Hungarian state’s stake in MOL (Hungarian Oil and Gas Company)

I think I ought to emphasize that MOL is not truly a Hungarian company, at least not in the sense that the Orbán government is trying to make the population believe. The announcements portrayed the Hungarian government’s purchase of a 21.2% stake in MOL as a tremendous coup by which Hungary managed to wrestle a big chunk of MOL’s stock out of the Russian bear’s paws. I’ll bet that most Hungarians still think that MOL is a state enterprise, which of course it isn’t. MOL is listed on the New York, Budapest, and Warsaw stock exchanges where it is freely traded. It is a company with a diverse and ever-changing ownership. Until now a bit less than 80% of its shares were owned by various investors, Hungarians as well as foreigners. However, the owner of 21.2% of MOL shares was Surgutneftegas, a Russian company that purchased the stake from OMV, the Austrian oil company, in 2009.

From the beginning the Hungarians didn’t like the fact that a Russian company owned a sizable stake in MOL because they claimed that the ownership of Surgut wasn’t clear. They suspected the Russian state of being behind Surgut. The Gyurcsány government made serious efforts to curb any possible influence of Surgut on MOL’s affairs. The Hungarian parliament actually passed a piece of legislation (jokingly called the Lex MOL) according to which Surgut was deprived of its shareholder right to vote on matters pertaining to MOL’s business. Surgut sued several times and the Hungarian courts always ruled in the government’s favor. The latest ruling, again against Surgut, was on April 7. I didn’t agree with Gyurcsány’s decision concerning Surgut and MOL because I didn’t think that the Hungarian government had the right to deprive Surgut or anyone else for that matter of its shareholder rights in a publicly traded company.

During the Gyurcsány and Bajnai governments there were vague talks about trying to purchase Surgut’s stake in MOL, but no serious attempt was made. The government wasn’t exactly flush with cash; indeed, it needed IMF assistance in order to survive. Shortly after the new government was installed in Budapest, however, it was becoming clear that extensive negotiations were taking place between Moscow and Budapest that included the possible purchase of the Surgut stake. It was on November 30, 2010, after Viktor Orbán’s visit to Moscow, that the Russians announced that Putin and Orbán had indeed talked about the Surgut stake in MOL and that negotiations would continue. Only a month earlier Putin was actually asking the European Union to help because MOL was violating accepted rules when it prevented Surgut’s participation in business decisions. My feeling is that Putin had had enough and decided to convince Surgut to sell.

In the last six months or so one heard practically nothing about the continuing conversations between Russia and Hungary concerning MOL. But then came yesterday’s announcement that Hungary had purchased Surgut’s 21.2% stake for 1.88 billion euros ($2.7 billion) or about 500 billion Hungarian forints. The deal was definitely good for Surgut: it got a 40% return on its 2009 investment. On the Budapest stock exchange, after an initial pop, MOL sold off. Right now MOL is trading at 22,660 forints, less than what Hungary paid Surgut.

Here is the current breakdown of MOL ownership:


Some help with the Hungarian: Külföldi befektetők = foreign investors; Magyar állam = Hungarian state; Hazai intézményi befektetők = domestic institutional investors; Hazai magánbefektetők = domestic individual investors; Mol sajátrészvény = MOL’s own stake. The rest are clear. As you can see, as a result of the deal, the Hungarian state became the largest single owner of MOL shares.

The deal was originally announced by Viktor Orbán, but about an hour later Tamás Fellegi gave a press conference where he was asked how the Hungarian government will pay for these MOL shares. To everybody’s astonishment the answer was that the money will come from that portion of the IMF loan that has not been used by either the Bajnai or the Orbán governments. The first reaction was disbelief. Surely, the IMF didn’t give Hungary the loan to “play with it on the stock market.” This must be a misunderstanding. But no, the IMF after all is not such a harsh lender as some people would like to portray it. Iryna Ivaschenko, resident representative of the IMF in Budapest, confirmed Fellegi’s announcement: Hungary is free to use that money in any way it wishes.

Viktor Orbán tried to convince the population that Hungary’s energy security is strengthened by this purchase. This is not true. MOL is an oil refiner and distributor of mostly Russian natural gas. “Someone” put it well: “It is like buying the tap, when you have no control over the water-pipe.” The decision to buy these MOL shares in my opinion is more a political than a sound financial move. In fact, it is most likely financially disadvantageous to the taxpayers. But politically it sounds good: “We saved a good old Hungarian company from the Russians.” Some pro-Fidesz analysts act as if these 500 billion forints really didn’t add to the Hungarian national debt. But surely, this is not so. The IMF loan will have to be repaid sometime fairly soon, and new bond issuances carry much higher interest rates.

