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. Last Updated: 07/27/2016

Yukos, Sibneft Opt for Divorce

Yukos and Sibneft have agreed to kill their record merger, sources from both companies said Tuesday, ending weeks of speculation over the future of what was de facto the world's fourth-largest oil producer.

"The decision has been made in principle. It was reached over the weekend, and the deal is yet to be spelled out," said a source close to Yukos shareholders.

Both sides, however, appeared to be still at loggerheads over whether Sibneft owes Yukos compensation for walking out of the deal, making it unlikely there will be a clean break between the companies soon.

"All in all, it will probably take about six months to complete," the Yukos source said.

The agreement to reverse the deal is the first significant corporate collateral damage to be caused by the relentless legal onslaught against Yukos shareholders, which has led to the arrest of Yukos founders Platon Lebedev and Mikhail Khodorkovsky on charges of fraud and tax evasion.

Senior executives from Yukos and Sibneft have been locked in talks in London since Nov. 28, when Sibneft moved to halt the merger just minutes before an extraordinary shareholders meeting was due to set it in stone.

Now that the two sides have agreed to disagree and call the whole thing off, a fresh bout of wrangling to determine the terms of the divorce deal has commenced, with negotiations likely to focus on compensation. Originally, both sides agreed to pay the other $1 billion if they backed out without cause.

"My position is that it is possible that the issue of compensation could be raised. The issue can be raised on any stage of the forging of the new deal," Leonid Nevzlin, the biggest Yukos shareholder not in jail, told Interfax from Israel.

A source close to Sibneft, however, said both sides had agreed there would be no demands for compensation because of the financial losses Sibneft incurred on the massive slump in Yukos' share price that began soon after Lebedev was arrested this summer and the legal onslaught against the company began.

Yukos has already paid Sibneft shareholders $3 billion in cash for 26 percent of Sibneft's shares, and a share swap that resulted in Yukos owning 92 percent of Sibneft has already been conducted.

Nevzlin said that if Yukos shareholders did not receive compensation for undoing the deal, the $3 billion Sibneft had received in cash would be like getting "an interest-free loan."

"The $3 billion is an interest-free loan for Sibneft's shareholders. At the same time, Yukos has not managed Sibneft and has not got any money back," he said.

Nevzlin told the Financial Times last week that Yukos shareholders could ask for as much as $1.7 billion in compensation.

Instead of imposing the $1 billion walk-out cause, it seems the deal is so far down the road that a new plan for reversing the process will have to be hammered out.

"So far it is not a deal, it is a plan for the deal," Nevzlin said Tuesday. "There is no need to rush over compensation. The fulfillment of the new agreement can take many months."

Senior Yukos executives are to hold a news conference Wednesday that may clarify some details of the divorce plan.

Overall, however, the divorce of Russia's No. 1 and No. 5 oil producers appears be heading for a peaceful settlement.

Nevzlin said no legal actions against Sibneft were in store.

"The issue of taking things to court only arises when contract obligations are not fulfilled. But this deal is only to make a new contract," he said.

Yukos' future without Sibneft, however, looks gloomy, particularly the prospects of selling a stake to a strategic investor, said Kakha Kiknavelidze, an oil and gas analyst at the Troika Dialog investment bank.

"[The reverse of the merger] sends a bad signal to the market: Do you really want to get in when Sibneft, which knows so much more about the true situation, is getting out?" Kiknavelidze said.

Western oil majors, including U.S. giant ExxonMobil, may still be interested in getting a chunk of Yukos, he said.

"But it will not materialize until the current conflict around Yukos is extinguished," he said.