Rosneft’s Initial Public Offering

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Initial Public Offering

• An initial public offering (IPO) is the process of selling stock to the public of a pre-existing operating company. The company, which already has owners and shareholders, is transferring a portion of this ownership to the public marketplace.

• The shares sold to the public may be either new shares that raise new capital, a primary offering, or existing shares that are sold by current shareholders (as part of their exit strategy), known as a secondary offering.

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Initial Public Offering

• At the time of the initial public offering an additional set of shares, known as the green-shoe option or over-allotment allocation, may be offered as a primary offering as well. Usually limited to 15% of the total share offering, these shares are sold when it appears that there may be a greater demand than what is being offered.

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Initial Public Offering

• After deciding to go public, management of a company works with an underwriter, an investment banking firm that manages the offering and its structure. – For smaller IPOs, the underwriter commonly accepts the

deal on a best efforts basis. There is no guarantee that all shares will be sold at any specific price.

– More commonly on larger IPOs, the underwriter and the company agree to a firm commitment, in which the underwriter guarantees that it will sell all of the stock at the offer price. The underwriter is effectively purchasing the entire offer for re-sale.

– In recent years there have been a number of issues which follow an auction process, in which the underwriter lets the market set the price of the stock by auctioning off the company shares

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Rosneft’s Initial Public Offering

• Established in 1993, Rosneft became a successor of Rosneftegaz, which in its turn was founded on the basis of the former Ministry of oil and gas industry.

• In 1995, a Russian government decree transformed Rosneft into an open joint stock company.

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Rosneft’s Initial Public Offering

• The company had only two obsolete refineries and several low-productive and poorly managed oil-producing assets.

• In October 1998, the Russian government decided to strengthen the Company’s management so that Rosneft could once again become a key player on the Russian energy market. The government appointed the Company’s current president, Sergey Bogdanchikov.

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Rosneft’s Initial Public Offering

• Rosneft had become profitable again by 2000, and from then on, the Company began a new period of strong growth, with average annual oil production increases of over 11%.

• Until 2005,firm was growing regularly. Since then the company has acquired controlling stakes in 4 Russian oil companies.

(Udmurtneft,Yukons, Severnaya Neft, Verkhnechonskneftegaz)

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Global Oil Companies by Reserves

2005

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Rosneft’s Initial Public Offering

• In 2005, the Company became the second-largest producer of oil and gas in Russia, with an average daily output of 1.69 million barrels of oil equivalent.

• In November 2005 the Russian government announced that it would sell somewhere between 20% and 30% of Rosneft, expecting to receive about $20 billion from an IPO.

• The shares would be placed on Russian and London Stock Exchange.

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Rosneft’s Initial Public Offering

• In the spring of 2006, as a result of rising oil and gas prices, the government cut the IPO by half because of the company’s rising profits.

• June 26th, the Russian government, Rosneft’s management, and its financial advisors had yet to decide on the final IPO price

• Valuations of the company ranged between $60 billion and $80 billion

• Rosneft had announced its intention to price the IPO between $5.85 and $7.85 per share.

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Rosneft’s Initial Public Offering

• Rosneft conducted one of the largest and most successful IPOs in global financial history after placing nearly 15% of its shares on stock exchanges in London and Moscow. The Company’s offering raised USD 10.7 billion.(On July 14, 2006 )

• Shares were priced at $7.55, near the upper end of the range forecast when the IPO was announced, resulting in Rosneft being valued at $79.8 billion

• This meant that the government of Russia would still

hold 85% of the shares.

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Valuing Rosneft

• Comparables• Russian companies seem to fair quite well in terms of

the market’s assessment of their value based on earnings, cash flow, and enterprise value

• Discounted Cash Flow• None of the investment banks published (that we have

access to) a DCF analysis on Rosneft prior to the IPO• Lukoil for all intents and purposes was considered a

very very good base for comparison on DCF • Lukoil’s valuation itself was based on interesting

assumptions about prospective oil prices and on a very low estimate of the company’s cost of capital

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Valuing Rosneft

• Market Capitalization & Reserves• An analysis of global supermajors in the oil and gas

sector indicates a very wide range of values• The market cap to reserve estimates show much higher

values for the biggest western producers (ExxonMobil, Shell, BP) as opposed to significantly lower values for the big Russians (Gazprom, Lukoil) and other emerging market representatives (Petrobras).

• Value … in the end• Rosneft had lobbied hard during June and early July for

a market valuation of between $60 and $80 billion – and the top end if possible

• They got it in the end – nearly $80 billion in valuation

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Valuation Summary

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Rosneft’s IPO

Capital and Share Results of Mid-July Rosneft Public Offering

Issues Shares Price Proceeds Implied FeesSecondary offering 1,126,357,616 $7.55 $8,504,000,001Primary tranche 253,874,997 $7.55 $1,917,000,000 $243,773Total, excluding green-shoe 1,380,232,613 $10,421,000,001

Green-shoe (actual) 31,189,362 $7.55 $235,479,683Total, including green-shoe 1,411,421,975 $10,656,479,684

Shares PercentFree Float 1,411,421,975 10.6%Government Holdings 11,903,879,676 89.4% Total Shares 13,315,301,651 100.0%

Source: CreditSuisse, September 1, 2006, p. 8.

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Rosneft’s IPO

Rosneft's IPO & Stake Purchases

Buyer Purchase PercentGazprombank $2,500,000,000 23.5%BP $1,000,000,000 9.4%Petronas $1,100,000,000 10.3%China Nat'l Petroleum $500,000,000 4.7%Sinopec $300,000,000 2.8% Subtotal $5,400,000,000 50.7%

Total Proceeds $10,656,479,684 100.0%

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Rosneft’s Share Price Since Issuance August 24, 2007

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Rosneft’s Share Price

  

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Rosneft

– Ranked second among all Russian oil producers, behind Lukoil, and third behind Gazprom and Lukoil among combined Russian oil and gas producers.

– It owned two refineries, four export terminals, and 600 service stations.

– including proved crude oil reserves of 14.88 billion barrels.

– It was now the world’s second largest oil company.

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Ali KAYTAN

Gizmen NALBANTLI