Thursday, 8 December 2016

The Oil Circus

So Igor Sechin has been busy in deal-making recently, with a rabbit out of hat today in selling about one fifth of Rosneft.

These have been the big ticket deals recently.
#1. 6 Oct: Rosneft buys Bashneft (50.08% at Rb 300b or about $ 5.3b)
#2. 15 Oct: Rosneft and Trafigura-UCP consortium buy Essar's Indian refining & retail business (98% at $ 6.4b equity valuation, 49% due to Rosneft and 49% to Trafigura-UCP). Parallely India’s state-owned energy companies were investing $5.5 billion to buy stakes in Rosneft’s Vankor and Taas-Yuryakh fields.
#3. 7 Dec: Rosneft sells 19.5% stake to Glencore & Qatar SWF at $ 11.3 b

These are apart from other recurring ones, for example where short term financing was provided by Trafigura to Rosneft on crude oil and diesel exports.

Few observations:
  • #1 was completed just before final announcement of #2 which was long time in making
  • #3 was necessary to fund state budget. The alternate was share buyback by Rosneft which would have been circular logic because how do you fund that? It couldn't be state bank because that would inevitably crowd out local lending, not to say it would crowd out state borrowing for plugging fiscal deficit.
  • #3 could happen only after #1. Such intent was not only clear from Sechin, it was publicly stated by Putin too. So this was with full blessing from the beginning. This also meant steamrolling over domestic opposition, possibly backfiring on the meddlers.
  • Arguably #2 was not needed and proceeds from #3 minus #1 would have gone to state coffers. But Putin-Sechin had other plans probably. Either getting outbid by Saudi was not an appetising prospect, or genuine synergy was seen to invest in downstream, or just getting a footprint in the biggest driver of demand growth was paramount. All of the above apply of course, but there must have been a dominant thought.
  • Rosneft kept minority holding in #2 to help Indian banks not worry about US sanctions. Trafigura may sell their stake to Rosneft at a later date. Presumably this is just hand & glove arrangement or Trafigura were not keen to get dragged into bidding up to a price they are not willing to pay.
  • Likewise Qatar may have arrangement to take Glencore's stake in Rosneft at a later date.
  • Where does #3 leave Trafigura though? Even if Trafigura saw this coming and decided not to participate, it could be perceived as a snub to see your BFF standing you up for a rival trading house and even ready to reduce your pie of long term supply deals.
  • While Glencore gets seen as a winner here, since fair amount of time they have had their own pressures on reducing debts and maintaining cashflow. So it is interesting to see that Glencore's description of the deal is focussing on rights issue and projecting upside at minimal risk, keeping their shareholder guidance consistent.
  • Qatar's participation gives more colour to OPEC-Russia dialog recently, even though action has been missing and genuine mistrust prevails, probably for the right historical reasons. Qatar perhaps risks crossing Saudi and GCC because Russia has earned brownie points for getting Iran & Saudi in talking terms and land the OPEC deal.
  • It also gives an additional flavour to 'each one for his own' policy. Saudi decided in 2014 to pump at will and flood the oil market. Now Saudi wants to IPO Aramco and others are frontrunning them in the capital market. Rosneft deal today is a QIP. US Shale companies have been hedging the heck out of future production. Junk bond yields have fallen again.
In summary oil market today is still each one for his own, with traditional alliances getting tested and new ones being formed only to be tested shortly. To quote, The chess board is shifting rapidly in the region and for oil markets.

Giant disclaimer: All the information cited above is in public domain. Any assumption/presumption is my own, without any special access. I have just tried to connect the dots.