Hess Corp sells Russian oil unit for $2.05bn

May 2013 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Leading global energy company, the Hess Corporation, announced on 1 April that it had agreed to the sale of its Russian oil and gas subsidiary Samara-Nafta to OAO Lukoil for a total consideration of $2.05bn.

The sale, first proposed by Hess in November, is the latest asset divestiture by the company as it looks to shore up its balance sheet, pay down existing debt, and become a strictly exploration and production business.

At the time of writing, the deal is still subject to the customary approval processes of the Federal Anti-monopoly Service of the Russian Federation.

Hess owns 90 percent of the shares in Samara-Nafta and originally acquired its stake in Samara-Nafta when the company paid $25m for a 65 percent interest in Trabant Holdings International in 2005. Simon Kukes, chairman of Russian firm Yukos Oil Co., Hess’ partners in the unit, will also sell his 10 percent stake to Lukoil.

Lukoil is Russia’s second-largest crude oil producer and the largest privately owned oil and gas company in the world, by proven oil reserves. Lukoil has an annual output of around 2.5 million metric tonnes and currently accounts for 2.2 percent of global production of crude oil. The company is acquiring Samara-Nafta in order to stabilise its oil output, which has been steadily declining.

Samara-Nafta, which has the rights to explore and develop more than 60 oil fields within 23 licence areas of the Volga-Urals region of Russia, currently produces 50,000 barrels of oil equivalent per day. The region also has approximately 85 million tonnes of oil reserves. “We have acquired a high quality asset with a long term growth potential in a new region that is characterised by one of the most developed oil and gas infrastructures in Russia, and located in the close proximity to major petroleum product sales markets,” said Lukoil president Vagit Alekperov. “The…transaction harmonises with the company’s development strategy until 2021 that provides for stabilisation and growth of oil production rate in Russia.”

New York-based Hess announced a sweeping restructuring plan in March in which it outlined its plans to continue shedding assets, including its vast network of fuel stations and its energy trading businesses. Hess has been divesting assets as it attempts to come to terms with lacklustre profits and increasing pressure from a dissident investor, hedge fund Elliot Management Corp.

Taking into account the proceeds of the Samara-Nafta sale and the divestiture of assets in the UK, the North Sea, southern Texas and Azerbaijan, Hess has now raised $3.4bn.“We are making excellent progress in executing our asset sales program, which is a central component of our plan to transform Hess into a more focused, higher growth, lower risk pure play exploration and production company,” said John B. Hess, chairman and chief executive officer of Hess. “By applying the proceeds from these divestitures to reduce debt and strengthen our balance sheet, Hess will have the financial flexibility both to fund its future growth and also to direct most of the proceeds from additional asset sales to returning capital directly to its shareholders,” he added.

Rogue investor Elliott took a 4.39 percent stake in Hess in January and has been vigorously pursuing change in the company. In January, Elliott nominated five new board members and began a campaign demanding the spinning off of Hess’ less profitable international assets, claiming that the move would release value worth twice the company’s market capitalisation.

Hess is one of the most active companies in the lucrative Bakken shale of North Dakota, a region which is at the heart of the most recent US oil boom. However the firm’s weak share prices over the last four years belies that strong position. John Pike of Elliott said in January that there had been a failure of corporate governance at Hess as the company’s board had been “unable and unwilling to challenge management”.

Richard Summerfield