Government reveals details of Odesa Portside tender

Ukraine’s Cabinet of Ministers published on Oct. 20 its resolution approved a day before outlining the conditions of the privatization of nitrogen fertilizer producer Odesa Portside Plant. As earlier, the government will offer a 99.57% stake in the plant. But this time it’s proposing a starting price of UAH 5.16 bln (USD 200 mln), a reduction from UAH 13.18 bln as approved in May 2016. Among the key requirements is the buyer will have to fully repay the plant’s debt to state natural gas supplier Naftogaz.

The tender may take place on Dec. 12-15, State Property Fund Head Ihor Bilous told a press conference on Oct. 20, as reported by Interfax-Ukraine. He said that four or five potential investors revealed their interest in the deal. In case the tender fails to occur (i.e. if less than two contenders participate), the government may consider temporarily freezing the plant’s operations, or will pass it into concession to a state natural gas producer.

Given current prices for fertilizers, Odesa Portside can break even if it buys gas at a price of USD 153/tcm, while the price currently charged by Natogaz is USD 270/tcm, Bilous said. Recall, Naftogaz was obliged by the government to supply Odesa Portside 0.3 bcm of gas in 4Q16, without any payment guarantees.

Alexander Paraschiy: At current gas and fertilizer prices, Odesa Portside will generate USD 35 mln in operating losses in 4Q14. If the plant continues generating the same losses in future quarters (Bilous expects some recovery in fertilizer prices only in 2019), its equity value could become negative in early 2018. That’s clearly not a good investment story.

Adding the USD 35 mln in expected losses for 4Q16, USD 250 mln in debt to Dmytro Firtash and an earlier estimated USD 100 mln working capital gap of the plant, as well as a privatization price of at least USD 200 mln, the total required investment in Odesa Portside would reach USD 585 mln as of end-2016. This is not an attractive price, in our view. So we do not expect this tender will be successful.

We expect the plant will be given into leasing (concession) to Naftogaz or a subsidiary, which will enable the government to postpone the tender for better times (or better fertilizer prices). In which case, Naftogaz will incur losses due to below-market prices for gas supplies to the plant.