Zhaikmunai — What Is Behind Its Intended IPO?

analysis

Zhaikmunai — What Is Behind Its Intended IPO?

By SRI ⋅ December 4, 2007 ⋅

Zhaikmunai, the Kazakh oil and gas company, stated its intention to offer its shares in an IPO on the London Stcok Exchange, hoping to raise up to $760 million. This is the first private oil and gas company in Kazakhstan which decided to seek transparency by becoming listed in London. Officially, the company explains its motive by the lack of funds for further development of business. However, analysts do not exclude that foreign (or domestic) investors are seeking the listing in an attempt to protect their holding in Kazakh oil and gas sector from possible encroachments by the state.

According to the official press release by the company, Zhaikmunai intends to place global depository receipts (GDR’s) on the exchange in the indicated range of $13-16 per share. It is expected that Zhaikmunai - being privately held - will issue GDR’s in exchange for a portion of shares in the company. The precise timing and the size of portion to be sold in course of the IPO are so far unknown. The timing of the announcement, however, is rather surprising. Given the current high oil prices, it would seem that a company of this type should have no problems finding sources of funds - unlike, for example, domestic banks and construction companies.

Zhaikmunai’s general director Vyacheslav Druzhinin, who is based in Uralsk, not far from where the company operates, refused to comment, saying that the issue was outside of his competence. As Business & Power, the Kazakh weekly, quotes “the local management was not to release any information to the media as it was not familiar with the situation.” Requests for comments that Business & Power sent to Kai-Uwe Kessel, the managing director of Belgium-based Probel Capital Management, also remained without an answer. According to Reuters, however, Zhaikmunai is expected to put up for sale 42.6 percent of the company.

According to oil and gas analysts, however, the conclusion that Zhaikmunai would actually offer almost 50 percent of its shares in an IPO is premature. It is likely that a larger share will be snapped up by other strategic investors who wish to increase their exposure to the oil and gas sector in Kazakhstan even prior to the listing. The company has more than doubled its output over the last three years, and some Kazakhstan observers propose that the intention to list its shares on the London Stock Exchange is to protect its holdings and prevent any interference on behalf of the Kazakh authorities or the KazMunaiGas, the national oil company. Listing on the LSE will make the company more transparent and will give it an additional layer of protection from the possible meddling of the authorities. On the other hand, if the company indirectly belongs to some government Kazakh officials or “objectionable” businessmen, it is also possible that the real owners intend to determine the market value of the company through the IPO and subsequently sell it.

Others, however, suggest that a successful listing of the company on the LSE is unlikely. The global credit crisis caused many companies to scrap or postpone their plans to undergo IPO’s in 2007, among the more high-profile ones Kazakhstan’s construction company KUAT. Another obstacle may be the current trouble over the Kashagan oil and gas field which has pitched the Western-led consortium developing the giant field against Kazakh authorities and KazMunaiGas. This development, along with the recent passage of the “law on subsoil use”, has not improved the reputation of Kazakhstan as a country that protects investors’ rights. Rather, some analysts talk about a “low level of the development in the relations between the state and the investors, undeveloped infrastructure, political, legislative, tax instability”. The investment climate in Kazakhstan drives away potential investors as even highly profitable investments become just too risky.

According to others, however, the Kashagan example does not apply this instance. In the case of Zhaikmunai, the potential investors do not necessarily have to be foreign. Moreover, they will not have the controlling stake in the project which makes the case very different from the currently contentious big projects like Tengiz or Kashagan where Western oil majors not only hold controlling stakes but also act as operators. And despite the investment risks outlines above, Kazakhstan still remains the oil and gas producer of the future, one of the few whose production is actually expected to increase significantly over the next decades. Therefore, there is significant interest among Western energy players - and not just the oil majors - to participate on the Kazakh bonanza.

According to natural gas consultancy, Ryder Scott, the reserves of the Chinarovskoye Field being developed by Zhaikmunai were 755 million barrels of oil equivalent, of which 397 million were proven, as of 1 July, 2007. According to Reuters, the value of the company should be approximately in $2 billion on the basis of these data. Meanwhile according to the official announcement of the company, Zhaikmunai plans to invest more than $1 billion exploration and development of the field.

About Zhaikmunai (from the company website)

Zhaikmunai is an independent oil and gas enterprise currently engaging in the exploration, production and sale of crude oil and gas condensate in northwestern Kazakhstan. Zhaikmunai’s field and licence area is the Chinarevskoye Field located in the northern part of the oil-rich Pre-Caspian Basin.
The Chinarevskoye Field, approximately 324 square kilometres in size, is located in the province of Batys Kazakhstan, near the border between Kazakhstan and the Russian Federation, and close to several major pipelines. The west Kazakhstan administrative centre of Uralsk (or Oral, in Kazakh) is approximately 80 kilometres southwest of Chinarevskoye Field.

Zhaikmunai is constructing an oil pipeline from the Chinarevskoye Field to the rail connection near Uralsk, along with a new receiving oil loading terminal at the connection, which will allow Zhaikmunai to deliver its oil directly to the loading terminal. The construction of a gas treatment facility with three gas treatment units has been commissioned for full utilisation of the associated gas produced by Zhaikmunai, which is essential for its continued crude oil production, and the treatment of gas condensate to produce dry gas for sale from 2009.