OREANDA-NEWS. February 16, 2010. Sistema reportedly filed for approval to buy up to 49% of Russneft, reported the press-centre of OTKRITIE Financial Corporation.     

View: Russneft is mid-sized integrated Russian oil company, which controls more than 20 small exploration and production (E&P) subsidiaries and two refineries located in the south of Russia—Orsk and Krasnodar. In 2009, Russneft produced 12.69MMt (254MBD) of crude, only 4% more than Bashneft. Russneft controls 1.25bn BOE of proved reserves (Bashneft has 2.2bn BOE). Unlike Bashneft, however, Russneft had a non-consolidated net debt of approximately US5.6bn at the end of September 2009, according to its RAS accounts.

Given that Bashneft essentially has no debt and its current Market cap is US 5.4bn, Russneft’s implied equity value should effectively be close to zero. This puts into persepective recent press reports that Mr. Gutseriyev acquired a 100% of Russneft from a group of companies controlled by fellow businessman Oleg Deripaska, a deal without a cash consideration in which he assumed a proportion of their debt. We believe there may be synergies between Bashneft and Russneft, and the merger would leave the combined company more balanced in terms of upstream and downstream assets.

Action: While Sistema shares have already strengthened on the news, we still see a significant discount to NAV and thus a further strengthening should not be ruled out.