Page 145 - RusRPTSept22

2023-31, reports Vedomosti. The reason cited for the early buyback is significant technical difficulties in transferring interest payments to bondholders in the current sanctions environment. Lukoil’s press release notes that it has more than sufficient cash on hand to execute such an offer that is “consistent with its other policy objectives''. Importantly, the company states the price to be paid vs face value for the bonds will be negotiated with individual bondholders. Finally, Lukoil stated repurchased bonds are to be cancelled.
The main question for shareholders in the current environment will regard the potential impact on the as-yet undeclared final dividend on 2021, on which Lukoil delayed decision until December as it searches for mechanisms to execute transfer of dividends to foreign shareholders. We think this repurchase offer ultimately should have only a modest impact on any dividend decisions, as we estimate that Lukoil indeed has enough cash to both execute this offered buyback and pay a significant final dividend on 2021. Our reasoning is as follows:
● Plenty of cash on hand. Lukoil ended 2021 with $9.0bn of cash on its balance sheet, and should have generated material amounts of operating cash in 1H22, despite the Ukraine crisis.
● The buyback is likely to require much less than $6.3bn face value of the bonds. First, any price negotiated will almost certainly be at a significant discount to face value, reducing the cash required for this operation, likely by a significant amount. Keep in mind that foreign bondholders are facing the possibility of receiving no interest payments for an extended period of time and significant uncertainty on the ultimate redemption of the bonds at maturity. Many will likely be willing to accept a material discount to face value to remove this risk from their portfolio. Second, we think many bondholders will likely find it impossible to take this offer due to sanctions, and so the face value of bonds actually repurchased will likely be well less than the full $6.3bn reported.
● Other
Japan’s Mitsubishi decided to apply to the Russian government to keep its stake in the Sakhalin-2 oil and gas project but still needs Kremlin approval, Nikkei reported on August 25. Russian President Vladimir Putin signed a decree on June 30 that will transfer all rights and obligations of the Sakhalin-2 oil and gas project to a new Russian entity, in effect giving the Kremlin the power to nationalise foreigners’ stakes in what is one of the largest energy projects in the world, and escalating the ongoing gas wars. Sakhalin-2 in Russia's Far East supplies circa 4% of the global LNG market and is a key source of energy for Asian countries and Japan in particular, which is heavily dependent on LNG imports. Russia accounts for 8.8% of Japan’s import of liquefied natural gas, almost all of which comes from Sakhalin-2. Japan has been a partner in the project for decades. At the same time Japan has
145 RUSSIA Country Report September 2022 www.intellinews.com