopher Weafer, head of research at Alfa Bank. "The oil price is likely to be quite uncertain early next year because of Iraq."

Even though LUKoil has long been seen as lagging behind rival oil majors Yukos and Sibneft in improving transparency and corporate governance, investors now say the company is beginning to catch up. LUKoil announced just last month it would sell off its 10 percent stake in the Azeri-Chirag-Guneshli oil field in Azerbaijan in a bid to start restructuring its mammoth structure and raise cash for more strategic investments.

In a move to raise transparency, the company earlier this year unveiled a list of its major shareholders.

And, in further encouraging news, it has hired the former head of Conoco in Russia, Richard Karplus, as a deputy to LUKoil's financial and strategic pointman, vice president Leonid Fedoun. He will help with the company's restructuring plans.

"This shows they are not afraid to bring in Western professional management," said Paul Collison, oil and gas analyst at Brunswick UBS Warburg.

He predicted strong interest from big global investment houses in the London share issue.

"On a global basis, LUKoil is a very attractive company. Its valuation is very low by global standards," said Collison, noting that a lower oil price would hit higher cost global oil majors first.

He said break-even costs for LUKoil were about $11 per barrel, and for Yukos and Sibneft about $8 to $9.

"Globally these are very competitive numbers," he said.

LUKoil offers growth prospects because of new projects to develop the far North Timan Pechora field and the Caspian, he said. "In comparison, global oil majors have been one disappointment after another."

Rising oil prices have also helped LUKoil boost net profits in the second quarter by 146 percent to $597 million, compared to the first quarter.

But as ever with Russia's often murky energy giants, the company still has much to do to clean up its financial reporting, analysts said.

The company is also still far behind Yukos and Sibneft as a stock pick because of investor perceptions of its lagging corporate governance improvements. Yukos' share price has jumped 74 percent to $9.07 since its year low in January, while Sibneft's has soared 175 percent to $2.02 since its year low in January. LUKoil's price, however, is up just 36 percent since its year low in February.

Furthermore, LUKoil's listing on the London Stock Exchange instead of the New York Stock Exchange could leave lasting questions in investors' minds.

"If LUKoil is going to be viewed as a world class oil company, it has to list on the NYSE," Collison said.

The decision to drop plans to list on the NYSE was largely due to a fight the company was embroiled in with U.S. energy company Williams over a stake in Lithuanian oil refinery Mazheikiu Nafta. After the Lithuanian government expressed interest in selling a 33 percent stake in the refinery to Williams, which already owned a third of the plant, LUKoil reduced oil supplies to the refinery and several times cut it off completely. Helms accused LUKoil of blackmailing Williams and the Lithuanian government, charges that LUKoil denied.