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Company in Mass Media

"This was an undervalued asset, not a troubled one"

03.11.2016. https://lenta.ru/articles/2016/11/03/koshelenko

“Polyarnoe Siyanie” was considered a troubled company, that obviously burdened its previous owners – Rosneft, Russia, and ConocoPhillips, USA. In 2015 they finally disposed of the asset, which completely turned around since the sale – recently the company announced its proven reserves doubled. Sergey Koshelenko, the new owner of Polyarnoe Siyanie”, told Lenta.ru on how he acquired and develop the business, mentioning by the way that he was working far from the energy resources sector for most of his life.

Lenta.ru: Purchasing a company with far-from-perfect financial indicators is a rather risky move, isn’t it?

Koshelenko: I’d rather disagree. On the contrary, as someone who has many years of experience in investment banking, I find such companies very attractive. Before buying, I thought Polyarnoe Siyanie was an undervalued asset.

But its acquisition by financier Sergey Koshelenko seems even more weird knowing that oil industry is a completely new area for you.

Indeed, I spent most of my career – more than 25 years – working in the financial sector. In 1992 I came to International Moscow Bank – one of the first financial structures in the modern Russia that began operating in the international markets at that time. Then I worked with Moscow office of Credit Suisse First Boston for a long time. Other names on my CV are VTB, VEB Capital, Rosbank and so on.

But only the uninitiated think that bankers deal in money and accounts. Thanks to the specifics of our work, we can be well aware of the events in one industry or another and know its inherent trends. We also learn to evaluate risks and perspectives.

But you are still a banker, rather than an oil industrialist. How did you get to own an oil asset?

Working in the banking industry, I was familiar with various oil deals. When I got an opportunity to enter this business – I thought it was worth a try.

But why not, say, food industry, which is developing rapidly these days, given the sanctions?

Production of energy resources is the most developed sector in our economy. I had been facing it all the time, no matter what bank I was working at. Besides, as I already said, I witnessed many deals in the industry, so I had an idea on what assets and in what locations were worth their money.

Why did you choose Polyarnoe Siyanie? It was a troubled asset with falling production. ConocoPhillips and Rosneft declared their intentions to leave the project long before they actually sold their shares.

Well, it’s not so much troubled after all. As for the previous owners, ConocoPhillips wanted to leave the Russian market for some time, while Rosneft was concerned about optimizing its empire. It is a huge company – they may have had a change of concept, and this small asset was no longer fit for their strategy. A state company has completely different appetites. Assets like Polyarnoe Siyanie are more efficient as part of smaller companies. They have about 6 million tons known reserves, with complete and quite unique infrastructure. If you look at what the Americans and Rosneft had done to it, it is indeed a very good asset. There were other buyers, too; at least three that I am aware of.

Can you name them?

That goes against my principles. Let me put it this way: what the press said was very close to the actual situation, so the asset was purchased in a competitive way. Even though the papers were ready in September and the deal was closed in December, somebody was trying to snatch the asset until the last moment.

What deal size are we talking about? The media estimates were anywhere between 150 and 200 million dollars.

I’ll just say the asset was purchased for a competitive price. The numbers in the media were close to the reality.

Was that borrowed money?

Part my savings, part borrowings.

But ultimately, the asset was worth it, wasn’t it?

At the price of 50 dollars a barrel, the company earns over 40 million dollars – this is annual EBITDA figure. It is worth mentioning that Polyarnoe Siyanie was passed to Rus’-Oil under a confidential management agreement.

Why?

As you noticed, I am more of a banker, but I have known Sergey Podlisetsky, Rus’-Oil CEO, for a long time. He built a highly successful management company starting with a small oil asset in Orenburg. I was so impressed with his performance I decided to trust him with my asset. And since Rus’-Oil already has experience of operating in the industry, it was only fair to delegate management functions to this company.

When previous owners sold Polyarnoe Siyanie, its production was dropping. How is the company doing now and what are its plans for the future?

Indeed, the production at Polyarnoe Siyanie had been dropping for a few years. The company produced more than 750,000 tons of oil in 2010 and just over 400,000 in 2014. But we investigated and increased recoverable reserves – from about three million tons at the time of acquisition to six million, according to the latest DeGolyer and MacNaughton data. This allowed us to start a 19-well drilling program scheduled for 2017-2018.

That’s a lot. Probably some serious investment was needed?

A new technology will be used for drilling, using Mobistack floating slabs instead of building cluster sites. It is not as expensive as traditional methods. So we expect production growth in the next three years: to 350,000 tons in 2017, up to 400,000 tons in 2018 and 490,000 tons in 2019.

So the company’s problems are over?

I would say Polyarnoe Siyanie never had any major problems. The issue was about concentrating on asset development. Apparently, previous owners had different priorities.

Have you ever worked as sort of a crisis manager before?

In the beginning of this decade, I came to VEB Capital as a Deputy CEO, where I was responsible, among other things, for restructuring a rather big portfolio of non-core and problematic assets. That is how I got a detailed knowledge of how some companies become troubled assets. I think this knowledge came handy in my current business – developing Polyarnoe Siyanie.