Troika dialog - sibneft: onca asset swap

Troika Dialog Research
Russia „ Oil and Gas „ Desknote
Onaco asset swap
Yesterday, TNK and Sibneft issued a joint statement confirming conversion of the latterís 38% stake
in Orenburgneft and 3% stake in Onaco into TNK Intl stock. According to the agreement, Sibneft
will receive an 8.6% stake in TNK Intl, together with an option to sell this stake to TNK Intl
shareholders (at an undisclosed price), a guaranteed level of dividends and a seat on the board. The
details on price and guarantees, unveiled yesterday, make the deal attractive for Sibneft. However,
the deal is negative for other minority shareholders of Orenburgneft and Onaco, making the
likelihood and timing of a buyout offer from TNK uncertain.

TNK Intl is the fourth largest oil company in Russia, with total proven reserves of 7,898 mln boe (including 7,258 mln bbl of oil reserves) and output last year of 692 kbpd. It owns a 97% stake in OAO TNK, which itself controls four upstream subsidiaries: Samotlorneftegaz, Nizhnevartovsk Oil & Gas, TNK Nyagan and Tyumenneftegaz. Before the deal, TNK Intl and OAO TNK controlled a 91% stake in Onaco, as well as a 61% voting interest in Orenburgneft (through Onaco). It also owns controlling stakes in four refineries (Ryazan, Nizhnevartovsk, Orsk and Ukrainian Lisichansk, providing it with a combined annual refining capacity of 900 kbpd. The only oil asset of the TNK group not consolidated in TNK Intl is SIDANCO. The company is registered in the British Virgin Islands and was, prior to the deal, owned equally by Alfa Group and Access Renova. In the interests of liquidity, it is the structure likely to be used for a future IPO or sale of equity to a strategic investor. A fair deal
We believe the agreement to be positive for both TNK and Sibneft. It effectively completes the consolidation of TNK Intl, by giving the company more than 90% voting control in all of its assets. Sibneft also appears to have secured attractive terms, particularly if the guarantees from TNK shareholders are taken into account. The value of Sibneftís investment in Orenburgneft and Onaco was reported to be $430 mln on
Sibneftís balance sheet at end 2001. Based on this figure, the deal implies an equity value for TNK Intl
of exactly $5 bln
and this is likely to have served as a basis for negotiation. It translates into an
EV/EBITDA multiple for TNK Intl of 4.0, on a par with Russiaís first tier oil majors. Although it could be
argued that TNK deserves a discount to other traded oil majors due to the poorer quality of its asset
base and share illiquidity, the put option and guaranteed dividends are an important consideration
and should compensate Sibneft.
Swap valuations
Book value of Sibneftís investment in Onaco assets Implied valuation of TNK Intl
After the conversion, Sibneft will, through the 8.6% stake in TNK Intl, command an annual oil output of 22.33 mln bbl. This is 2% lower than that from its stakes in Orenburgneft and Onaco, but the put option and dividend guarantees make up for this. Before conversion
Annual output, mln bbl, equity based
Sibneft share

Sibneftís share of output, mln bbl
After conversion
Annual output, mln bbl, equity based
TNK Intl share

Sibneftís share of output, mln bbl (8.6% of TNK Intl)
Minorities left out in the cold
Although the deal is positive for Sibneft, its exit as blocking shareholder will reflect negatively on minority shareholders in both Orenburgneft and Onaco, who are unlikely to be offered the same terms. One very simple reason for this is that conversion into shares of an offshore company would be technically difficult for Russian residents. The most likely scenario is a buyout of these minorities by TNK, although the timing and even likelihood of such a buyout are uncertain. Having already accumulated more than 90% of the voting shares, TNK will certainly be in no hurry. TROIKA DIALOG

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