Russia Looking to Sell Stake in Rosneft (ROSN.ME, BP)

The Russian government is looking to sell an additional 19.5% stake in its largest oil company, Rosneft (ROSN.ME), to help shore up the government’s finances. The Russian government currently owns approximately 70% of the company. According to Reuters, Russian Economy Minister Alexei Ulyukaev said the privatization of a stake in oil major Rosneft would take place between November and December this year. Analysts estimate a 19.5% stake could fetch as much as $11.7 billion at current market valuations.

Russia delayed the privatization of Rosneft in August 2016 because of the decline in oil prices. The price recovery seen in the last few weeks on the back of a potential production freeze by OPEC, however, seems to have restored government confidence in a potential stake sale. (See also: Russian Oil Companies Deal Better With Low Oil Prices.)

Russia seems to want Rosneft to be as big as possible before any potential sale. The Financial Times reports that over the weekend Rosneft announced it will take a 49% stake in India’s Essar Oil, which owns the country’s second-biggest private refinery as well as a network of 2,700 filling stations. United Capital Partners, a Russian investment group, and the commodities trading company Trafigura will each take a 24% stake, in a deal valued at around $13 billion.

Bloomberg reports that last week Rosneft announced it had paid about $5.2 billion for a majority stake in Bashneft, a fellow Russian oil and gas company, previously owned by the government. This is a remarkable change of events because Oil & Gas 360 reported as recently as August this year that the Russian President Vladimir Putin had forbidden Rosneft from taking part in the sale.

Rosneft’s acquisitions are viewed differently by the major credit rating companies. For example, Moody’s said back in March 2016, “The potential $2 billion - $3 billion acquisition of a non-controlling 49% stake in Indian oil refinery Essar Oil Limited (not rated) is credit negative as it has the potential to increase [Rosneft's] leverage while the benefits are not clear.” Meanwhile, S&P Global Ratings, another credit rating company said, “In our view, the financing of the [Bashneft] acquisition will not pose any material liquidity challenges, since Rosneft has accumulated a significant cash cushion of $22 billion, which it could use to finance this and other potential acquisitions, including a 49% stake in Essar Oil.”

British oil company BP plc (BP) currently owns slightly less than 20% of Rosneft following the buyout of another oil company, TNK-BP, in 2013. Any potential strategic investor taking the 19.5% soon to be put on offer can expect similar financial benefits from their stake. BP provides quarterly results showing Rosneft’s performance, including the share of Rosneft’s annual dividend it receives. The dividend is directly correlated with the price of oil. As shown in the graph below, in 2014 when prices were closer to $100 per barrel, BP earned around $700 million in dividends from its stake in Rosneft. (See also: Are Conditions Improving For Oil Companies?)

This year, with prices averaging closer to $42 per barrel, that number is roughly half at just under $350 million. That is a dividend yield of around 3% at current prices. By comparison, ExxonMobil (XOM) currently has a dividend yield of 3.47%, according to Yahoo Finance. If oil prices remain around $50 per barrel for the foreseeable future, an investor in Rosneft can expect a dividend yield of around 4.2%. This yield seems low given the risks associated with the Russian market.

Another factor that will likely weigh on any potential strategic investor’s mind is the fluctuating state of Russian tax policy for the oil industry. According to Reuters, Rosneftegaz, which controls Rosneft on behalf of the government, was asking the government to issue a decree guaranteeing a stable tax regime during the sale of the 19.5% Rosneft stake and beyond.

Fitch Ratings has also commented on instability in Russia’s tax policies for the oil industry. In a press release issued during the Bashneft privatization they said, “… there is a risk that industry taxation will rise as the federal budget remains under pressure… we believe that the tax burden on the industry will remain manageable… however, there is a risk of further tax hikes, especially if oil retreats to below USD 40/bbl again.”

Russia is looking for ways to raise additional cash but doesn’t want to lose control over a key sector like the oil industry. The government has come up with a creative way to raise billions of dollars without handing control of this key sector over to private, or worse – foreign, investors. Rosneft’s acquisition of Bashneft ahead of Rosneft’s own stake sale paves the way for the government to bring in much-needed financing to fund the inflated 2017 budget without reducing its ownership in Rosneft below the 50% level that is needed to retain control.

Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment advice.