Market to Take Positively Privatization of Oil Companies

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Specific aspects of the privatization of Rosneft and Bashneft have not yet been worked out, said presidential press spokesman Dmitry Peskov. ‘This matter is in the development stage’, he said. The day before that, Deputy Prime Minister Arkady Dvorkovich also said that the government has not yet identified neither the package size nor the way to sell Bashneft, and intends to do so in the near future. ‘We expect that there will be significant interest from investors and we welcome the competition. We look forward to develop the company through privatization,’ said Dvorkovich.

It was reported earlier that the federal authorities intend to sell a part of the package (25% of shares) owned by the Federal Agency for State Property Management. Bashkiria has no intention to sell its stake in the oil company. In 2016 Russia may sell a large number of assets in order to reduce the budget deficit. In particular, it concerns the state-owned parts of packages of Rosneft, Bashneft, ALROSA, and so on.

The moment for privatization of oil companies is not the most appropriate in terms of government revenues from the sale of assets, as in connection with the fall in oil prices, the capitalization of the oil sector companies is at a minimum. Therefore, it is important to accept the new reality and to proceed from the conditions that exist now and not look back, waiting for a new surge in oil prices. At the moment, it is unlikely that in the mid-term the oil companies will cost significantly more.

At the same time, the government is acting in the conditions of budget deficit, so the financial department of the government is looking for any additional sources of income in an environment where cutting costs might lead to a dangerous social explosion, and where the government is not ready to reduce costs on the defense industry, as it was more than once publicly stated, and on what appears to be some good reason. Kirill Kukushkin, Analyst at National Rating Agency, comments:

‘Privatization of Bashneft in comparison with other companies from the list looks extremely profitable, taking into account the fact that until recently it was under the control of private sector. But when it comes to the further development of the company, it is important that the practices of risk management, governance, social responsibility, established by the previous shareholder (Sistema JSFC), are not affected, and the selection of the Board is conducted selectively. In light of the recent information about the desire of Lukoil to participate in the privatization of Bashneft, given their joint work on Trebs and Titov fields, as well as a joint venture for exploration in the licensed areas in the Nenets Autonomous District, this option would give the greatest synergistic effect.

In this case, the benefit from the privatization would have received both companies. Another contender for the privatization of Bashneft may be Surgutneftegaz, with its huge liquidity cushion and zero debt. Bashneft seems an excellent investment option for inorganic growth of the company, but the information closeness of Surgutneftegaz will play a key role, and such transaction is likely to be negatively apprehended by the market.

Among potential buyers, experts also name Rosneft, which actively loans in state banks, which itself is in the list of companies for privatization. Also should not be ruled out the possibility of purchase of the company by some major investment and industrial holding, but nobody has yet spoken about such intentions, and Sistema is unlikely to step the second time into the same river.

Privatization of Rosneft itself seems more than positive. Reduction of the state's share in the ownership structure will be beneficial for both the government and investors. Reduction of the state's share and the emergence of a new shareholder will improve the company's efficiency, while the government will retain control over the largest oil company in the country and will remain the guarantor of stability and continuity of the company's activities. Privatization of these two companies will certainly be positively perceived by the market.

The purchase price is likely to be held on top of the price range, which will maximize the revenue from their sale, about which the government is so reluctant, and in case of high demand could push new sales of state property and reduce the state's share in the overall economy, reduce political risks for companies, the influence of which is now the most noticeable.’

FederalPress, 18/02/2016