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Russneft polishes up

Moscow's first energy IPO since sanctions puts the company on a solid footing – but may make it a target

Russneft, Russia's seventh-largest oil producer, is expected to consolidate the energy assets of its main shareholder's family following November's $0.5bn initial public offering (IPO). The tidying up of the firm's interests may, however, now put it on Rosneft's radar, the acquisitive state-controlled firm.

Russneft, which has a diversified portfolio of assets located in the Volga region, Western and Central Siberia and Azerbaijan, will now seek to consolidate other assets belonging to its main shareholder, Mikhail Gutseriev. Apart from Russneft, billionaire Gutseriev and his affiliates own Neftisa, an oil producer based in the Perm region; GMC Global Energy, a UK-based potash producer, and ForteInvest, a Moscow-based firm involved in oil refining and sales of petroleum products.

Mikhail Shishkhanov, a co-owner of Russneft and Gutseriev's nephew, told local press that he expects the consolidation of the additional assets to take place within a year. "The assets are somewhat scattered but they should be consolidated on the basis of a transparent public company, which will provide huge synergies in the future," he said.

Consolidating its assets with other Gutseriev entities will boost Russneft's output to 9.3m tonnes a year (about 190,000 b/d) of oil, up from 7.4m t/y. Its recoverable resources will also increase to 0.595bn tonnes (about 4.4bn barrels), up from 0.55bn tonnes, according to the company.

Russneft's output could rise from 7.4m t/y to 9.3m t/y

Russneft prepared for the listing by slashing its debt more than threefold to $1.3bn, from $5.3bn in October 2015. It is a quarter owned by Swiss trader Glencore, which didn't participate in the IPO, and has said it will continue to reduce its debt load.

The Moscow listing was the first IPO of a Russian energy company since sanctions were imposed against the country by the US and EU. But it had no international dimension. The transaction's bookrunners, coordinators and brokers were all Russian, while bankers suggested that all the investors were Russian institutions and individuals.

The sale of a 25% stake in the IPO, which values Russneft at R161.8bn rubles ($2.7bn), signifies a remarkable turnaround for Gutseriev, who lost the company after fleeing Moscow in mysterious circumstances almost a decade ago.

In April 2010, the criminal case against him was suddenly dropped and Gutseriev regained control of Russneft three years later - albeit with a $7bn debt load. Analysts suggested the billionaire's rehabilitation may have been linked to his role in calming tensions in Ingushetia, in the North Caucasus region, which has been dogged by near-daily Islamist rebel incidents.

Amid the oil-price slump of the past two years, Russneft struck comparative gold, earning $0.7bn by hedging its crude price, supposedly at the insistence of Sberbank boss Herman Gref. Gutseriev had signed a hedging contract with the state-run lender in late 2014. "Gutseriev owed Sberbank a lot, and Gref basically told him to hedge for 2015," an anonymous source told business daily Vedomosti.

The windfall was used to pay down Russneft debt and as a war chest for the acquisition of new assets. Gutseriev now plans to more than double production, to about 20m t/y. Such a level would make its output comparable to that of Bashneft, Russia's fifth-largest producer - and may well put Russneft on Rosneft's radar and its asset-hungry board.

Bashneft is now functioning as a Rosneft subsidiary after it was acquired for $5bn in a so-called privatisation in October, in which one state-controlled firm bought assets from another state-controlled firm. Should Rosneft, led by President Vladimir Putin's energy supremo Igor Sechin, wish to add Russneft to its stable, don't bet against a deal.

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