Consolidation under consideration. During its 3Q11 results conference call last December, Bashneft’s CEO Alexander Korsik said that the company was evaluating its refining assets in light of the introduction of the 60-66-90 tax system. When the process has been completed the company will decide whether to consolidate its refineries or leave things as they stand.
Share swap is the best option. We believe that reorganisation involving a swap of the subsidiaries’ shares for Bashneft shares is the best option for the company to consolidate 100% of Ufa Refinery, Novoil, Ufaneftekhim, Ufaorgsintez and Bashkirnefteproduct. A simple buyout of minorities’ shares in the subsidiaries is much less favourable: it would be expensive (we estimate at least $617mn at current market prices) and some minorities might reject the offer.
Major risks are present. Bashneft’s reorganisation could pose a risk for minority shareholders in its subsidiaries because the valuation of these companies for reorganisation purposes would be conducted by an independent appraiser, making the swap coefficients difficult to predict. The history of refinery consolidation in Russia holds several cases where the appraisal values of facilities were several times lower than their market value and, more importantly, lower than investors’ expectations. However, given the strong corporate governance standards that Bashneft has adopted since its acquisition by Sistema, we believe its reorganisation could be completed on acceptable terms for the subsidiaries’ minority investors.
Target prices changed. In this report we change our target prices and ratings for the Bashkirian refineries to take the expected consolidation into account. We used a comparative approach to estimate the value of the refineries. We believe that in the current circumstances this is the most objective method as it requires few assumptions and is mainly based on actual data. We rate all the refineries’ shares a HOLD while our target prices imply little or no upside potential. We believe that a share swap would be a good option for current minorities (especially major ones) due to the poor liquidity of the refineries’ stocks.
Indirect entry into Bashneft. In our view, reorganisation would provide minority shareholders in the subsidiaries with a good chance to receive Bashneft’s shares, which we estimate offer potential upside of 43% at current prices. We see Bashneft’s shares as some of the most attractive in the oil sector due to their high dividends (we estimate $3.86 per ordinary and preferred share in 2011E with respective yields of 8% and 10%) and strong potential triggers which may be realised this year.
Liquidity improvements can be expected. We estimate that the consolidation of subsidiaries would increase Bashneft’s shares liquidity by $617mn to $1.7bn, adding to the attractiveness of the stocks.
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