Strategic investors have pledged to buy shares in the initial public offering of Russian oil firm Rosneft, ensuring the order book is more than covered even as some fund managers balk at the offer price, market sources said on Thursday.
Western and Asian oil and energy firms are prepared to spend heavily to buy a piece of the state oil firm, seeking favour with the Kremlin, and helping the world's fifth-biggest IPO amid volatile emerging markets.
Rosneft wants to float 13-19 percent of its stock and raise up to $11.6 billion on July 14 in a stock offering valuing it at $60 billion to $80 billion, a premium to bigger rival LUKOIL which many portfolio investors are not prepared to accept.
"I would not be surprised if the book is dominated by strategic investors - Western and Asian firms and Russian oligarchs," said one market source familiar with the IPO.
"Even an investment of up to $1 billion won't be material to their capital employ, but will secure good relations." Three sources said the IPO was already oversubscribed. One added he expected to see two or three strategic investors rather than a flurry of bids from them.
"As to the clan of (Russian) oligarchs, I'm sure some have been asked to participate, but we will never find out their names as they will bid through obscure vehicles," he added.
Sources say Rosneft has asked its existing and potential corporate partners to invest in its IPO. It has approached European and Asian partners - mainly private firms including "at least one" of BP Plc and Shell.
A BP source said it is unlikely to bid, Italy's ENI said it was not interested, Singapore's and Malaysia's state firms Temasek and Petronas said they could buy, while sources close to the matter said China National Petroleum Corp (CNPC) may invest $3 billion.
All have very similar reasons to buy - to secure Kremlin support for expansion at a time when Russia, the world's largest energy producer, is curbing foreign involvement.
BP, ExxonMobil and India's ONGC have a joint venture with Rosneft on the eastern island of Sakhalin and, like CNPC, they are keen to secure more reserves there and in East Siberia.
"So far firm bids have come only from the Chinese and Indians. As for BP, nothing has been decided yet, it is still pretty much at the discussion stage," said one IPO source.
BP may have to decide on its next partner in its joint venture TNK-BP, Russia's No 2 oil producer, as early as next year, when its deal with Russian private shareholders expire. Some say Rosneft could be its next partner. BP could go for a stake and Exxon may also want to reward Rosneft for Sakhalin," said one market source.
The Russian parliament approved this week a law granting gas monopoly Gazprom exclusive gas export rights. But Rosneft has pressed hard to exclude its venture with Exxon, Sakhalin-1, from this law as it wants to ship gas to China. Some funds still say Rosneft needs to lower its IPO price, if it wants to succeed after a slump in emerging markets.
"We will decide whether to bid virtually at the last moment," said Ivan Mazalov, who helps manage $2.3 billion worth of Russian stocks at fund manager Prosperity.
"As to strategic investors, I can hardly see how their participation in the IPO could bring significant dividend given the toughening of the Russian legislation," he said.
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