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. Last Updated: 07/27/2016

LUKoil Buys Stake in Affiliate for $400M

Top oil firm LUKoil said Friday that it had bought a small stake in an affiliate for a generous $398 million to further consolidate assets, but analysts questioned the deal's transparency.

Analysts said LUKoil, which launched an ambitious restructuring and cost-cutting plan last year to improve its image and catch up with market peers, agreed to buy back a minority stake from unknown buyers in Russia's largest such transaction.

"It seems to be the largest sum ever spent in Russia to buy back a stake from minority shareholders," said Kaha Kiknavelidze from Troika Dialog brokerage.

LUKoil said it had agreed to fully buy PFPG-Energy, a company that owns 27 percent of one of its upstream subsidiaries, LUKoil-Perm, for $398 million in cash.

The buyer will be LUKoil's wholly owned subsidiary, LUKoil Overseas and the deal is to be completed in the first half of 2003, leaving LUKoil with 100 percent of LUKoil-Perm.

LUKoil-Perm produced 8.57 million metric tons (172,000 barrels per day) of crude in 2002 and has reserves of 208.8 million tons (1.53 billion barrels). LUKoil as a whole produced 78 million tons (1.57 million bpd) of oil in 2002.

"It means that LUKoil agreed to pay $60 per barrel of LUKoil-Perm production and $1.0 per barrel of reserves, which is slightly higher that the Russian sector average," said Bulat Karimov from Aton brokerage.

"But given that we are talking about a minority and not a controlling stake, the premium seems to be huge," he added. Analysts also questioned the way the deal was done, as doubts remained over the sellers' identity.

LUKoil did not say who owns PFPG-Energy, which obtained 27 percent in LUKoil-Perm as a result of restructuring of Perm Financial and Industrial Group last year.

However, analysts noted that Perm Financial and Industrial Group, was headed by Andrei Kuzyaev, who also heads both the buy side, LUKoil Overseas, and the acquisition target, LUKoil-Perm.

"There is potential for a conflict of interest," said Leonid Mirzoyan, an analyst at Deutsche Bank, who, however, noted that LUKoil has made an effort to resolve the problem by ordering an independent audit of the transaction from PricewaterhouseCoopers.

 LUKoil net profit under U.S. generally accepted accounting principles fell 29 percent on the year to $1.35 billion in the first nine months of 2002, despite revenue in the reporting period increasing 5.8 percent to $11.10 billion, Interfax reported Friday.

Oil export revenue increased 3.6 percent to $3.19 billion, with revenue from oil product exports up 20.6 percent to $4.53 billion. Domestic revenues from oil fell 54.5 percent to $362 million, while oil product sales grew 3.4 percent to $2.02 billion, Interfax said.

EBITA fell 25 percent to $1.9 billion.

LUKoil spokesman Gennady Krasovsky said the drop in profits was due to a transportation costs rising more than 40 percent to $1 billion.

He said transportation costs increased because the company exported more petroleum products and the increase was seen in both pipeline and rail transport.

LUKoil also began exporting oil using a non-traditional method -- rivers.

(Reuters, MT)