Rosneft Appeals to Market With $2 Billion Buyback, Debt Cut

(Bloomberg) -- Rosneft PJSC plans to start a $2 billion share buyback this year, while also cutting spending and debt.

The state-run producer, which pumps more than 40 percent of Russia's crude, has already signaled a shift toward more efficient “organic” growth, ending years of deal-driven expansion that made it the country's most indebted company. The latest announcement could boost Rosneft's appeal to investors, who are starting to demand payback from the oil industry for keeping faith during a three-year downturn.

“This move puts Rosneft's strategy into an almost perfect alignment with minority shareholders,” said Ildar Davletshin, an energy analyst at Wood & Co. Financial Services AS in London. “It should boost both the equity value and the share price.”

Rosneft spent about $100 billion over the past years swallowing up Russian rivals and transforming itself into the world's largest listed oil producer by both output and reserves. Asset purchases last year from India to Venezuela and Egypt made the company a global player, whose expansion often aligns closely with Russian foreign policy priorities.

As a result of that expansion, Rosneft ended 2017 with a record $93 billion in loans and obligations to long-term oil buyers. It plans to cut debt by at least 500 billion rubles ($8 billion) this year, according to a statement Tuesday. The company will undertake a number of initiatives, including cutting planned spending. It intends to start buying back shares as soon as the second quarter, and continue until the end of 2020.

Several of Rosneft's peers are planning or implementing share repurchases as a way to share the rewards from rising crude prices, and investors are impatient to receive those payments. Europe's largest company Royal Dutch Shell Plc last week reported the highest profit since 2014, but the shares slumped after it missed forecast on cash-flow, casting doubt on the timing of a buyback program.

Despite pumping more oil than any other listed company, Rosneft's market capitalization lags its peers. “We are strong believers in the fundamental value of Rosneft that is not fully appreciated by today's volatile equity markets,” Chief Executive Officer Igor Sechin said in the statement.

The Russian behemoth now plans to avoid big acquisitions, people with knowledge of the matter said earlier this month after meeting with the company in London. This year's plan for capital expenditure is currently set for 800 billion rubles, Rosneft said in the statement, down about 20 percent from an earlier estimate.

The buyback plan will be financed “through organic free cash flow generation and divestments of non-core assets,” the company said. The plan still needs corporate approval.

The proportion of Rosneft shares that trade on the open market -- about 10 percent -- is relatively low compared to its biggest peers both in Russia and abroad. The planned $2 billion buyback equates to about 3 percent of the free-floating shares, based on the company's market value before the announcement.

The government in Moscow controls half of Rosneft shares, with BP Plc holding 19.75 percent and a joint venture of Glencore Plc and Qatar Investment Authority owning 19.5 percent.

Glencore and QIA last year agreed to sell most of their stake to CEFC China Energy Co. While the deal stalled amid increasing government scrutiny of the Chinese privately owned conglomerate, CEFC said last week it was still hoping to complete the transaction.

To contact the reporter on this story: Elena Mazneva in Moscow at emazneva@bloomberg.net.

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Rakteem Katakey

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