The board of Russia's 75% state-owned oil and gas firm Rosneft, which has significant representation in MSCI Russia Capped Index Fund ETF (ERUS), has given its approval to the deal between TNK-BP and Rosneft in a cash and equity-swap arrangement where Rosneft will acquire a 50% stake in TNK-BP and BP (NYSE:BP) will control 18.5% of Rosneft. In the cash part of the deal BP will get $12.3 billion US to help then deal with the final bit of their liability over the Deepwater Horizons catastrophe in the Gulf of Mexico. There are still a number of regulatory hurdles to jump over but Russian approval was seen by analysts as the most difficult to acquire. Getting those approvals from countries like Brazil will likely take until the end of the 1st half of 2013. But once completed this deal could create the world's biggest listed oil company with a potential daily output of 4.6 million barrels of oil equivalent ahead of Exxon Mobil (XOM) whose output stands at 4.2 million.
Although it looks like the deal is going to tighten Russia's grip over its oil supplies but the Deputy Prime Minister Arkady Dvorkovich has reminded the world yet again that Rosneft will be privatized in 2018 and the government would reduce its stake to less than a controlling interest. Similarly, the current deal will increase BP's stake in Rosneft which seems to support that notion.
Interestingly, the ratings agencies seem confused as to the assessment of Rosneft's credit ratings following the deal. Both Fitch and Moody's (MCO) have warned about a possible downgrade while Standard & Poor's has said that it could upgrade the ratings depending on the details of the deal.
Rosneft's most recent quarterly results have shown profits jump by 103% to $5.7 billion from just a 3.6% increase in revenue to $25.5 billion. On the other hand, the company has also recently entered into an agreement with Inter-RAO, a domestic government-owned energy company, to sell 875 billion cubic meters of gas from 2016 for the next 22 years. Similarly, gas giant Gazprom, Russia's only LNG producer and exporter and the supplier of a quarter of E.U.'s gas, is investing $2 billion to further enlarge its Belarus pipelines. Due to political problems, Gazprom wants to avoid the Ukraine route which has created problems for its major customer the European Union. Gazprom is the top holding of ERUS and MSCI Emerging Markets Eastern Europe Index ETF (ESR).
Rosneft % AUM
Gazprom % AUM
Energy Sector Weightage
In the meantime, Rosneft and Norway's Statoil (STO) are currently working on oil projects in the Russian Arctic Shell through a joint venture in four offshore areas. Rosneft is also working closely with ENI (E) and Exxon on developing oil and gas resources in the Arctic. Rosneft's President Ivanovich Sechin met recently with PetroVietnam (PVN) Chairman Phung Dinh in Russia in which the two companies mulled the idea of forming a joint venture to develop oil and gas in Russia. Right now, however, PetroVietnam has asked Rosneft to invest in Vietnam's offshore assets. Given that Vietnam is facing a longer-term collapse of their domestic crude oil production, this request by PVN is not surprising. Gazprom and PetroVietnam have already been collaborating on various oil and gas projects since September, 2000.
The global implications of these moves are that the trend of U.S. strategic multi-nationals, i.e. banking and oil, are pulling back - being forced back? - from the world stage while European interests become more aligned with the rising powers of Russia, China and their satellites, for lack of a better term. 2012 has seen Exxon-Mobil pulling back from central Asia and buying North American assets, while China continues to ink deals all across Africa and Asia. With China now trading oil directly in Yuan with an explicit guarantee of supply from Russia to make oil available this marks an important moment in the history of the petrodollar.
As an investor we are bullish on oil and gas simply from a demand perspective, looking at how rapidly things are changing even in dysfunctional economies like Vietnam, but within the industry it makes sense to hedge your bets geographically having access to all areas of downstream production.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.