LONDON/MOSCOW/DUBAI (Reuters) - When Qatar negotiated a deal to increase its holding in Rosneft it told the Russian oil company it wanted higher returns on its existing stake before it bought more, three sources familiar with the deal said.
Qatar’s request was one of the triggers which prompted Igor Sechin, Rosneft’s boss and a close ally of President Vladimir Putin, to propose last week a $2 billion share buyback and an $8 billion debt reduction, marking a significant shift in the oil company’s strategy.
Days later, Qatar’s sovereign wealth fund Qatar Investment Authority, one of the world’s largest, raised its stake in state-controlled Rosneft to just under 19 percent from 4.8 percent bringing the value of its total investment to 10 billion euros.
“The pledge to reduce debts and embark on a buyback was taken by Rosneft’s directors as part of preparations for Qatar’s investment,” one of the three sources familiar with the talks, said.
Rosneft and the QIA declined to comment.
Rosneft’s shift to focus on shareholder returns and debt reduction is its biggest in years after a decade of expansion which turned the group into Russia’s most indebted company with borrowings of more than $90 billion as of the end of 2017.
This has had an impact in terms of Rosneft’s valuation versus its rivals.
Rosneft’s market value is currently around $65 billion, while its production is at more than 5 million barrels of oil equivalent per day. ExxonMobil, the world’s biggest oil company by market value, has a market cap of $330 billion while producing less than 4 million boe.
Investors say this partly reflects the impact of Rosneft’s heavy debts.
“Rosneft is just plain cheap. Look at where it value stands versus peers and compare it with its production,” one of the sources involved in negotiation told Reuters asking not to be named as the matter is not public.
Rosneft’s shares were also hit by sanctions on many Russian companies after Moscow’s annexation of Crimea and incursion in east Ukraine.
Sechin travelled to Doha in March together with his right hand man, first vice-president Pavel Fyodorov, who spent days negotiating the Qatar deal, according to two sources close to the talks.
The new partnership could also help Rosneft expand its gas projects around the world, possibly in cooperation with Qatar Petroleum, the world’s largest producer of liquefied gas.
For Qatar, the deal showed the country’s return to making large scale investments nearly a year after a boycott by its Gulf neighbours.
The Rosneft deal would help Qatar guarantee long-term access to “good gas assets”, a Doha-based industry source said: “Qatar is thinking long-term game. By long-term they mean decades, when their own gas reserves could start depleting.”
Qatar bought the Rosneft shares when a deal by Chinese energy firm CEFC to buy a 14 percent stake in the Russian oil company collapsed after an investigation into the Chinese group’s chairman.
The Rosneft deal makes the QIA the third biggest investor in the oil company behind the Russian state with 50 percent and BP with 19.75 percent.
Set up in 2005, the QIA benefited from Qatar’s gas boom amassing assets of over $300 billion and making it one of 10 world’s largest sovereign wealth funds, according to the Sovereign Wealth Fund Institute.
Its investments from the United States to France and China effectively helped the tiny state to gather political support in some of the world’s biggest capitals.
Additional reporting by Ranie El Gamal, Writing by Dmitry Zhdannikov. Editing by Jane Merriman