In evaluating major international energy producers like Exxon Mobil (XOM) and BP (BP), I often have run across multiple deals these majors have cut with Rosneft (OTC:RNFTF). I paid minimal mind to the Russian energy producer until I noticed a news item announcing the signing of a cooperation agreement for implementation of offshore projects in Venezuela. A big Russian company getting involved in a big way in Latin America? And it has shares listed on the OTC? I definitely needed to look more closely.
Rosneft was originally established in 1993 as a state enterprise, then became an open joint stock company in 1995. From 2000-04, Rosneft increased its oil output from 98.56 million barrels to 148.26 million barrels and from 2004 to 2005, Rosneft acquired one of the largest producing enterprises in Russia and acquired a 25.94% stake in Verkhnechonskneftegaz. In July 2006, Rosneft conducted its international IPO, placing 15% of its shares on stocks in London and Moscow. The offering raised US$10.70. The company used the proceeds to go on a major asset spending spree in 2007 and in 2009. In 2010, two new fields with an estimated reserve of over 1.2 billion barrels were discovered in Siberia.
But it is not just a Russian producer, quoting from the Rosneft information page:
Rosneft is widely engaged in exploration and production across all key hydrocarbon regions of Russia: Western Siberia, Southern and Central Russia, Timan-Pechora, Eastern Siberia and the Far East. In addition, the Company participates in several exploration projects in Kazakhstan and Algeria. Rosneft's seven major refineries have convenient locations throughout the country, from the Black Sea coast to the Far East, and the Company's retail network covers 41 regions of the Russian Federation. Rosneft also owns 50% of Ruhr Oel GmbH, which holds stakes in four refineries in Germany.
Rosneft currently claims total proved hydrocarbon reserves of 22.8 billion barrels of oil equivalent with a proved reserve-to-production ratio of 25 years. Rosneft also has 12.5 billion barrels of oil equivalent of probable reserves and up to 10.5 billion barrels of oil equivalent of possible reserves.
In comparison to two international bigs which have partnered with Rosneft:
|Company||Reserves (billion barrels oil equivalent)|
Speaking of those partnerships, Rosneft and Exxon Mobil have several vast partnerships ongoing. The first includes joint work in the arctic, centered around the Kara Sea, Chupki Sea and Laptev Sea, additional programs to develop non-Arctic areas of the Kara Sea as well as farther south in the Baltic, while on land over a million acres in Eastern Siberian licenses are also under exploration. All told over 13 million sea acres and almost 2 million land acres are being developed by the two, with the ownership going 66.7% to Rosneft and 33.3% to Exxon Mobil. Exxon is ponying up the first $200 million in funding, with Rosneft and Exxon splitting the next $250 million tranche.
In March, BP sold out of its previous Rosneft deal, a joint venture titled TNK-BP. BP received $27.5 billion in cash from Rosneft and retained a 19.75% interest in the parent company. Thus they still have some ties and the possibility of additional work together in the future. Meanwhile Rosneft keeps a much greater share of the income from the old joint venture. Some analysts had been concerned about how Rosneft would finance the buyout. This was done in part by cutting pre-paid oil supply deals with oil traders Glencore International PLC (OTCPK:GLCNF) and Vital Group.
I plan to discuss the Rosneft share structure and financials in a moment, but first an additional word about Rosneft activities. Rosneft has currently 414 producing fields with an annual output of 870 million BOE and over 12 billion cubic meters of gas. In addition to the massive Russian areas, the company is in a number of early level exploration projects in Algeria, the UAE, and the earlier mentioned Venezuelan project. Early stages of these projects indicate over 220 million tonnes of oil equivalent within the fields.
Now to the basics. One reason Rosneft is a sleeping giant in that while you can buy the stock, trying to get information can be tough. For instance, most of the online reporting services has no information on dividend, and yet it pays a dividend yield of 4.8245%. The recent price was $8.05, trading near its 52-week low on a zone of $8.05-$9.22.
The share price:
Rosneft Stock Price OTC Grey Market; Source: Scottrade.
