Gazprom may buy Novatek stake valued at $2.4 billion

OAO Gazprom, the world's largest gas company, may buy a stake valued at about $2.4 billion in domestic producer OAO Novatek to increase supplies of the fuel in Russia as it seeks to meet rising European demand. A preliminary accord to acquire as much as 19.9% of Novatek “at market value'' from its main shareholders, OOO Levit and SWGI Growth Fund Ltd. was signed, the companies said today in separate statements. Novatek shares in London on June 23 closed at $40.20, valuing it at about $12.2 billion. Gazprom relies on exports to Europe, where it has a quarter of the market, for profit because the Russian government caps domestic prices to help control inflation. Novatek, which doesn't send gas outside Russia, said it expects the accord to help it develop new and existing fields. “Gazprom is worried about its ability to supply the domestic market in times of growing demand for gas as its output is peaking,'' said Ian Hague, who manages $2.1 billion at New York- based Firebird Management LLC, including Gazprom shares. “They need to put their hands on as much domestic production capacity as they can.'' The accord is expected to be completed in August, the companies said. Novatek's London-traded shares today climbed 9.6% to $44.05. Gazprom shares in Russia lost 0.5% to $9.50, giving the Moscow-based company a value of about $225 billion.

Positive for Gazprom:State-controlled Gazprom has 29.1 trillion cubic meters of gas reserves, about 16% of the world's total. Novatek's proved reserves were 641 billion cubic meters on Jan. 1. Gazprom pumped 547 billion cubic meters of gas last year, while Novatek, the second-largest Russian producer, extracted less than 5% that amount, or 25 billion cubic meters. The deal “is positive for Gazprom'' Citigroup Inc. said in a note to investors. “Novatek has lower operating costs and better production dynamics and domestic gas prices are increasing faster than inflation.'' The transaction will give the state a so-called 25% blocking stake in Novatek, Deutsche UFG said in a note to clients. State-owned Vnesheconombank holds about 5% in Novatek shares, the brokerage said. About 25% of the company's shares are traded. Gazprom said the stake will allow it “to tap additional resources for supplying gas to Russian consumers and for carrying out a coordinated policy of developing the gas market in Russia.'' Novatek said the partnership will help it “increase production targets and realize its strategic objective of maximizing liquids processing.'' Novatek raised $966 million last year in an initial share offering to the public. (Bloomberg)