Analysts say ExxonMobil has inside track for YukosSibneft takeover

As rumours continue to circulate concerning a possible takeover of Russia's YukosSibneft, analysts say ExxonMobil is better positioned than ChevronTexaco to consummate such a massive financial transaction. The rumours centre around the possibility that either ExxonMobil or ChevronTexaco might be looking to take a majority stake in YukosSibneft.
The Russian energy company is estimated to be valued at more than $ 50 bn, while ExxonMobil is valued at more than $ 250 bn.

But Russia is worried about YukosSibneft, considered the crown jewel of the Russian energy industry, with oil and natural gas production of 2.35 mm bpd, making it the world's fourth largest private sector oil producer.
"There are negotiations that are ongoing. Both ExxonMobil and ChevronTexaco have taken a clear interest YukosSibneft," said Tyler Dann, senior oil analyst for Banc of America Securities in Houston. "In terms of scenarios, the biggest issue is going to be control. Can one of the US majors achieve operational control, can they have control over management decisions, and can they dictate strategy? I suspect ExxonMobil would insist on well over 50 % ownership within the next few years."

There are indications that momentum might be building in talks between YukosSibneft and ExxonMobil. YukosSibneft chairman Mikhail Khodorkovsky is scheduled to visit the US and deliver the keynote address to the US-Russia Business Council.
While Russian President Vladimir Putin recently confirmed that ExxonMobil is in talks with YukosSibneft about taking a major stake in the company, it is still unclear whether Khodorkovsky and his board would be comfortable with ceding that amount of control.
"There's an element of support for the deal as expressed by Putin, but obstacles remain as long as there are no private export pipelines in Russia," said Julia Nanay, senior director of PFC Energy, a Washington, DC-based consulting firm and an expert on Eurasian energy issues.

Lee Raymond, ExxonMobil's president, was said to have held talks with Russian Prime Minister Mikhail Kasyanov. A report said there does not appear to be political opposition within the Putin government to a possible deal between the two companies. ExxonMobil apparently is offering to pay $ 25 bn for a 40 % stake in YukosSibneft.
"A deal could happen at any time, but there are still some steps that need to take place," Dann said. "One key is the personal involvement of Putin and his staff in the deal. I would expect there would need to be more meetings before a deal of this size is sealed." Nanay said putting together a deal of this size, value, and complexity would take some time, and she couldn't imagine it being concluded before "next year, at the earliest."

Any US energy major would have to closely weigh the risks and opportunities of entering into such a huge merger transaction, but analysts say ExxonMobil is better positioned than ChevronTexaco to conclude a deal of this magnitude.
"If any American company is ready to make such a massive investment, then ExxonMobil has deeper pockets," Nanay said. "In terms of which balance sheet would be able to handle a transaction of this magnitude, ExxonMobil is better financially positioned," said Dann, adding, "ChevronTexaco has a smaller capital base and higher debt-to-capital percentage than ExxonMobil."

And it's not just financial and operational issues that need to be considered; any deal would clearly involve the Russian president, and could have a major influence of one powerful Russian oil oligarch.
"Putin has two major issues to resolve. One, what would the ramifications be of allowing Russia to sell off one of the country's most valuable corporate assets? And two, by allowing the oligarchs to sell he would be bolstering them, while potentially minimizing his own power and influence," Nanay said, adding that if a deal was to be concluded, it would make Mikhail Khodorkovsky a major shareholder in a US-based multinational energy company, and an even richer man than he is today.

The political dynamics of any deal within Russia should not be discounted ahead of parliamentary elections in December. Many within Russia have criticized the massive amount of power and influence, which oligarchs like Khodorkovsky have amassed in recent years.
"Khodorkovsky would see a deal with a major US company as a crowning achievement and closing a deal with one of the US majors would make him a very rich man ahead of his retirement in 2007," Nanay said, adding, "would Putin like to see him amass that much money and power?"
And while there are questions whether Khodorkovsky would want to give up control of YukosSibneft, Dann believes a deal could be concluded for the right price. "The fact that the oligarchs seem to be willing to give up some interest in their companies for a premium is now opening up the game," Dann said.

But while a possible deal is being discussed widely throughout the industry, both companies flatly deny talks are under way.
"For some time we have expressed interest in future investments in Russia, and have been involved in a number of discussions regarding potential opportunities over the past several years, including opportunities with Yukos. However it is our practice not to comment or speculate on specific future business decisions," said Tom Cirigliano, an ExxonMobil spokesman.
"ChevronTexaco has a long-standing policy not to comment on stories or queries involving rumour or speculation concerning mergers, acquisitions, or divestitures of ChevronTexaco assets," said Maripat Sexton, a ChevronTexaco spokesperson.

But analysts indicate that now that the YukosSibneft merger has concluded, the US majors are taking a close look at how Russia fits into their future portfolios.
"I believe all of the majors are thoroughly analysing how Russia fits into their portfolio. The reason this has happened is because with the [TNK-BP] transaction, the whole issue of taking interest in Russia has come to the forefront," Dann said. "Ultimately companies are going to be willing to take on large risks in places like Russia to realize the huge potential gains, it's just not clear that this will happen very quickly," said Nanay.

Dann said both ExxonMobil or ChevronTexaco would require a rigorous due diligence process. He said the companies would explore if there are "any skeletons in the closet," including whether there would be any legal, tax, or environmental pitfalls in a deal. Dann added that ownership of export pipeline capacity is a major issue, and there are also the complications of regulation, deregulation, and divestiture of assets in any deal with YukosSibneft.
Nanay said ExxonMobil has its own problems already in Russia with its Sakhalin project. She said it still has yet to be decided where a still yet-to-be-constructed pipeline will be built, adding it may go to Japan, and there is also the possibility it may go through Russia to China. She said ExxonMobil would look at the deal very closely before taking on any undue risks.

"ExxonMobil is already one of the largest investors in Russia as operator of the $ 12 bn Sakhalin-1 project. Construction and drilling are under way on this oil and gas production project. First oil is anticipated by yearend 2005. A total of 5.2 bn barrel is expected ultimately to be developed," Cirigliano said.
If a deal is concluded between ExxonMobil and YukosSibneft, it would be the biggest energy deal since Exxon's takeover of Mobil. in November 1999, and would mark the largest equity investment by a western energy company in Russia.