Russia’s major oil producer, Rosneft, has unveiled plans to ease back on development plans, tighten up on its debt profile, and a $2 bln share buyback, in a move which will broaden its appeal outside strategic investors, while at the same time minimising global geopolitical risks stemming from its closeness to the Russian state.
In its statement the Russian oil major flagged its ‘key strategic focus is to increase profitability and returns on the existing assets’ with CEO Igor Sechin noting that’s its appreciation global by global investors was underwhelming.
“The Company continues to demonstrate robust financial results and proposed new initiatives will enable us to improve the focus on the business using core strengths that will result in the enhancement of shareholder returns. We are strong believers in the fundamental value of Rosneft that is not fully appreciated by today’s volatile equity markets”
The key plank in turning sentiment around will be driving down debt, beginning with RUB 500 bln (USD $7.89 bln) worth this year, and which will also see RUB 800 bln taken off 2018 CAPEX – more than 20% earlier CAXPEX guidance – with the bottom line also helped along by the sale of a range of non-core assets.
But the move attracting most initial interest is plans for a share buyback through the market. Vedomosti noted that with a current capitalisation estimated at $64.4 billion, the buyback could see 3.1% of capital in play. It also noted that Rosneft hadn’t announced what the parameters of the share buyback would be – an important point for a company which has ‘strategic’ investors far outweighing retail investors, with a 10% equity float, and where two of these strategic investors – Glencore and Qatar Investment Authority – have agreed to sell their stakes to CEFC China Energy, with no real information where that deal currently is, except that the CEO of CEFC China Energy being investigated by Chinese authorities, and nobody seems quite sure if it has the funding to buy out the stakes it is contracted to buy.
Vedomosti refers to BCS analyst Kirill Tachennikov proposing that Rosneft will look to buy in should market volatility see it hit with significant share price downside. But it also quoted Aton analyst Alexander Kornilov noting that the overall message from Sofiyskaya Naberezhnye is that the company is now paying attention to concerns about its debt load, its capital deployment and return on invested capital.
“For many years investors wanted to hear from Rosneft about reducing the appetite for purchases and acquisitions and capex, and, at last, they heard it,”
The concerns about Rosneft’s debt load have long begged questions on two accounts.
The first is the sheer size of the debts it needs to service, with a debt load it estimated at RUB 2.216 tn (circa USD $35 bln) as at the end of June 2017, with Bloomberg reporting it has chalked up more than USD $93 bln in loans and obligations, for a company which dipped into capital markets for $17 bln in 2017 alone.
Certainly most of this is to roll over earlier debt, and may well be a good hedge against both further sanctions which may limit its future capital market access, as well as rising borrowing costs as the US Federal Reserve begins to tighten, driving global borrowing costs higher along with it. The 2017 debt stance also reflected resurgent crude prices and Rosneft’s underlying ability to pay. But it is still a lot of debt, and would become considerably heavier should Russia and OPEC not be able to strike achieve higher global prices, or worse, if higher prices bring US shale production significantly back into play.
The second has been about what Rosneft does with the debt. Plenty of it has been splashed about on offshore production and distributions assets, with 2017 alone seeing deals announced involving Essar Oil in India, development in Iraq, new ice breakers, joint ventures with Statoil, the purchase of the Zohr gas field in the Mediterranean, and development of the Tuban refinery complex in Indonesia, Arctic development, and that is just scratching the surface.
While every last one of these may be good, the range of partners and projects does give the impression of a company with a lot on its plate, and the consequent doubt on its focus, as well as whether the assets are operational in terms of driving profitability in the here and now, or strategic in the sense that they help ward off geopolitical uncertainty, sanctions, or the vagaries of global crude markets. Bloomberg spelled it out neatly while observing,
“Asset purchases last year from India to Venezuela and Egypt made the company a global player, whose expansion often aligns closely with Russian foreign policy priorities.”
The size of the task
Those types of observations have coloured investor sentiment about Rosneft. Bloomberg highlighted the capitalisation issue with two charts ranking major European crude producers in terms of output and capitalisation. Rosneft, which accounts for more than 40% of total Russian crude production, topped production but languished when it came to capitalisation. Sechins comments, and the size of the perception he needs to modify, start and end there.
The first reactions in Moscow have been overwhelmingly positive, with the Rosneft share price getting a 6.5% boost after the news was unveiled.