The five-year dividend growth is 58.69%, with the last dividend paid on May 7, 2013. The current P/E ratio is 6.4504. The next earnings announcement is scheduled for Aug. 1. The last announcement was staggering, with massive increases in production as Rosneft began to feel the benefits of receiving the full force of the TNK-BP. Results in Russian Rubles:
Operating and financial highlights
Q1 2013 Q4 2012 Change, % Q1 2013 Q1 2012 Change, % Operating results Hydrocarbon production, th. boepd 4,804 2,823 70.2% 4,804 2,634 82.4% Crude oil production, th. boepd 4,169 2,479 68.2% 4,169 2,408 73.1% Commercial gas production, th. boepd 635 344 84.6% 635 226 180.9% Refinery throughput, mln t 15.84 15.91 (0.4%) 15.84 15.54 1.9% Financial results, RUB bln Revenues and equity share in profits of associates and joint ventures 812 792 2.5% 812 759 7.0% EBITDA 156 145 7.6% 156 176 (11.4%) Net profit 102 62 64.5% 102 117 (12.8%) Capital expenditures 95 123 (22.8%) 95 120 (20.8%) Adjusted free cash flow 33** 13 153.8% 33** (45) -
*TNK-BP financial and operational results are incorporated into reporting from the acquisition date up to the end of the reporting period (11 days).
** Excluding one-off effect from receipts under long-term oil contracts of RUB 232 billion.
(Source, Rosneft 1Q2013 Earnings Announcement)
Revenues in Q1 2013 were up 2.5% at RUB 812 bln. Excluding acquisition impact, revenues decreased by 3.7% in comparison with Q4 2012 to RUB 763 bln, largely due to a seasonal decrease in sales volumes of petroleum products, determined by market dynamics, which was partially compensated by an increase of crude oil sales.
The worrisome part is the working capital of the company. Rosneft last reported in their 2013 Q1 statement of holding 1.1 trillion Rubles in cash, cash equivalents and other current assets ($33 billion) vs. 973 billion current liabilities ($30.4 billion), which is not going to make anyone particularly comfortable. Cash flow is increasing nicely, but the story for Rosneft has never been the oil assets, but the financial wherewithal to develop and unlock those assets. The agreement with Exxon Mobil goes a long way for the company to monetize their licenses with minimal risk. Still it is like a boa constrictor that ate a horse. It will eventually go down, but it might be slow. and bit ugly and painful in the process.
Going on now to the unique share system of Rosneft. Companies operating in places like Russia and China, where the governments own a significant share, always make me wary, as they often swing to the will of the government in power. The state holds 69.50% in the company (through OJSC ROSNEFTEGAZ), while approximately 10% of shares are in free-float.
Shareholder Structure: Rosneft Shareholders with Equity Stakes Exceeding 1%, as of July 1, 2013
|Number of Shares||Equity Stake, %|
|OJSC ROSNEFTEGAZ (shareholder)||7,365,816,383||69.50|
|National Settlement Depository (nominal shareholder)||3,178,527,761||29.99|
|Other legal entities with stakes less than 1%||1,639,343||0.02|
|Russian Federation (through the Federal Agency for State Property Management)||1||less than 0.01|
Source: Rosneft Official Website.
Total amount of shares in nominal holding includes 1,960,449,797 shares owned by BP Russian Investments Limited that constitute 18.50% of Rosneft's registered capital. In addition, BP International Limited, the sole shareholder of BP Russian Investments Limited, is a legal owner of 132,450,300 global depository receipts, constituting 1.25% of Rosneft's registered capital.
Shares are mainly traded on the Russian MICEX market. In July 2006, Rosneft carried out listing of Global Depositary Receipts (GDRs) on the London Stock Exchange. These GDRs are available on the OTC. One GDR is equivalent to one common share of Rosneft. As of July 1, 2013, GDRs were issued for 959 million ordinary shares, which is 9.1% of total shares.
The plain fact of the matter is Rosneft has immense reserves, while the Exxon Mobil deal is opening a relatively painless door to develop and monetize those assets. This is not a sure thing, Rosneft's financial condition is thinner than ideal, plus it will be heavily impacted by Ruble-Dollar Forex swings. While the Russian government seems stable now, the company will be affected by any political or economic uncertainty.
Still, for long-term investors willing to look into the shadows, Rosneft offers itself at a P/E under 6.5 and a dividend above 4.8%, with outstanding long range potential for growth and monetization as it uses international partnerships to monetize its awesome resources. It looks like an outstanding buy.
Note: All currency values were calculated using the rate of 1 RUB = 0.0301198 USD.