LMP criticized the deal. Its economic expert, Benedek Jávor, mentioned the real possibility that given Surgut’s reluctance to sell, Hungary perhaps offered something else to the Russians by way of an enticement. LMP, being a green party, is especially worried about commitments to the expansion of the Paks Atomic Power Plant.

According to MSZP buying the stake is “a mindless waste of money, bordering on a criminal act.” An MSZP member of parliament also noted that in 2012 there is a planned saving of 550 billion forints as a result of the very severe austerity program thrust upon the population. And now the government spends almost the same amount of money to buy shares in a publicly-traded company. According to some analysts investors on the whole are not keen to see a large government stake in a company. Therefore MOL shares may drop in value, especially if it turns out that the Hungarian government is too involved in the everyday running of MOL, which is not outside the realm of possibilities. The CEO of MOL is a close friend of Viktor Orbán and a great supporter of Fidesz.

 

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22 comments

  1. Lex MOL was not adopted as a preventive measure against a hostile takeover by Surgutneftegaz, but against OMV. OMV tried to take over MOL in an untransparent manner sometime in 2007 or 2008.

  2. Is it not possible that, instead of giving something in return for a Russian agreement to sell, Orbán made it clear that he would continue to make things uncomfortable for Surgutneftegas? I try to be fair, even to him.

  3. “the Russians announced that Putin and Orbán had indeed talked about the Surgut stake in MOL and that negotiations would continue”
    This is what proves best that it was indeed the Russian state behind Surgut.
    “The decision to buy these MOL shares in my opinion is more a political than a sound financial move. In fact, it is most likely financially disadvantageous to the taxpayers”
    How can you say a thing so clearly wrong? MOL is a highly profitable company and it can be easily calculated how it will yield profit for Hungary. Investing in profitable companies is worth it alone, even if we ignore its national significance! Please consult the excellent book “Economy for dummies”, vol. 1.
    And you shouldn’t be mentioning MSZP’s opinion at all. If someone has absolutely no right to even sheesh a loud breath, it’s them. They sold it down to the last nail. Their only morally not outrageous option is to shut up.

  4. I think you got this one just about completely right. This does not make sense from a financial/economic perspective. This was solely a political decision. It does add to the State debt (but they did buy an asset that will presumably pay dividends and long term appreciate in value so the net increase in liabilities should really be considered as less than the amount spent), so it is not as bad as using he money for transfer payments but worse than not using it at all.

  5. NWO: by your economic knowledge, it may not make sense from an economic perspective. But that only tells of your economic knowledge.

  6. Well, all I can say my economic knowlege is extremly limited … But didn’t the Chief say recently that they saved the Hungarian pensions from the stock market sharks? How come they are gambling now on stock market? Those awesome dividents will help to keep the value of the … wtf? … the pensions ??? No wonder my redneck brain is confused.
    There is another thing my backwoods people (my kin) don’t really get. Folks can hardly afford to buy “benzin” (gas) at the pumps and now their government just bought stakes in an oil company. Johnny! When the price of one liter regular hits the 500 HUF think about the wonderful revenues from your government’s latest investment.

  7. I’m always wondering if you are mixing things up on purpose or you honestly understand so little.
    First, there is a difference between a steadily growing company and speculative trading of mixed shares in the stock market by uncontrolled broker companies.
    Second, no one wants MOL to be losing money. Petrol price control is needed (and the state has better instruments to do it by owning the shares, even), but as an all-around multinational company, domestic petrol prices are only one ingredient of the profit. In case the government would want to get profit from the petrol prices via MOL, they could do it easier by raising excise tax. No need for complicated measures here.

  8. “I’m always wondering if you are mixing things up on purpose or you honestly understand so little.”
    Both.
    It’s very cute. When the government invests (gambles in Orban’s dictionary) on the stock market that’s buying “steadily growing companies”. If the context is mutual funds (that happened to be “nationalized” by the government) then it is “speculative trading of mixed shares in the stock market by uncontrolled brokers”. What’s more evil? The speculation or the diversification?
    Actually, your definition of mutual funds (“speculative trading of mixed shares in the stock market by uncontrolled brokers”) is really good. It could be in the Wikipedia. That’s the whole idea. That is why we give them money.

  9. There is a significant misunderstanding here. I never supported the goverment’s decision to re-nationalize the pension funds due to their speculative behavior on the stock markets. That was demagogue for most of the people who sadly can’t understand anything more complicated than a toothpick.
    Of course the real reason behind the government’s action was to take back into the national budget what belongs there.
    And that’s why I supported the decision.
    So I guess we’re not at battle on this case.

