Rosneft buyback points to BP share swap

Rosneft buys its shares back from minorities in a wake of a deal with BP
Rosneft has commenced a minor share buyback which is widely seen as preparation for its share swap with BP – currently stalled by a legal dispute between BP and its partners in TNK-BP, the AAR consortium.

­In a statement released on Tuesday Rosneft confirmed it had commenced a buyback of its shares and repurchase of company stock by top management

“The initial volume of the buyback program will total $100 million-$200 million in the coming months. The purchase of shares worth $104 million by the company RN-Development LLC on April 13 was the first step in this program's implementation. The  president and two members of Rosneft's management also announced the purchase of $27 million worth of the company's shares on Tuesday. These purchases reflect the Rosneft management’s confidence that the company is significantly undervalued on the market and has good growth prospects.”

Rosneft subsidiary, RN-Development, has acquired 11.3 million shares on the stock market, increasing its stake to 9.53% from 9.42%.

In January, BP and Rosneft announced the creation of a global strategic alliance based on a mutual exchange of shares and partnership in Arctic-shelf operations. Rosneft is to get 5% of BP in exchange for almost 9.5% of its own stock.

At that moment, however, Rosneft had only 9.4% of its own shares available and RN-Development's share holding could be used in the swap. The Rosneft share price at the close of trading last Wednesday, would make the deal worth almost 3 billion roubles.

The AAR consortium, a co-owner in TNK-BP charged the agreement between BP and Rosneft violated the TNK-BP shareholders agreement, arguing that it was the vehicle which had right of first refusal on BP activities in Russia, and took the matter to court. Last week, Rosneft and BP agreed to extend the swap timeframe until May 16.

Oleg Maximov, Alex Fak, and Valery Nesterov, analysts at Troika Dialog, believe the buyback is a move to arrange the share swap rather than increase company capitalization

“Rosneft yesterday said that its subsidiary, which bought some $104 million worth of shares last week – reportedly for the BP share swap – will continue buying stock on the open market, "initially" to the tune of another $100 million or more. A buyback of this size is immaterial unless the program expands significantly. As it is, the forthcoming purchases may simply be an exercise to gather more shares ahead of a potential deal with BP.”

Dmitry Adamidov, Deputy Head of analysis at InvestCafe also sees the move as linked to the BP deal.

“The decision to buyback shares on the stock market is part of BP Rosneft share swap in order to create a joint venture for arctic shelf development. Rosneft initiated a buyback to acquire the outstanding amount of shares and proceed on the finalization of the deal. Probably, the disagreement between BP and TNK-BP is close to being squared away, meaning Rosneft accelerated the buyback process.  However, Rosneft is not involved in the dispute and is acting in its own interests according to company strategy. As of today, Rosneft share price traded at 253 roubles per share on the back of oil prices reaching $122 per barrel. Despite the high cost of Rosneft shares being unfavorable for a buyback process the company is expected to fulfill its plans on buyback.”

Adamidov added that the BP Rosneft deal is rapidly reaching finalization, adding that the claims by AAR about wanting to participate in the joint venture with Rosneft are specious, and that having TNK-BP in instead of BP offers Rosneft little advantage.

"TNK-BP claims on the BP Rosneft deal lead to two possible outcome, both revolving around money issues.  Either BP decides to purchase the AAR stake in TNK-BP to obtain an absolute control of the company, or payment for violation of interests to TNK-BP shareholders. However if the deal is disrupted the Federal Anti Monopoly service (FAS) FAS may conduct investigation to sue one side.  The ridiculous thing is that TNK-BP can’t actually participate in Arctic exploration and knows this. It has no experience and no technological capacity to run exploration, and above all it can not be taken in as an investor in that project overriding the advantages of having BP in. BP is a strategic partner for Rosneft because it is one of the operating leaders in Europe and has already succeeded on Russian fields. Cooperation with other oil giants, Shell for instance, does not fit into both company and country interests.”