Foreign investment bonanza fuels boom

Global Finance, Jun 2002 by Norton, Guy

With wells gushing cheap oil, Russia's oil companies are turning to the West for investment.

There has arguably never been a better time to be a Russian oil company. A combination of political and economic factors has produced a near-ideal funding environment for Russian oil companies, leading to a massive increase in the number of firms seeking capital abroad.

That's a far cry from the dark days following August 17 1998 when the ruble was devalued and the Russian government defaulted on $40 billion of debt and announced a 90-day moratorium on $4 billion of commercial debt-effectively choking off offshore funds for the country's capital-intensive oil industry.

Less than four years later the international bond, equity and loan markets are once again open to Russian oil companies, which have been among the prime beneficiaries of the rehabilitation of Russia in the global financial community since the accession of Vladimir Putin to the Russian presidency in 2000.

"Vladimir Putin has stabilized the Russian economy since he came to power," says Howard Cooper, president and chief executive of Teton Petroleum, a Steamboat Springs, Colorado-based oil and gas exploration and production company operating in Russia.

He adds that following the September 11 terrorist attacks there has been a huge rise in the geo-political significance of Russian off. "People realize that right now for the United States to have a continuous source of oil, it needs to get it from Russia," he says. Cooper points out that political and economic problems in the Middle East, Latin America, Southeast Asia and Africa have all helped to highlight the position of Russia as a reliable source of oil and an alternative to exports from OPEC. What's more, he adds, unlike in many other emerging market countries, the Russian oil industry is largely in private hands, making it less vulnerable to government interference than the state-owned firms in the Middle East and South America.

The growing importance of Russian oil was demonstrated in April when BP agreed to pay $375 million to increase its stake in Russian oil company Sidanco from 10% to 25%. John Browne, group chief executive of BP, said the share purchase underlined BP's confidence in Russia and its improving business environment. "BP's participation in Sidanco will help to increase the value of the company," says Alex Knaster, general director of Sidanco. He adds: "BP under John Browne is seen as a visionary company, and its participation in Sidanco will make people sit up and notice the Russian oil industry. I am sure it will act as a catalyst for further acquisitions."

As a result of the improving finances of the Russian oil industry, the syndicated loan markets have reopened to Russia, and there has been a resurgence in borrowing by Russian oil companies. A growing appetite among bank lenders has meant that firms have been able to increase both the size and tenor of the loans they are able to secure.

For example, HypoVereinsbank and BNP Paribas are currently arranging a $150 million three-year loan for Tyumen Oil-three times larger and twice as long as a $100 million 18-month facility it secured via ING in March 2001.

Peter Kennedy, global head of origination, syndications and new issues at Standard Bank London, says that according to the bank's own estimates the capex requirement of the Russian oil industry is in the region of $100 billion, meaning that there will be almost insatiable appetite for debt funding from Russian oil companies for the foreseeable future. He believes that the best Russian oil companies-those with US GAAP or IAS accounts and good corporate governance track records-will be able to secure longer-dated funding this year, with margins below the current 300 basis points over LIBOR benchmark. He adds that, given the political crises in the Middle East and South America,"Russia overall is seen as a relatively safe haven, and people are more relaxed about the risks attached to Russian oil companies than they were "As a result, Kennedy says, there will be a move toward less structured lending, with less onerous covenants attached to loan agreements.

Unsecured Financing Becomes More Available

Russian oil companies have also been able to secure unsecured financing in the international bond markets. State-owned oil company Rosneft kicked things off last year with a $150 million five-year bond and has since been followed by privately opened Sibneft, which launched a $400 million five-year issue this year. As Global Finance went to press,TNK was preparing a $500 million five-to-seven-year transaction. Rafael Biosse duPlan, co-head of emerging market debt origination at Citigroup/SSSB, says that at present Russian oil company eurobonds are principally sold to dedicated emerging market investors, but he expects that the improving economic backdrop for Russian oil firms will see their bonds increasingly snapped up by generalist global bond funds and oil fund specialists.

A similar trend has already occurred in the equity markets. Johnny Beveridge, head of equities at Renaissance Capital in London, says, "In the early part of this year we have seen significant inflows from global equity funds, with the selling of stocks in mature western oil companies in favor of Russian oil companies like Yukos and Surgut."