Russian oil firm Rosneft hopes to pay down its huge debt by milking and honing its increasingly profitable business rather than selling more shares, the firm's vice president for finance said.
Rosneft has just swallowed the bulk of its rival YUKOS at a series of bankruptcy auctions between March and May, turning itself into Russia's biggest producer and refiner of oil.
The assets were helped down by two loans totalling an almost indigestible $22 billion, leaving state-controlled Rosneft with a debt hangover it is determined to overcome.
"The priorities now, at least for the next 12-15 months, are about integration, optimising what we're integrating to boost the EBITDA number, and reducing debt," Peter O'Brien, vice president for finance, told Reuters in an interview.
The firm aims to have a ratio of debt to EBITDA, or earnings before interest, tax, depreciation and amortisation, of about 1:1 by the end of 2010. Raising EBITDA will allow more debt and provide cash to pay it off.
Rosneft's massive borrowing was enough to jolt Russia's currency markets and led to a bulge in capital inflows that threatened the annual inflation target, prompting the central bank to jump in and mop up the loose billions.
The firm now plans to refinance the $22 billion debt with Eurobonds and possibly convertible bonds and syndicated loans, but the bigger challenge is to repay it.
A Billion Here, A Billion There
The first cut will be the deepest -- and the easiest. Rosneft is about to receive $10 billion, after tax, that it is entitled to as a creditor to YUKOS, mostly recycled from its own spending spree at the YUKOS auctions.
The second slice will be paid off with sales of non-core assets that Rosneft picked up at the auctions, including oilfield service firms and minority stakes in power utilities.
"We've purchased over 130 assets in different lots," said O'Brien, who is a former Morgan Stanley investment banker.
"I think we will hire advisers and hold tenders for some of them. Some of them will be smaller and there will be specific buyers who have actually initiated a discussion with us and it would make sense to sell them on that basis."
Stakes in firms in Russia's liberalising power sector could go to the existing shareholders or to portfolio investors, while the oilfield service firms might be of interest to local market players such as Integra and CAT Oil or big names like Schlumberger and Halliburton.
The total take could be as much as $4 billion.
"I would say the $4 billion number is possible but we don't have a clear path to $4 billion right now," O'Brien said.
One of the first assets Rosneft bought at the YUKOS auctions was 9.44% of its own stock, now a $9 billion war chest.
"We view the stock as an attractive currency mainly for M&A, to be used for acquiring EBITDA, whether it's in upstream or downstream," said O'Brien.
"We don't have any specific targets right now that we're near closing a deal on, but we view the stock as potentially of interest to sellers of other Russian assets.
"The second thing it might be potentially useful for is to monetise and reduce our debt, if we need to. That's going to be a function of how the business plan looks: Are we going to get to 1 x EBITDA or not without selling the stock? If the oil price remains higher than in the business plan, we might."