Yukos/Exxon – Exploring a Deal
Rob Anstey
Carolina Bresciani
Greg Mazur
Saurabh Sekhri
Kristy Von Ohlen
Agenda
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Russian currency crisis
Russia today
Russian oil industry
Yukos/Exxon deal
Exxon perspective
Yukos perspective
Hedging against risk
Russian Currency Crisis
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Economic and Institutional reasons:
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Fiscal Problems:
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Economic transformation
Transitional depression
Cumulative drop in GDP of 40% from 1989-1996
Consolidated budget deficit of 4.8% in 1998
Mounting interest payment as large as the budget deficit itself
Fall in price of Russian commodity exports
Government Debt:
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Ruble depreciated by 25% to Ruble 6.1/US$
Moratorium on foreign debt
Russia defaults on domestic debt
Russia Today
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Russia is now Investment Grade
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Imprisonment of Khodorkovsky
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Economy driven by natural resources
Russian Oil Industry
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Oil
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Oil Production-275.1 Tons rise of 11.2%
Proven Reserves
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Siberia 70-87 Billion Barrels
Rest of Russia 27-32 Billion Barrels
Total 97-119 Billion Barrels
Probable Reserves 13.43 Billion Barrels (50% probability)
Possible Reserves 14.7 Billion Barrels (25% probability)
Other Reserves 14.44 Billion Barrels (10% Probability)
Oil Pipelines
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China
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Pipeline from Angarsk to Daqing 1,500 miles
Carry Oil to China, China Export it to other mkts.
Environmental Concerns specifically Lake Baikal
Japan
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Conflicting Pipeline from Angarsk to Nakhodka 2,500
miles
$7 Billion deal
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$5 billion for construction
$2 billion for exploration
Oil could be shipped to Japan, Asia and to U.S. mkts
Russia
Russia vs. OPEC
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Russia
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Did not Join-No Incentives
Positives
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Price-Right now about $28-29 per barrel want $20-25
Oil Production-equal to Saudi Arabia, make own quota
OPEC
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Cartel of Oil Producers-quota of 900,000 barrels per day
Meeting quotas poor-overproduction, reserves,
Rogue Producers-Russia, Norway, Mexico
Basics of the Deal
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Deal was for Equity Ownership Stake, not Joint Venture
Initially $17.5 billion for 25% stake of Yukos
Increased to $25 billion for 40% stake
 Could increase beyond 50% when Khodorkovsky retired in
2007
Estimated $3/barrel (up to $6) compared to BP’s price of
$2/barrel. Analysts value Russian reserves at $1-$1.5/barrel
Premium resulted from 80% increase in Yukos stock in 2003
Deal lauded by Energy Minister Yusufov.
Other Russian officials: “No legal barriers for Exxon”
All has changed since Khodorkovsky’s arrest
Exxon - Risks
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Deal is very expensive: Exxon will be overpaying for assets
 Inflated Yukos stock value
 Moody’s: Russian sovereign credit rating increased from
junk to investment grade
Effect on Exxon’s Balance Sheet
 Threaten perfect AAA credit rating
 All Cash Deal: Debt-to-Capital Ratio increase of 28%
 Half Debt/Half Cash Deal: Debt-to-Capital increase of 15%
Effect on Financial Performance
 Return on capital employed (ROCE): only 10%
 Will require future cash outlays to find untapped Russian
reserves
Exxon - Risks
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Biggest Risk – Political
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Russia: still uncertain investment climate
Yukos: uncertain relationship w/ Government
Gov’t imposed concession costs: eliminate per barrel
profits
These risks are materializing with arrest of Khodorkovsky
Other Risk – Environmental
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Inherited risk from Yukos’ outdated legacy assets
Exxon – Benefits
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Exxon must establish a presence in Russia – Yukos is the
biggest Russian company (3rd biggest worldwide)
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Yukos has world’s largest reserves: 20 billion barrels
Competitive Move – get in before Chevron and become the
dominant Western company in Russia
Profitability of Russian oil companies much higher than in the
West
Would lower Exxon’s worldwide production, refining, and
drilling costs
Benefits are purely Long-Term and are worth the Short-Term risks
Exxon Perspective: After the Yukos
Crisis
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Political Risks are much more dangerous now
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Exxon committed to Russia
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42% of Yukos assets frozen: possible re-nationalization
Must work with Putin and Gov’t to accomplish deal
Investors have reacted negatively to Russian crisis
Exxon will never abandon Russia (Sakhalin-1)
Khodorkovsky out – possibly a good thing for Exxon
Yukos stock down – new deal would be cheaper
Possibility of Greenfield Investment, but unlikely
Will Yukos even sell?
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New CEO, Simon Kukes, deal is delayed indefinitely
The Deal: Yukos’ Perspective
The Deal: Yukos’ Perspective
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Export infrastructure has not expanded to keep up
with production
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Bottlenecks restrict output growth
1 million tons not delivered this year
Need to build a new pipeline (current at 99% capacity)
Transportation costs too high
Exxon is #1 oil company, mostly cash funded.
It has the needed money.
The Deal: Yukos’ Perspective
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American companies allow Russia more control
Implied sales guarantee
Both want more Russian oil in the US
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Wider opportunity to attract more loans for ambitious
projects
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Russian domestic sales not at right price
Added credibility of US partner = more investments
FDI in Russian oil industry is only $4.5bn
Oligarchs ready to cash in
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Good at seizing money, but not management
Need foreign help to manage int’l company
The Deal: Yukos’ Perspective
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Foreign investment might curb Kremlin’s influence
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Since August Yukos has been raided by police, subjected to
criminal investigations and a murder probe, and has seen its
owner arrested. All are thought to be politically motivated.
National security
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Strong partner could solidify security
Yukos can capitalize on a foreign investment deal
from Exxon. It would increase growth opportunities
without giving up control.
Hedging Strategies
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Foreign exchange risk
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Purchase price ($)
Local costs offset naturally by local revenues
Political risk
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Possibly offset by a government stake in the deal
Any Questions?