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Yukos-Sibneft to rival majors

YUKOS and Sibneft have agreed in principle to merge. The deal, announced last month, would create the country's largest oil and gas company and the world's fourth-largest privately owned oil producer.

YukosSibneft Oil will have an estimated market value of $35bn. Its reserves will amount to about 19.4bn barrels of oil equivalent (based on end-2001 data). Crude oil production will amount to around 2.3m barrels a day (b/d) - including Sibneft's share of Slavneft.

Yukos' chairman and chief executive, Mikhail Khodorkovsky, will run the new company, which will be the largest on the Russian stock exchange. Sibneft's president, Eugene Shvidler, will be chairman.

Khodorkovsky says YukosSibneft will be an industrial giant with huge industrial and financial potential and that it will become a leader of the global energy market.

Shvidler says the link-up creates a new super-major that will enhance value to its shareholders and better serve its millions of customers.

Sibneft shareholders will sell a 20% stake for $3bn in cash and subsequently exchange their remaining shareholding in Sibneft at a ratio of 0.36125% of YukosSibneft for each 1% shareholding in Sibneft. YukosSibneft will then make a fair offer to minority shareholders of Sibneft, based on advice from an internationally recognised investment bank.

Yukos says that before the deal is concluded it wants to increase its financial leverage and is, therefore, considering cash distributions to its shareholders in the form of dividends and share buybacks. It is expected that after this capital restructuring and the completion of the transaction the new company will have a moderate level of leverage and a strong working capital position. The merger is due for completion by the end of this year, subject to usual conditions.

The new company will have proved oil reserves of 18.4bn barrels and gas reserves totalling 5.9 trillion cubic feet. The combined crude production of 2.3m b/d will be the largest in Russia accounting for 29% of total production. YukosSibneft will operate six major refineries in Omsk, Achinsk, Angarsk and three in Samara, as well as the Mazeikiu Nafta complex in Lithuania, and an increased interest in the Moscow and Yaroslavl refineries in Russia, and Mozyr in Belarus. Refining capacity will be 1.2m b/d, based on 2002 figures, and the new company will be the largest retailer in Russia, with over 2,500 filling stations.

Colin Lothian, a consultant at Wood Mackenzie, says the deal is a good move for both companies - it enables them to consolidate their positions within Russia, taking them to first place in terms of production and reserves. They are way beyond Lukoil and, with the synergies they can expect from reducing operational costs and asset restructuring, they will become very strong. This merger puts them up with the big boys and turns them into a major overnight. 

The announcement follows months of speculation about further consolidation in the oil and gas sector. More merger activity has been widely expected, following the amalgamation of BP's Russian interests and Tyumen Oil's (TNK) assets. Many expected non-Russian companies to be involved in further consolidation. Some say Yukos' acquisition of Sibneft has put paid to further large-scale international mergers in the country.

According to Adam Landes, an oil and gas analyst at Renaissance Capital, the Moscow-based investment bank, the merger has effectively blocked any ambitions the international super-majors may have had for acquiring significant Russian assets. He adds that although the new company will become one of the world's largest oil and gas firms, it will have little immediate impact on the sector outside Russia.

Vladimir Lechtman, a Russian energy lawyer at Jones Day, in Washington, who was involved in the BP deal, says the YukosSibneft merger represents an important step in the transformation of Russian oil firms into international oil majors, as their market capitalisation starts to match their reserves. He also says this will increase the likelihood of an equity deal between the newly merged company and an international oil major.

Earlier this year, BP merged its interests in Russia with the Alfa Group and Access-Renova to create the country's third biggest oil and gas company - TNK-BP. The new company incorporates Russian producers TNK and Sidanco, which, between them, produce around 1.2m b/d of oil. TNK-BP owns significant exploration interests in Siberia and Sakhalin, together with a major downstream business that includes interests in five refineries and a retail network of more than 2,100 sites in Russia and Ukraine.

Last month, the US' Marathon Oil said it is planning to merge with Khanty Mansiysk Oil (KMOC), a privately owned, US-domiciled company focused on oil production in Russia, where it is developing nine oilfields in western Siberia. The purchase price for the transaction is $275m. The deal is subject to the approval of KMOC stockholders, Enterprise Oil Overseas Holdings and Enterprise Oil Exploration, both part of Royal Dutch/Shell, which own around 45% of outstanding KMOC common stock between them.

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