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. Last Updated: 07/27/2016

Conoco Said in Talks for 25% of LUKoil

bloombergConoco CEO James Mulva
U.S. oil major ConocoPhillips is seeking to buy up to 25 percent in oil giant LUKoil to add billions of barrels of reserves to its books, an industry source familiar with the matter said Friday.

The source said Conoco was looking to buy extra shares on the market after the Russian state sells its remaining 7.6 percent stake in LUKoil at an auction Sept. 29, with a $1.93 billion starting price. Conoco is seen as a frontrunner.

"Conoco is going to seek additional stock on the market. It will be looking for a very large portion ... probably up to a quarter," said the source, who spoke on condition of anonymity.

"The two companies will be looking to set up joint ventures in Russia and Iraq.

In Russia, it will be in the north and probably some other regions. This will add billions of barrels to Conoco's portfolio.

"For Conoco, reserves are top priority. As for LUKoil, it is interested in U.S. downstream and the liquefied natural gas business."

LUKoil shares rallied on the news to trade 2.2 percent higher at 852 rubles on Moscow's MICEX exchange. Its dollar shares gained 2.1 percent on the RTS exchange to trade at $29.10.

The starting price of the LUKoil stake auction values the company at $25.4 billion, or $29.86 per share, which is a slight premium to the market, analysts estimate.

Conoco, the No. 3 U.S. energy firm, has long been linked to LUKoil, with which it already has a number of joint projects that are working on ideas to develop fields in the frozen Far North.

LUKoil has the world's largest proven oil reserves after the United States' ExxonMobil, making it a prize for any oil major looking to book extra barrels.

Speculation of a tie-up heated up when Conoco CEO James Mulva flew to southern Russia in July for unexpected talks with LUKoil CEO Vagit Alekperov and President Vladimir Putin.

Given that Kremlin displeasure is widely seen as having driven LUKoil's main rival, Yukos, to the brink of collapse under $7 billion in tax bills, the meeting was viewed as a vital Kremlin blessing for the deal.

Conoco has repeatedly declined to comment on this issue. And LUKoil vice president Leonid Fedun declined to comment on the report.

"We don't comment on market rumors. I can only repeat that LUKoil managers are not planning to sell their shares and the company is not planning additional issues in favor of any potential buyer of the state's stake," Fedun said.

Managers, led by CEO Alekperov and Fedun, are believed to control up to 30 percent of LUKoil, while up to 50 percent of the company's shares are traded freely.

Sam Barden from Trust investment bank, which is close to Yukos, said he believed the Kremlin had given its blessing to managers to sell 18 percent of their shares to Conoco.

"The blocks would come from the stock controlled by current LUKoil management through its opaque structures, and Vagit Alekperov would then have a seat on the board representing Conoco, rather than himself," Barden said in a note.

Some analysts also doubted Conoco was ready to immediately afford paying an extra $4 billion for more shares in addition to the $2 billion it would need to pay for the state stake.

"As of the end of the second quarter, Conoco had $804 million in cash, meaning it would need to raise additional funds to finance the purchase," said Oleg Maximov, an energy analyst at Troika Dialog.

But Aton brokerage said appetite for more shares could come because the state's valuation of LUKoil was attractive by global and even by Russian standards.

The U.S. oil major would secure the stake at $1.70 per barrel of reserves versus the $1.90 per barrel price paid by British rival BP last year for a 50 percent stake in Russia's No. 3 oil firm, TNK.