GLNCY Glencore Plc (PK)

Rosneft deal gives boost to commodity trader after standing in region ebbed

By Scott Patterson 

LONDON -- Glencore PLC's move to take a stake in Russian oil producer PAO Rosneft appears to be a victory for the Swiss commodity trader in a market it once dominated.

Glencore's history of trading in Russia goes back to the days of financier Marc Rich, whose company was Glencore's forerunner and who bartered Russian oil for Cuban sugar in the early post-Soviet period. Glencore has also forged close ties with Russian aluminum makers, oil companies and agricultural firms under Chief Executive Ivan Glasenberg.

The deal for a small stake in Rosneft disclosed Wednesday comes after Glencore's position in Russia slipped in recent years, analysts said. Competitors like Trafigura Group Pte. swooped in after the U.S. imposed sanctions over Moscow's interventions in Ukraine in 2014, making deals to ship Russian oil across the world.

The Rosneft deal is difficult to unravel. Russia says the company took a 9.75% interest in Rosneft worth over EUR5 billion, while the company says its stake is worth only EUR300 million with banks and the Qatar Investment Authority taking on the rest of the EUR10.2 billion deal.

Neither the company nor the Kremlin offered further clarity on Thursday. Qatar -- which is also Glencore's biggest investor -- declined to comment.

Analysts cheered the deal, though, saying a separate part of the deal mattered most: Glencore's stake gives it access to 220,000 barrels a day of additional Rosneft crude to trade. That would come on top of a previous five-year deal Glencore struck with Rosneft in 2012 that gave it the right to buy 180,000 barrels a day.

Investec said Glencore had found its footing again with Moscow after having "lost its status as the top trader of Russian crude."

The extra oil will help Glencore as the Organization of the Petroleum Exporting Countries and Russia look to cut back production to raise slumping oil prices, said Craig Pirrong, a University of Houston finance professor who studies the commodity-trading sector. Oil traders like Glencore have small profit margins and need to ship massive amounts of crude to make money.

"It's a volume and margin business," Mr. Pirrong said.

While the company said its equity stake is relatively small, the deal marked a return to risk-taking form for Mr. Glasenberg, who has spent a year cutting debt instead of making deals.

Rosneft and much of the Russian oil industry is under U.S. sanctions. Glencore said it created a limited liability structure that would be "fully ringfenced."

Mr. Glasenberg's leadership of Glencore has long been driven by acquisitions, highlighted by the firm's $29.5 billion deal in 2013 to merge with mining behemoth Xstrata. That deal followed Glencore's 2011 IPO and the Swiss trading company's move into the mining sector with a series of coal and copper mine purchases.

The approach helped build net debt at the firm to nearly $30 billion in 2015, casting a cloud over Mr. Glasenberg's strategy as its share price plunged -- including a 29% drop in one day in September 2015. Mr. Glasenberg eliminated the company's dividend in response and has spent the past year cutting debt.

A sharp rebound in commodity prices this year, especially in coal and copper, have helped turn around Glencore's fortunes. Its stock is up more than 200% this year, gaining 3.7% in London trading Thursday.

Last week Glencore said it planned to reinstate its dividend in 2017 and said its divestment program was finished. Mr. Glasenberg also hinted that he was looking at new investment opportunities.

Mr. Glasenberg has made splashy moves in Russia before.

In 2006, Glencore sold its aluminum assets to Russian metals giant Rusal, part of a three-way merger deal that forged the world's largest aluminum producer at the time, United Co. Rusal, with a market value of between $25 billion and $30 billion. Glencore retains a stake of about 9% in Rusal.

In 2012, Glencore teamed up with fellow commodity trading giant Vitol Group to organize a $10 billion loan to Rosneft in return for five years of oil deliveries. Glencore also owns about one-fourth of Russian oil producer Russneft.

The most recent deal with Rosneft, Mr. Pirrong said, shows Mr. Glasenberg "is back in deal-making mode and looking to cement their position as one of the leading trading firms in the world."

--

Nikhil Lohade

in Geneva contributed to this article.

Write to Scott Patterson at scott.patterson@wsj.com

(END) Dow Jones Newswires

December 09, 2016 02:47 ET (07:47 GMT)

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