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The Orthodox version of the Old Testament mentions a miraculously flammable liquid, the origin of the word neft. Rosneft’s name therefore fuses Mother Russia and the oil within. Since taking over as chief executive, Igor Sechin has worked hard to transform the vast state oil group. The results so far are more smoke than fire.
The scale of Mr Sechin’s ambitions are not in doubt. Monday’s supply deal, 440m barrels of oil over four years, with CEFC China Energy, is just the latest. Rosneft has been spending heavily. It bought domestic oil producer TNK from BP for nearly $60bn, paid $5bn for Bashneft last year and another $5bn for a 49 per cent stake in Indian refiner Essar Oil. Net of disposals, Mr Sechin has ploughed nearly $86bn into the company’s growing portfolio since 2011.
Once a sleepy bit player among Russian oils, Rosneft’s oil production of 4.2m barrels daily now dwarfs the next largest in the country, Lukoil. Rosneft has financed its largesse with debt. Net of cash, this now exceeds market value, unusual for one of the world’s largest oil companies. If Mr Sechin is looking for affirmation of his strategy from investors, it has not yet been forthcoming. Within Russia, industry analysts also harbour doubts. A Sberbank research report published last month was uncomplimentary enough about him that Rosneft complained, forcing the report’s recall.
Mr Sechin’s grand schemes have done little for Rosneft’s share price which has gone sideways for 18 months even as oil has risen. Already, Rosneft has plenty of explaining to do about its various loans and oil swap deals with Venezuela, worth just under $6bn. Third-quarter results last week created more doubts when a surprise $2bn rise in receivables took a serious chunk out of operating cash flow — disappointing any bulls. The latest CEFC deal, equally murky, follows an earlier agreement by the Chinese oil trader to buy a 14 per cent stake in Rosneft. As no terms were revealed, outsiders cannot know if CEFC will receive preferential treatment in the supply agreement.
Rosneft would do better to improve its returns on capital, not to mention returns to shareholders. Dividend yield at 2 per cent is low among its peers, perhaps because it lacks the free cash flow to pay out more. A higher price for the miraculously flammable liquid may provide a salvation, but it will not do much for Mr Sechin’s reputation.
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