Seadrill: Perspective From Russia - Part 6

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Rosneft's application for the money from the National Wealth Fund went from the Ministry of Energy to the Ministry of Economic Development.

Meanwhile, the Russian ruble continued to fall, but the dollar amount of the National Wealth Fund remained stable.

The government decided to sell 19.5% of Rosneft.

In my latest article on this topic, I discussed how Seadrill's (NYSE: SDRL) partner Rosneft (OTC:RNFTF) battled for the resources of the Russian National Wealth Fund. North Atlantic Drilling's (NYSE: NADL) $4.2 billion contract is very important for Seadrill in the light of falling oil prices. Falling oil prices will surely trigger spending cuts in oil companies, and it would be harder for Seadrill to replace the deal with Rosneft in such circumstances. In this article, I want to address the topic of the rapid devaluation of the Russian currency, the ruble, and how this devaluation affects Rosneft's ability to fund the contract with North Atlantic Drilling.

The ruble's devaluation was fast and severe amid economic problems, sanctions and the drop of oil prices. This summer, the exchange rate was 35 RUB for one dollar. As I'm writing this article, the exchange rate is 53 RUB for one dollar. Initially, Rosneft requested more than 2 trillion rubles from the National Wealth Fund. This request met certain obstacles, and it's possible that Rosneft's request would not be satisfied in full. However, the rapid devaluation of the ruble actually increased the total amount of money (in rubles) in the National Wealth Fund. The latest data (please note that the link is in Russian) from the Russian Ministry of Finance shows that the National Wealth Fund decreased from $83.2 billion in October to $81.74 billion in November. Meanwhile, the fund increased from 3.28 trillion RUB to 3.55 trillion RUB because of devaluation. At the same time, Rosneft's request is on a lengthy trip through the corridors of the Russian government. On November 28, the Russian Ministry of Energy sent (please note that the link is in Russian) Rosneft's application to the Russian Ministry of Economic Development. The Ministry of Economic Development stated that it got the request for financing of four projects and that it was currently evaluating the request. The Ministry of Economic Development did not clarify neither which projects are in the application nor the total sum of the application.

In my view, the devaluation of ruble does not decrease Rosneft's ability to get money from the National Wealth Fund. As I've stated before, the dollar amount of the fund is stable. However, there is another risk to consider - increased competition. The National Wealth Fund is a big pie, and everyone wants a piece of this pie. What's more, there is a number of Russian companies whose debt is denominated in dollars but whose revenue is in rubles. For them, the rapid devaluation of the ruble is a hard blow, and they tend to ask for governmental support.

There is another thing to consider. In search for funds, Russian government decided to sell 19.5% of Rosneft. On this deal, the government plans to get $8.5 billion. Most likely, this money will go to the national budget rather than to Rosneft. It's also worth noting that Rosneft has (please note that the link is in Russian) a relatively high debt - $47.3 billion. Out of this debt, $20 billion are current obligations. In this light, Rosneft needs governmental support for its projects, and its ability to get this support could be crucial for the deal with North Atlantic Drilling.

To sum it up, there are three main unknowns in this story. First, how much money would Rosneft get from the National Wealth Fund? Second, what are the four projects that are in Rosneft's application? Third, what would be in Rosneft's updated plan on the development of the Artic, which should be published at the end of this year? Given the amount of unknowns, the tough situation in the oil market and the bad situation in Russian economy, I have to admit that the risks for the North Atlantic Drilling's deal have increased.

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