WEATHERFORD TO BUY TNK-BP SERVICES UNIT FOR $450

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 001451

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DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
DOE FOR HEGBURG, EKIMOFF
DOC FOR JBROUGHER
NSC FOR MMCFAUL, JELLISON

E.O. 12958: DECL: 06/01/2019
TAGS: EPET ENRG ECON PREL RS
SUBJECT: WEATHERFORD TO BUY TNK-BP SERVICES UNIT FOR $450
MILLION

Classified By: Econ MC Eric Schultz for Reasons 1.4 (b/d)

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Summary
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1. (C) American (but Swiss-registered) oil field services
company Weatherford agreed on May 29 to buy TNK-BP's oil
field services (OFS) enterprises in a deal worth
approximately $450 million. It is one of the largest foreign
investments in Russia in recent years and certainly the
largest since Russia's economiclQ1=,Q}rd's confidence in the market for its services, we
are not yet convinced that it signals restored broader
investor confidence in Russia. End summary.

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TNK-BP EXITS OFS TO FOCUS ON CORE-BUSINESS
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2. (C) As part of what COO Tim Summers recently told us will
be his company's focus on streamlining operations and
focusing on its core oil business, TNK-BP announced on May 29
that it would sell its oil field services (OFS) unit to
Weatherford, a Swiss-registered but U.S.-headquartered OFS
company with extensive global operations. The deal still
requires approval from Russia's Federal Anti-Monopoly Service
(FAS),but given that it enjoys the support of all elements
of TNK-BP, including its new Chairman, Alfa Group's head and
oligarch Mikheil Fridman, this is not expected to be an
obstacle.


3. (SBU) According to its press release, Weatherford will
acquire TNK-BP's OFS business in exchange for 24.3 million
Weatherford shares of common stock. Weatherford's filing
with the U.S. Securities and Exchange Commission further
notes that Weatherford will guarantee a price floor of $18.50
per share for its stock, valuing the deal at $450 million.
The deal reportedly also includes "other considerations,"
thought to be a reference to TNK-BP's continued use of OFS
through the unit, despite the change in ownership.


4. (C) TNK-BP's International Affairs Advisor Alexander
Mikhailants told us June 1 that TNK-BP will receive the
Weatherford stock at the close of the deal and that it is
free to sell the shares at anytime. He said the sale is part
of a long-term TNK-BP strategy to divest from non-core assets
and that the company had decided to exit the OFS business 3
years ago. He reiterated that the deal has the unanimous
backing of both BP and its Russian partners.


5. (C) According to Mikhailants, TNK-BP's main concern with
the deal was its ability to continue to access the technology
and services of the OFS unit and that the deal guarantees
this access. For Weatherford, he said, the use of stock as
payment allows the company to conserve cash, which it intends
to use for future investments in the business.


6. (C) Weatherford's director of marketing for Russia, Katja
Petrova, told us June 1 Weatherford has been looking to
expand its capabilities in Russia and that this deal offered
that opportunity. She said, however, that while the
agreement awaits regulatory review from the FAS she could not
comment on the extent to which this acquisition would enhance
Weatherford's market position in Russia. She added that over
80% of the Russian OFS market is controlled by local firms
and by the Russian oil companies' own services units. She
indicated that many companies are interested in selling off
their services businesses.

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A CATALYST FOR M AND A ACTIVITY?
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7. (C) Alfa Bank Head of Research Ron Smith told us June 2
that his firm believes the deal may serve as a catalyst for
new mergers and acquisitions activity in the Russian
oil-field services sector, including further deals by

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Weatherford. He noted that based on Weatherford's apparent
valuation of TNK-BP's OFS business, other OFS companies in
Russia are undervalued.


8. (C) Halliburton's former Russia country manager Simon
Turton (protect) had told us previously that the best way for
foreign OFS companies to expand in Russia was through
acquisitions. However, he said these acquisitions could be
very complicated due to the difficulties in conducting
appropriate due diligence in a sector fraught with
unconventional business practices and outright corruption.

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COMMENT
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9. (C) Weatherford's new investment in Russia is the largest
by a foreign firm since Russia's economic downturn began last
August, when foreign investors cooled on Russia following the
war with Georgia. Although the Russian stock market has been
among the world's strongest performers this year, a direct
result of rising oil prices globally, we are not convinced
that this deal signals a broader renewed appetite for
investing in Russia. Many experts, even traditionally
bullish ones, are wary of a market correction and fear oil
prices are being driven by speculation rather than demand.
In addition, Russia remains underweight in institutional GEM
portfolios despite the rising markets with little new money
coming in.

10. (C) Moreover, the OFS business in Russia may present
specific opportunities that do not translate to the larger
economy. Russia is the world's largest producer of
hydrocarbons, but with a relatively inefficient existing
stock of capital and technology, and weak knowledge of modern
best practices. Russia needs, and GOR officials have
frequently publicly welcomed, Western technology and
expertise to produce oil and gas more efficiently. And
critically, services do not threaten Russian ownership of oil
and gas assets that the GOR considers "strategic."
BEYRLE