LONDON (Dow Jones)--London-listed Imperial Energy Corp. PLC (IEC.LN) is expected to receive a formal bid for its shares within days, which, in turn, may open Imperial's assets for a Russian state-controlled company.
Imperial, an independent, Russia-oriented oil company with a market capitalization of about GBP1.2 billion, has said that it's discussing a possible cash offer for the company at a price of 1,290 pence a share and has also received a second approach from another company.
Imperial didn't name the bidders, but people familiar with the matter said the first one is India's Oil & Natural Gas Corp. (500312.BY), or ONGC, and the second is China Petrochemical Corp. (SNP), also known as Sinopec Group.
People familiar with the matter said that Korea National Oil Corp., or KNOC, is also interested in Imperial.
All the companies are state-controlled and already have projects in Russia.
The wave of interest in Imperial has pushed the share prices up by almost a third to 1,145 pence Wednesday from late July when the first reports on a potential bid appeared.
Brokerage Cazenove said a bid would need to be between 1,300 pence and 1,400 pence to be successful.
Brokerage Daniel Stewart sees a successful offer at around 1,500 pence a share, a view supported by Churchill Capital, which said that both ONGC and Sinopec could offer that price if a bidding contest occurs.
There is a possibility that ONGC and Sinopec will avoid a takeover battle and team up, as they did in 2006 when they jointly bought a 50% stake in Onimex de Colombia. However, according to people familiar with the matter, the possible bidders approached Imperial separately.
Churchill capital said that there is just a 20% probability of a joint bid.
A bidding war, analysts said, is more probable. Churchill estimates the probability of this at 60%, with a Sinopec victory more likely. Chinese companies outbid ONGC or one of its affiliates in energy deals in Kazakhstan and Ecuador in 2005 and in Nigeria in 2006.
Analysts agree that it's very unlikely that either of the foreign bidders would be able to buy Imperial without a Russian state-controlled partner, either OAO Rosneft (ROSN.RS) or OAO Gazprom (GAZP.RS).
UniCredit analyst Pavel Sorokin said the deal will probably be structured like the one that saw Sinopec buy Russian oil producer Udmurtneft in 2006, later selling 51% to Rosneft. Sinopec and Rosneft are partners in the Sakhalin-3 oil and gas project, with Rosneft holding a 75% stake.
Rosneft and China's state-controlled companies cooperate on a number of projects. National Petroleum Corp., the parent company of PetroChina Co. (PTR), and Rosneft are in talks to build a refinery in China with a planned annual capacity of 10 million metric tons of crude, or 200,822 barrels a day.
Rosneft also has a supply deal with China for delivery by rail of 48.4 million tons of oil by 2010. The parties are now renegotiating the price.
Also, Rosneft Vice President Dmitry Bogdanov recently visited China for talks with oil companies. Rosneft, however, declined to comment on whether any deals have been made.
Rosneft and KNOC have teamed up for development of the West Kamchatka shelf in easternmost Russia, and, according to people familiar with the matter, are considering further cooperation.
Although Rosneft and ONGC are partners in the Sakhalin-1 project, the Indian company is closer to Gazprom and its oil arm, Gazprom Neft. The two companies have an agreement on joint development and production in Russia and abroad.
Tim Heeley, an analyst at Daniel Stewart, said: "ONGC probably has Gazprom Neft backing, while Sinopec probably has Rosneft's one, and there is a 60% probability that the former will win."
Gazprom has expressed interest in Imperial in the past.
But Imperial failed to strike a deal with Gazprom in 2007, when the gas monopoly's banking arm wanted to buy a 25% stake below what was then the market price. Gazprom Neft said earlier this year that it's interested in acquiring assets in Russia and abroad.
Imperial is one of the few independent oil companies operating in Russia, and has firsthand experience with the risks associated with doing business there. Imperial shares suffered when it was accused by Russia's resource watchdog of overstating its oil reserves to boost its share price.
Imperial has been able to register its reserves and emerged as one of the cheapest Russia-oriented independent producers, based on reserves multiples.
Imperial, which mostly operates in the Tomsk region of Western Siberia, has reserves of 920 million barrels of oil equivalent, with total possible resources estimated at 3.4 billion barrels.
"Although any acquisition would bring investors' rewards faster, we are convinced that the company offers strong fundamental value on its own," said Alexander Burgansky, an analyst from Renaissance Capital bank in Moscow said.
"Even if the bid fell over, Imperial will still be sustainable," Heeley said.
According to Heeley's calculations, at a bid of around 1,300 pence a share, investing in Imperial at the time of the company's floatation in April 2004 would bring a total annual return of more than 320%.
"Imperial is clearly a success story, but Russian risks have perceptively increased recently. It's a good time for Imperial to get out of the country," Heeley said.
He added: "Too many people have been burned recently in Russia."