Daily analyst comments

On April 4, the second auction was held to sell off Yukos assets. The lot included 20% in Gazprom Neft and Yukos gas assets (100% in Arcticgaz and 100% in Urengoil Inc.) and another 19 assets in the form of stakes and promissory notes in a number of companies. The starting price was Rub 144.776 bln ($5.56 bln) and the bid increment was Rub 260 mln ($10 mln).

The second Yukos liquidation auction was more intriguing than the first (a 9.44% stake in Rosneft was auctioned off and subsidiaries of Rosneft and TNK-BP placed bids). Neither Gazprom nor its subsidiaries directly participated in the second auction. Four bids were filed, from Enineftegaz (owned by Italian majors Eni (60%) and Enel (40%)), Unitex (Novatek), Trans-Nafta and Neftetradegroup (Rosneft). However, Trans-Nafta cancelled its bid before the auction got under way.

Competition for the lot turned out to be fierce and bids were hiked more than 26 times (9 times at the first auction). Novatek’s business structure was left behind at the level of Rub 146.336 bln ($5.62 bln) and main contenders were Rosneft and Enineftegaz. As a result, the latter which paid Rub 151.53 bln ($5.82 bln) or up 4.7% on the starting price was declared the winner.

Meanwhile, the media reported before the auction that Gazprom inked an option agreement with Italian majors Eni (oil and gas) and Enel (utilities) on the future acquisition of assets included in lot #2 of the auction to sell off Yukos shares in the event that Enineftegaz wins. A strategic partnership agreement between Gazprom and Eni provides for direct supplies of Russian gas on the Italian market effective 2007. Gazprom is expected to gain access to Eni’s production and/or distribution assets and Enel’s electricity generation assets. Meanwhile, Gazprom reported in late March that Italian O&G major Eni S.p.A. plans to announce that it gains access to Russian production assets.

According to Gazprom Deputy Chairman Alexander Medvedev, the gas company is interested in acquiring a 20% stake in Gazprom Neft from Eni and at least 51% in Arcticgaz and Urengoil Inc and the option could be executed in the coming days. Thus, Gazprom will most likely acquire a 20% stake in Gazprom Neft (the gas company currently owns nearly 72.6%). As of Tuesday’s close, the value of this stake on MICEX amounted to nearly Rub 102.15 bln ($3.9 bln).

The media reported previously that the Roseco consortium of appraisers valued the market price of 20% in Gazprom Neft at Rub 111.34 bln ($4.29 bln at the current rate), i.e. Gazprom Neft shares accounted for 76.9% of the value of the lot. The remaining assets could be assigned to Arcticgaz and Urengoil. Based on this proportion, we can assume that Gazprom Neft shares account for Rub 116.53 bln ($4.48 bln) of the overall value of the second lot (Rub 151.36 bln ($5.82 bln)). Thus, we can provisionally estimate the premium paid by Enineftegaz for acquisition of a 20% stake in Gazprom Neft at the auction as nearly 14% to the market.

According to Eni’s press release, the company will sell Gazprom a 20% equity position in Gazprom Neft for $3.7 bln plus expenses to finance and execute the transaction. In addition, Eni reported that the option to sell Gazprom 51% in Yukos assets (Arktikgaz, Urengoil and Neftegazgeologia) is valid for two years and in the event they are sold, Eni, Enel and Gazprom will manage these assets via a JV.

Thus, Gazprom will receive a 20% stake in Gazprom Neft at a minor discount to the market (around 5%) and as part of its investment program to buy out this stake ($3.75 bln). This is a positive for Gazprom and an unexpected result, taking into account the initial price of the stake which envisaged a premium to the market and the fact that the selling price exceeded the starting level. As for investments in gas assets, according to Gazprom’s spokespersons, their price is in line with the market and makes it possible to expect that investments will be recouped. For Gazprom Neft’s minority shareholders, consolidation of around 95% by Gazprom means a certain rise in corporate governance risks, including the prospects of a mandatory share buyout.