Russian Oil Czar Reluctant to Change Buyout Offer

The Wall Street Journal       Gregory L. WHITE

Beyond his official post as chief executive of state oil company OAO Rosneft, Igor Sechin is a longtime confidant of President Vladimir Putin and widely seen as one of the most powerful people in Russia. So when his PR staff called the top editors of most of the country’s major newspapers late Friday night to summon them to an urgent briefing with him the next day, nearly all turned up.

But Mr. Sechin didn’t gather them at Rosneft headquarters in downtown Moscow to announce a new multi-billion-dollar deal with a global oil major or another giant project with customers in China. No, the reason he brought the editors, including two foreigners, out of bed on a Saturday morning was to respond to a complaint voiced a few days before by a small shareholder in one of Rosneft’s many subsidiaries.

Over the following two hours, ignoring the plates of fruit and Russian blini laid on the table, Mr. Sechin provided a window into the mindset of the man who runs the world’s largest publicly traded oil company by production.

He seemed less concerned about the substance of the shareholder’s complaint–the fund manager voiced a concern widely held in the market that Rosneft’s offer to buy out minorities was unfairly low–than the fact that the investor had taken it directly to Mr. Putin during a public question-and-answer session at an investment conference.

“This was an attempt to apply pressure, maybe even to manipulate the market,” Mr. Sechin said of the fund manager’s question to the president.


“They should have said, ‘We thank Vladimir Vladimirovich (Putin) for the opportunity to work in Russia and please let us buy something else,’” he added, with only the faintest hint of a smile.

The concern was voiced by a representative of Franklin Templeton Investments, a veteran of emerging-markets investing. Templeton, the questioner said, had bought a stake in TNK-BP Holding, the traded unit of Anglo-Russian oil giant TNK-BP Ltd. in 2006. When Rosneft bought TNK-BP in March of this year, it bought out BP PLC and a group of Russian billionaires who were the British giant’s partners, paying a total of about $56 billion in cash and stock.

The Franklin Templeton representative said last week the stock had been trading at about 85 rubles ($2.10) a share before the Rosneft-TNK-BP deal was announced. The price Rosneft paid to BP and the Russian billionaires, he said, worked out to about 100 rubles a share. Then he added that Rosneft had just announced it planned to report a gain on the transaction because auditors had found the real value of TNK-BP was even higher than what Rosneft had paid–about 123 rubles a share.

His questions were simple: he asked the president if he thought Rosneft’s 67 rubles was a fair price and if such behavior would serve as a precedent for other state-controlled companies.

After Rosneft took over TNK-BP in March, Mr. Sechin and Rosneft said they had no legal obligation to buy out the minority shareholders in TNK-BP Holding, which was renamed RN-Holding after the takeover, and Rosneft’s share price plunged. Anger simmered in the market for months until late September, when Prime Minister Dmitry Medvedev, sitting next to Mr. Sechin on stage at an economic forum, ordered him to buy out the RN-Holding minorities.

Mr. Sechin said Rosneft had already worked out the details and would use an average price from the previous 18 months–during most of which the stock had languished, partly due to Rosneft’s previous refusals to buy out the holders. The 67-rubles-a-share price Rosneft offered was about 30% above the depressed market price, but well below the pre-merger price. Analysts–including those at state-run banks–decried the deal as unfair.

Mr. Putin, according to the official Kremlin transcript of the event, started out answering Franklin Templeton’s questions seeming to defend Rosneft. But then he instructed the company and the government to consider the investor’s concerns. Unfair terms, he said, would be “absolutely unacceptable.”

Mr. Sechin wasn’t at that session but his comments Saturday made clear that he thought the company’s offer, worth a total of about $1.5 billion and already approved by the board of directors, was more than generous. Rosneft is under “absolutely no” legal obligation to buy out the RN-Holding shares, he said.

“They’re a great fund, but no one should put pressure on us,” he added, referring to Franklin Templeton. Mr. Sechin said he’d had his staff identify the employee who asked the question, as well as to pull the records of the fund’s ownership, how much it had earned in dividends and how it had voted at annual meetings.

“Everything suited them,” he said, marveling that after such returns the fund would accuse Russia of “putting the squeeze on investors.”

A spokeswoman for Franklin Templeton said the group couldn’t immediately comment over the weekend. Mr. Sechin said he had written to Mark Mobius, executive chairman of Templeton’s emerging-markets group, for an explanation.

Mr. Sechin gave no indication that he was ready to reconsider the buyout price, however.

“Objectively, I doubt anyone can complain of making losses in Russia,” he said. “Everyone leaves with a good result.”

Mr. Sechin praised Russia’s investment climate, repeatedly crediting Mr. Putin for passing regulatory and other changes to stimulate oil production on the Arctic shelf and in other hard-to-produce fields.

“We have reinforced-concrete political stability led by Vladimir Vladimirovich,” Mr. Sechin added.
His brief tour of competing oil producers covered the Middle East and Venezuela, but didn’t include North America. When asked later about surging production of shale oil and gas that’s likely to help the U.S. overtake Russia as the largest producer of the fuels in the world this year, he acknowledged the boom but seemed dismissive. Echoing a view common among Russian officials but discounted in much of the rest of the oil world, he said the impact would be limited to the “local market.”

“We won’t be competing with them on global markets,” he said.

He brushed off a suggestion from a Russian journalist that Rosneft should focus on its own vast reserves of shale oil and gas and leave its current costly drive into the Arctic offshore for the future.

“There will be competition, but we have competitive advantages,” he said.

Source: http://blogs.wsj.com/emergingeurope/2013/10/06/russian-oil-czar-reluctant-to-change-buyout-offer/