LUKoil revealed an acquisition spree on Friday, bidding $2 billion for oil firm Nelson Resources and announcing plans for a massive return to international capital markets.
Its offer for Toronto-listed Nelson, which has all its assets in Kazakhstan, is at a 15 percent discount to the market value of a firm with large potential reserves in the Central Asian republic.
LUKoil investor relations chief Gennady Krasovsky said the company was planning a "massive" borrowing to fund acquisitions, including Nelson and also Lithuania's Mazeikiu refinery from the fallen oil firm Yukos.
"We are working on a massive borrowing program on international capital markets. ... We're considering buying Mazeikiu, and this is up to $1 billion," he said.
"And we are planning to buy Nelson, which is another $2 billion. So we have financing needs of a few billions of dollars and are planning to borrow them abroad because it is obvious that it will be cheaper," he said, but gave no details.
The Nelson deal, which would be the largest Russian acquisition abroad, would further spur competition for Kazakh energy resources as global oil majors, and Chinese firms are already scrambling for oil riches in the Caspian Sea region.
LUKoil is already heavily present in Kazakhstan and has said it wants to expand further in a country with giant hydrocarbon reserves and which is set to become a key global oil player as it aims to triple oil output to 3 million barrels per day by 2015.
LUKoil's offer for Nelson is around 2.57 Canadian dollars ($2.21) per share, compared with Thursday's closing price of 2.96 Canadian dollars. Nelson shares in London were down 7.9 percent by Friday afternoon.
Nelson said earlier that the two sides "have agreed to negotiate the definitive agreements by Oct. 12," adding it was keen to ensure the offer would be for 100 percent of its shares.
LUKoil said it already had agreement from 65 percent of Nelson shareholders that they would sell their stakes. It would extend the offer to minority shareholders at the same price.
"This price represents a premium of 27.5 percent to the six-month average trading price of Nelson," said LUKoil.
But some analysts were surprised at the level of the offer.
"It is 37 percent below our fair value, and the reasons for this discount are not clear," said Dmitry Lukashov of Aton brokerage, noting Nelson's young fields offered great potential.
"We will recommend to those of our clients who are shareholders in Nelson to vote against this deal," he said, adding LUKoil could now move to de-list the shares of Nelson.
But Andrei Gromadin of MDM Bank said he considered Nelson expensive at current levels, and Kaha Kiknavelidze of Brunswick UBS said the price was in line with recent Kazakh oil deals. "LUKoil wants to pay $12.60 per barrel of proved reserves and $7.90 per barrel of proved and probable reserves, which is close to what CNPC offered for PetroKazakhstan," he said.
China's CNPC offered to pay $4.18 billion for Toronto-listed Kazakh producer PetroKazakhstan, valuing the firm at $10.70 per barrel of proved reserves -- well above Russian levels and among the highest in the history of Kazakh oil deals.
LUKoil has a 50-50 joint venture with PetroKazakhstan, known as Turgai Petroleum. It said this week it that wanted to buy the other 50 percent of the venture from CNPC before the deal closes.
Nelson has stakes in several oil firms or separate fields in Kazakhstan, including the Alibekmola, Kozhasai, Zhambai, North Buzachi, Karakuduk and Arman fields. It says its net proven and probable reserves are around 270 million barrels, but its total reserves in place could be potentially as high as 2 billion barrels. It produces 30,000 bpd and had net income of $36 million in the first quarter of 2005.
The bid for Nelson looks much more certain than the company's plans to buy Lithuania's Mazeikiu from Yukos, which owns 53.7 percent of the refiner.
LUKoil has said it would jointly bid with its strategic partner U.S. ConocoPhillips, but other potential bidders include Gazprom, oil major TNK-BP and Kazakh state-owned oil firm KazMunaiGaz. A consortium of Western banks chasing Yukos for a $475 million bad loan are also after Mazeikiu assets.
LUKoil and Conoco have called a tender for ice-class tankers as they boost oil output in Russia's north and expand a Barents Sea export terminal.
A LUKoil spokesman said Friday that a joint venture between the two firms, Naryanmarneftegas, had recently announced a tender to build three or four tankers able to make year-round shipments from the Varandei terminal to the larger port in Murmansk and possibly onward to Europe. He declined to disclose pricing details and the tankers' deadweight but said they should be able to sail through ice of up to 1.5 meters, The Moscow Times reported.