The Surmont oil sands project, co-owned by ConocoPhillips and Total.Nathan VanderKlippe
ConocoPhillips Co., the third-largest U.S. oil company, said Wednesday it would sell its entire stake in Russian oil major Lukoil and use the funds to buy back shares.
The Houston company, in the midst of a years-long plan to shrink debt and improve returns, said it would sell 40 per cent of its one-fifth stake in Lukoil back to the company for $3.44-billion (U.S.).
The Lukoil sale is not part of the company's previously announced $10-billion asset divestiture program.
Conoco plans to sell the balance of its stake in open market transactions by the end of 2011, with proceeds going to share repurchases.
Under an agreement between the two companies, Lukoil has 60 days to buy back the balance of Conoco's stake for $56 a share, Conoco chief executive officer Jim Mulva said on a conference call with analysts.
The deal was seen as a good one for both companies.
"This is a positive because there was some question about [Conoco]keeping half of their stake," Brian Youngberg, an oil analyst with Edward Jones, said. "While it has been a good investment for the company, it hasn't been a great investment, and this move reduces the company's risk profile."
Previously, Conoco said it would sell half of its Lukoil shares. In explaining the change of mind, Mr. Mulva said the venture did not work out as planned.
"The development of opportunities not just within Russia but outside of Russia ... that really hasn't materialized quite like we thought," Mr. Mulva told analysts on the call. "The business environment is quite different."
Conoco bought into Lukoil in 2004 and gradually built up its stake to 20 per cent, while also investing hundreds of millions of dollars into a joint production unit with Lukoil in Russia's Arctic, Naryanmarneftegaz.
"Conoco thought they would grow faster in Russia, but now they are finding they can grow faster elsewhere," Mike Breard, an oil analyst at Hodges Capital Management in Dallas, said. "Personally I would rather invest somewhere else than Russia."
When Conoco's plan to halve its stake was first reported in March by Reuters, there were some fears that the sale could hurt the Russian company's share price or its relations with the Kremlin.
"The market already digested that Conoco was pulling out when it announced that it would sell the first 10 per cent," Valery Nesterov, an analyst at Troika Dialog brokerage, said. "Now that it is fully selling its 20 per cent share, it will not make much of a difference in terms of sentiment."
Lukoil will use its own funds and is looking for $600-million worth of loans to finance the deal, banking sources told Reuters on Wednesday.
The announcement came with Conoco's second-quarter earnings. The company topped Wall Street estimates, helped by higher profits in its refining and exploration businesses.