OPINION: The way the wind is blowing Yuganskneftegaz

Contributed by Adam Landes, oil and gas analyst at Renaissance Capital

Russian Deputy Economic Development & Trade Minister Andrei Sharonov warned yesterday, at a press briefing, that if money raised from selling Yuganskneftegaz only managed to cover tax debts through 2001, risks would remain relating to the 2002 and 2003 tax claims that Yukos faces, which are still to be formalized.

This basically implied a continuing risk of quasi-bankruptcy for mini-Yukos, ex Yuganskneftegaz. Later in the day, Mr. Sharonov reportedly said that Gazprom could bid at the Yuganskneftegaz auction, through one of its affiliates. Interfax later added that Germany's E.ON might be involved in any Gazprom-sponsored bid, although it cited an unidentified source. E.ON would not comment on the matter. We would be very surprised to see E.ON, or any other foreign investor for that matter, as a front line participant in the auction. E.ON could conceivably get involved subsequently, as a second line buyer from Gazprom, which would have to find funding from somewhere.

In any event, Mr. Sharonov's comments were significant, we believe. That anyone in German Gref's supposedly reform-minded team (which has in recent memory moaned about Gazprom's empire building, in electricity, for example) should say that Gazprom might indeed bid for Yuganskneftegaz signals the way the wind is blowing. However, his comments are not that surprising, really. The state has evidently begun a new assault on Menatep, and pressure will likely mount in the coming days. All sorts of threats, from all sorts of quarters, might be made, mirroring the prior fits and starts pattern observed during the whole Yukos saga.

We still believe that the government would be best served by having no one bid at the auction for Yuganskneftegaz, and basically take the asset in exchange for Yukos' tax debts. This would certainly help to (partly) dispossess Menatep. A second phase of this would happen via the personal cases against Mikhail Khodorkovsky and Platon Lebedev. It would 'legitimize' a low sale price for Yuganskneftegaz. It would give the administration most flexibility going forward, to put Yuganskneftegaz into Gazprom-Rosneft, or to sell it to Surgutneftegaz or a foreign company, all at a later, full price. It could also re-inject Yuganskneftegaz into mini-Yukos, to gain outright control. Finally, it would be the outcome that, to the best extent possible, preserves minority investors' property.

Setting a ludicrously high deposit for the auction and suggesting that Gazprom, alongside a powerful ally, could mount the killer bid, is bound to put off other would-be participants, in our opinion. Comments made by Surgutneftegaz General Director Vladimir Bogdanov Tuesday, in which he said that the company was not at this stage considering buying any Yukos assets, would seem to vindicate this view. However, he did add that the question was not being considered because no assets were for sale as yet.

Anyhow, the news helped Gazprom, which rallied on the prospect of picking up an asset cheaply that happens to be rather complementary to the cash-hungry Rosneft (see more on Gazprom in a later email). The news, however, seemed potentially bad for Surgutneftegaz, which has rallied strongly in recent weeks on hopes that it could land Yuganskneftegaz. Arguably, Surgutneftegaz' share price now reflects much hope of victory, in our view. We saw the news as neutral for Yukos given where matters already stood, but the market evidently disliked all the stage management around the mooted sale of Yuganskneftegaz. Even so, with Yukos' 34.5 position in Sibneft alone worth U.S. $2.77/share, Yukos' share price does not convey the impression that the market is expecting much else.

A bunch of other Yukos-related news went largely ignored yesterday. This included comments from Russia's Industry & Energy Minister Viktor Khristenko indicating that the planned sale of Yuganskneftegaz would not disrupt crude production. He added that the owner of the unit is not a critical factor affecting its output. Technically speaking, this might be correct, but the prior experiment in disrupting integrated value chains, in the early 1990s, had calamitous effects of production. Elsewhere, further reports that Yukos would engage J.P. Morgan to value Yuganskneftegaz, presumably to support efforts to stall, or block the sale of the unit, and a credit downgrade by Moody's barely registered. Finally, newswires reported Tuesday that Russia's Tax Ministry had appealed the October 11 Moscow Arbitration Court ruling that had found in its favour in respect of 2001 tax fines and penalties claimed against Yukos, yet had reduced the Tax Ministry's original claim by 1.5 billion rubles, or around 3%, to 39.1 billion rubles. As was the case with the prior 2000 case, we believe that the appeal, if ruled on quickly, makes the claim enforceable. Although this would seem to add to Yukos' woes, it does not. It would actually make the amount of formalized tax claims that could be recovered via the sale of Yuganskneftegaz a larger, and therefore more palatable, sum.

(From Prime Tass 20.10.2004)