Spain’s Largest Oil Producer

OAO Lukoil requested financing to buy a stake in Repsol YPF SA, Spain’s largest oil producer, according to Miguel Blesa, chairman of Caja Madrid.

The group of banks that may fund the deal asked Russia’s largest non-state oil company for more guarantees, Blesa told reporters today in Madrid. Lukoil spokesman Dmitry Dolgov declined to comment when contacted by Bloomberg.

Lukoil, which owns oil-producing assets in Siberia, wants to boost refining capacity in the Mediterranean to process its crude. Analysts at JPMorgan Chase & Co. and ING Groep NV had expressed skepticism that Lukoil, which already has refineries in Bulgaria and Romania and has agreed to set up an Italian oil venture next month, could afford another purchase.

“The odds of Lukoil being able to arrange financing are fairly high even with oil prices at $50 per barrel,” Steven Dashevsky, managing director of equities at UniCredit SpA in Moscow, said in a telephone interview today. “Lukoil remains a very profitable company.”

Sacyr Vallehermoso SA, the Spanish builder whose debt is six times its market value, is seeking to sell its 20 percent stake in Repsol to reduce debt as the nation’s housing slump shows no sign of easing. Criteria, a Barcelona-based investment company, has a 9.1 percent direct holding in Repsol.

Dropped Price

A 30 percent stake in Repsol is worth about 5 billion euros ($6.5 billion), based on the oil producer’s closing share price on Nov. 20, the day before Criteria first disclosed the talks. Lukoil has dropped the price it’s prepared to pay for the holding to a range of 22 to 24 euros apiece from 27 euros, Expansion reported today, without saying where it got the information.

“Western banks might be reluctant to take Russian-based assets as collateral, although Lukoil has some non-Russian assets such as its stake in ERG,” said Iain Reid, a London- based analyst at Marquarie Bank. “They might be reluctant to take Repsol shares as collateral given the recent share price fall.”

Lukoil agreed in June to pay 1.35 billion euros to buy into a refining venture in Italy with ERG SpA. Repsol, which operates five refineries in Spain, has lost 40 percent of its value this year.

Any oil producer interested in buying a minority stake in Repsol won’t automatically qualify for a seat on the company’s board, Chief Executive Officer Antonio Brufau said today.

Show Commitment

“An industrial competitor will have to demonstrate that they will add to the business to be allowed a seat on the board,” Repsol spokesman Kristian Rix told Bloomberg by telephone.

A potential investor seeking to have a say in the running of the oil producer would be required to make a public offer. “They have to cross the magic line,” Brufau told a conference in Madrid.

“It would be hard to keep a 30 percent holder off the board,” said Reid at Marquarie Bank. “It would be better to have them inside the tent than outside.”

If a rival oil company were interested in buying a stake in Repsol, it would be limited to 10 percent of voting rights, under company statutes, Brufau said.

Crude oil futures have dropped 64 percent since reaching a record $147.27 on July 11.

“A lot will depend on the price, but Lukoil does have a track record of buying undervalued assets at distressed values, and ultimately profiting from them when the cycle turns,” said Dashevsky at UniCredit.

Debt Outstanding

Lukoil currently has $6.9 billion dollars in bonds and loans outstanding, according to Bloomberg data. It had $1.66 billion in cash at the end of June.

Repsol gained 4 percent to 15.20 euros in Madrid while Sacyr lost 0.9 percent to 7.74 euros. Lukoil added 3.3 percent to 870.40 rubles on the Micex stock exchange.

The cost of protecting Repsol debt from default has surged fourfold to a record since the middle of October.

Credit-default swaps linked to the company rose 4 to 376 today, according to CMA Datavision prices, compared with 94 on Oct. 14. An increase in the contracts indicates a deterioration in the perception of credit quality.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.