LUKOIL Could Participate in Brazil Oil and Gas Projects

By Lada Ponomareva, April 24, 2013

WEB EXCLUSIVE, Moscow. Russian oil company LUKOIL could acquire a 40 percent share of Brazilian oil producer OGX Petroleo&Gas Participacoes. LUKOIL is currently auditing OGX, according to Bloomberg, who cites Brazilian newspaper Folha de S.Paulo. The the deal, estimated at a $1 billion value, is expected to close in May. Gazeta.ru website, citing a source close to the Russian company, writes that the deal involves LUKOIL's participation in OGX projects, not necessarily the sale of shares of the Brazilian company. "A corporate takeover won't happen. We are talking about the possible entry of LUKOIL into one of OGX's projects," the source told Gazeta.ru. According to the source, the companies have not yet decided in which specific OGX project LUKOIL could participate.

OGX said Folha de S.Paulo's report regarding the deal was "unreasonable" in an e-mail response to a Bloomberg inquiry, and LUKOIL's press secretary Vladimir Semakov declined to comment on the negotiations.

Analysts from VTB Capital said that the deal between the Russian and Brazilian companies could have a negative effect on LUKOIL. "Taking into consideration the size of OGX's market capitalization, the cost of the deal could reach $1 billion, which presupposes future production value of $0.38 per barrel of oil produced. Compared to other Russian companies (whose value per barrel of EV/2P is $3.1), $.38 seems low, although this value could be justified by the high operational risks of developing these fields," VTB Capital said. "The effect on the long-term market value of LUKOIL will depend on the value of the deal, although we believe with high certainty that the acquisition could negatively effect the company's share value. LUKOIL's future overseas production expansion could damage the company's share value. The market reacted along these lines after news broke of the potential deal. LUKOIL share prices fell by 1.15 percent, while share prices on the RTS index fell by 0.5 percent. If the deal goes through, pressure on the company's share prices will increase," according to VTB Capital.

Yet, Andrey Polishchuk, analyst at Raiffeisen Bank, believes that LUKOIL's participation in OGX projects could help the company assess the overall volume of recoverable oil and gas reserves in Brazil, Gazeta.ru reports. Considering the fact that LUKOIL's production volumes have steadily declined over the past several years, the company could profit from acquiring new resources outside of Russia, particularly since it is becoming more difficult for private oil companies to obtain development licenses in Russia.

LUKOIL is actively fighting against declining production rates, focusing a bulk of its capital expenditures on acquiring new fields. The company acquired the Imilorskoye field for 50.8 billion rubles ($1.6 billion) last year, which was double the starting price. And in April 2013, LUKOIL bought Samara-Nafta for $2.05 billion, outbidding other companies like Gazprom Neft, Russneft, Bashneft, and others. Industry analysts believe that LUKOIL overpaid for both of these acquisitions.

According to Polishchuk, LUKOIL's acquisition of foreign assets is beneficial for the company's reserves and production growth rates, although this involves some economic and political risks.