Conoco Phillips Buys a Stake in Russian Oil Giant Lukoil

question 78

Essay

Conoco Phillips Buys a Stake in Russian Oil Giant Lukoil
In late 2004, Conoco Phillips (Conoco) announced the purchase of 7.6 percent of Lukoil's (a largely government owned Russian oil and gas company) stock for $2.36 billion during a government auction of Lukoil's stock. The deal gives Conoco access to Russia's huge, but largely undeveloped, oil and natural gas reserves. Conoco intends to boost its investment to 10 percent by yearend and to 20 percent within two-to-three years. To help ensure that Conoco's interests are protected, even though it has only a minority position, Conoco will have one seat on Lukoil's board and Lukoil changed its corporate charter to require unanimous board approval for the most important decisions such as payment of dividends and major new investments. Conoco will gain one additional seat once its ownership share climbs to 20 percent. Conoco has also agreed to pay $370 million to Lukoil for a 30 percent stake in a joint venture to develop reserves in northern Russia. The two firms will split operational responsibilities equally. Conoco's stock fell more than 1 percent immediately following the announcement.
-Why do you believe Conoco's stock fell immediately following the announcement?

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