  10. First, there is a difference between a steadily growing company and speculative trading of mixed shares in the stock market by uncontrolled broker companies.
    What is the difference. I am pretty sure that MOL also operate on the stock/commodity market.
    Second, no one wants MOL to be losing money.
    Well I know some parties that would like to see MOL losing money. Shell, Esso, Yukos,BP, etc.
    Btw you know that under the new constitution this never would have taken place.

  11. A 40% increase in value in two years, and the purchase price paid for with borrowed government funds to a Russian firm, a transaction with all the transparency of, well, a Russian energy deal? The opportunities for private off-shore skimming on this deal by participants on either side of this deal are simply too great to be ignored, and this is at a scale that makes a lakeside or inner city land deal look microscopic. Will we see any parliamentary or criminal investigation into this?

  12. “What is the difference. I am pretty sure that MOL also operate on the stock/commodity market.”
    The difference is that MOL manages real assets that are deeply embedded in the real economy (see: oil and gas) and its actions don’t end at trading with imaginary assets (see: stocks). More than that, trading with stocks is not a significant area of MOL.
    “Well I know some parties that would like to see MOL losing money. Shell, Esso, Yukos,BP, etc.”
    Of course I meant the government members or other Hungarians, not the competitors.
    “Btw you know that under the new constitution this never would have taken place”
    Why not?

  13. One of the first things we learned when studying economics was the concept of opportunity costs: take into consideration what else you could have done with the money. The investment will be profitable for the Hungarian state if later they sell the shares again for a higher price (as we don’t know the future development of MOL-shares on the stock market, this is speculation).
    The other option is that the state gets annual dividends out of the profits. From the point of view of economic policy, high company profits are a signal of competition not working well. The German anti trust office just released a report on the gas market in Germany, btw.
    In both cases you have to deduct the capital costs for the 1.9 billion Euro. Hope the dividend is going to exceed that.

  14. T. Sanyi: “The other option is that the state gets annual dividends out of the profits.”
    As far as I know MOL hasn’t been paying dividends for years.

  15. MOL paid no dividend for either 2009 or 2010. That’s not a good indication that this investment will be able to cover the loan with which it was financed. With this purchase, the P/E ratio has now shot up to over 24:1, which is very high for the sector (compare Shell with 11:1). In short, they massively overpaid. With no convincing financial rationale for the share purchase and the lack of transparency in the transaction, it is hard not to suspect that serious kickbacks have been paid, and the whole deal paid for on the nation’s IMF credit card.

  16. To PT, your comment was most welcome. You seem to be somebody who is very familiar with the world of stocks, bonds, and the business world in general. I really appreciated your very valuable comment. Thank you.

  17. The Spanish government is privatizing El Gordo the Spanish Lottery. They think the deal could fetch upto 10 billion US which would be spent on reducing the national debt.

  18. Perhaps I am biased (prejudices, prejudices…) but to buy back anything from a Russian company close to Putin sounds good to me. If Gyurcsany tried to make the takeover from OMV impossible for me this sounds like a general preference (across the party spectrum) to see the domestic power supplier more under “domestic control”. I am not sure whether that is not relatively frequent also in other EU countries as it is a strategic sector.
    But what I do not know: does a country pay interest for the IMF loans even if it is not actually “used” for saving the currency? I thought that interest has to be paid in any case but I really do not know.

  19. I think the debate is rather around the fact that the money could have been put to better use … if they new what to do with it. They have no idea how to give a boost the Hungarian economy. That’s why they didn’t want anymore help from the IMF. Their plan is to “stabilize the patient” with austerity measures, in other words to make the people get used to the fact that they cannot consume more than they produce, and to float on from elections to elections blaming everybody else for the low living standards.
    The post-communist generation will be in their 40s from 2020. That’s where the change may come.
    I’m still wondering how old is Johnny …

  20. Kirsten,
    As long as the Russian holding was a minority holding without ability to control the operations of the company and as long as no dividend was being paid, there was no advantage in buying out the Russians. Moreover, it might have been useful to have them have capital tied up in the company, at the very least as an incentive towards cooperation.
    Mutt Damon,
    You’re absolutely right to ask about the opportunity cost of this deal. Given the overpayment and that opportunity cost, there are only two possible logical conclusions (a) the deal was corrupt, with someone taking personal advantage; or (b) gross financial negligence. I don’t know which scenario is worse.

  21. Johnny boy, I think your comment is a bit to extreme.Everyone has the right to hve their own opinion about things, there is no one “absolute truth”, not even dealling with economics. By the way, I also read excellent book “Economy for dummies”.

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