Glencore, Qatar Buy $11 Billion Stake in Russian State Oil Giant

Glencore, Qatar Buy $11 Billion Stake in Russian State Oil Giant
Commodity trader Glencore and Qatar's sovereign wealth fund agreed to buy a $11 billion stake in Russia's largest oil producer from the state.

(Bloomberg) -- Commodity trader Glencore Plc and Qatar’s sovereign wealth fund agreed to buy a 10.2-billion euro ($11 billion) stake in Russia’s largest oil producer from the state in a triumph for President Vladimir Putin over sanctions imposed by the West.

The surprise deal gives the buyers a 19.5 percent stake in Rosneft PJSC, which the U.S. and European Union have targeted with punitive measures, and is the biggest foreign investment in Russia since the crisis in Ukraine. It also marks a stunning return to deal-making for Glencore Chief Executive Officer Ivan Glasenberg a little more than a year after his company was forced to raise cash from shareholders.

Glencore said in a statement Wednesday it would commit 300 million euros in equity, with the rest coming from the Qatar Investment Authority -- itself Glencore’s largest shareholder -- and bank financing. Glencore said the deal was still in “final-stage negotiations” and would likely close in mid-December. The QIA declined to comment. Putin, who announced the deal on television with Rosneft Chief Executive Officer Igor Sechin, put the total deal value at 10.5 billion euros. It wasn’t immediately clear why the figures differ.

‘Santa Claus’

Bringing in buyers for Rosneft, especially a trader like Glencore, probably makes “Putin smile all the way to when Santa Claus comes around in Moscow,” Steen Jakobsen, the chief investment officer of Saxo Bank A/S, said on Bloomberg Television on Thursday. Putin “was under pressure because the privatization program in Russia has been very stale and it has been almost impossible to find them a deal partner.” 

Rosneft, which pumps almost 5 million barrels a day, held talks with more than 30 potential buyers from Europe, America, Asia and the Middle East, Sechin told Putin on state television. “The deal became possible only thanks to your personal contribution.”

The price was the “maximum possible with the minimum discount,” Sechin said. “One of the largest European banks” will provide financing, he added, without specifying which one.

Intesa Sanpaolo SpA agreed to provide financing for Glencore, according to two people familiar with the deal who declined to be identified because they were not authorized to speak on the matter. Intesa, which worked for the Russian government as its consultant on the Rosneft privatization sale, declined to comment, as did Rosneft. A Glencore spokesman couldn’t immediately be reached.

Russia is selling assets to raise money after the collapse in oil prices sapped government revenue. Putin had said in October that, in the absence of buyers willing to pay an acceptable price, Rosneft might buy back its own shares and sell them on later.

‘Major Win’

“This is also a major win for Rosneft that avoids going through a ridiculous self-privatization exercise,” Luis Saenz, head of equity sales and trading at BCS Financial Group in London, said in a note. “Most importantly, a massive positive for Russia that’s moving closer to breaking the sanction/isolation regime.”

Rosneft shares jumped 6.2 percent to a record 378.15 rubles as of 12:04 p.m. Moscow time.  Contracts on the company fell 5 basis points on Thursday to 304 basis points, the lowest in more than a month, the data show. A decrease signals improvement in perceptions of credit quality.

Glencore shares added 0.5 percent to 298.20 pence. Credit-default swaps insuring Glencore’s debt against losses for five years were little changed at 170 basis points, near the lowest since July 2015, according to data compiled by CMA.

Mining Footprint

The deal marks the third big acquisition for Glasenberg after he led the takeover of mining company Xstrata and grain merchant Viterra. Glasenberg has transformed Glencore, which he floated only five years ago, into a commodities trader with a huge mining footprint and, now, a large oil production base.

Glencore is a longtime investor in Russia, with a blocking stake in mid-sized oil producer in RussNeft PJSC, as well as substantial agricultural holdings and shares in aluminum giant United Co. Rusal. It also participated, along with Vitol SA, in a $10 billion prepayment deal with Rosneft for crude supplies in 2013.

But in a sign of the political sensitivity of dealing with Rosneft, which is subject to financial and technical sanctions, Glencore said it would be “fully ring-fenced” from exposure to the Russian state company, outside of a 0.54 percent “indirect equity interest.” The bank financing in the deal will not include recourse to its balance sheet, Glencore said. The agreement also includes a new five-year supply deal with Rosneft for 220,000 barrels a day of crude, a boost for Glencore, which last year lost its status as the top trader of Russian crude.

The supply deal could deliver annual trading profits of about $80 million, Bank of America Merrill Lynch analysts led by Jason Fairclough wrote in a note. They said the view the deal “positively.”

Qatar, OPEC

On Qatar’s part, the deal marks a rare venture of an OPEC member into Russia, the world’s second-largest oil producer. Moscow has joined forces with OPEC, saying last week it will cut output by 300,000 barrels a day to add onto the 1.2 million barrels a day that the oil-producers group announced. Qatar played a key role in the OPEC cut, acting as a go-between Saudi Arabia, Iran and Iraq and hosting meetings including oil ministers from Riyadh and Moscow.

The Rosneft sale was the keystone of the government’s privatization program this year to help narrow the budget deficit. Rosneft played a key role in the second-biggest deal in Russia this year, buying the state’s stake in oil company Bashneft PJSC for $5 billion in October. Sechin, Putin’s longtime ally, persuaded the government that selling Rosneft shares after gaining control of the smaller producer would attract foreign buyers and boost the price. Russia will retain a controlling stake in Rosneft and BP Plc owns 19.75 percent.

Putin contributed to boosting Rosneft shares in recent weeks as he helped to negotiate a pioneering deal with OPEC on cutting output, which has lifted oil prices.

The transaction is so big that Putin specifically asked Sechin to work with the Finance Ministry and central bank to ensure that it doesn’t destabilize the currency market when the proceeds are converted into rubles. The ruble gained against the dollar in late trading after the deal was announced, before weakening Thursday.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.

With assistance from Anatoly Medetsky, Jake Rudnitsky, Jesse Riseborough, Sonia Sirletti and Katie Linsell. To contact the reporters on this story: Elena Mazneva in Moscow at emazneva@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net To contact the editors responsible for this story: Torrey Clark at tclark8@bloomberg.net ;Will Kennedy at wkennedy3@bloomberg.net Lynn Thomasson

Copyright 2016 Bloomberg News.

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