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DOI: https://doi.Org/10.17323/j.jcfr.2073-0438.17.3.2023.93-115 JEL classification: F23, F51, G30, G32, G34
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Leaving Russia: Exit Strategies of Foreign Companies
Nikolai Duvakin
Analyst, Family office, Moscow, Russia, [email protected], ORCID
Lucky Alexis Isagalieva isi
Senior analyst, Rostelecom, Moscow, Russia, [email protected], ORCID
Andrey Panteleev
Analyst, Kept, Moscow, Russia, [email protected], ORCID
This study involves the compilation of a database detailing the exit of foreign companies from Russia in 2022 and the identification of their primary exit strategies. The current situation is unprecedented in its scale and has no analogues in the history of the Russian economy, therefore, it has not been sufficiently studied yet. A total of 28 industries across 25 countries were selected for the initial study. Through an analysis of exit patterns, nine primary strategies were identified, including joint venture exits, soft closings, sales to local buyers, suspension, liquidation, management buyouts, selling shares to partners, carving out to local legal entities, and sales to foreign buyers. The subsequent research stage focused on the oil and gas industry and examined the cases of its five leading companies: Shell, TotalEnergies, Equinor, ExxonMobil, and BP. It assessed both financial and non-financial losses incurred by these companies due to their decisions to withdraw from the Russian market. Financial losses were determined using the Discounted Cash Flow method and the Economic-Value-Added valuation method, while non-financial factors were assessed through operational indicators such as reserves and oil and gas production. The fundamental value of the above-mentioned companies was shown to comprise to $20.6 billion, $1.1 billion, $0.5 billion, $17.8 billion, and $36.5 billion, respectively. The study revealed that companies with strategically important and substantial projects in Russia, notably BP and TotalEnergies, pursued a "soft" exit strategy. Despite their decision to exit Russia, these companies continued to receive dividends and effectively retained ownership shares in assets, even though financial statements reflected impairments.
Keywords: discounted cash flow (DCF), economic value added (EVA), losses incurred by foreign companies, exits of foreign companies, oil and gas sector, exit strategies from the market
For citation: Duvakin N., Isagalieva L.A., Panteleev A. (2023). Leaving Russia: Exit Strategies of Foreign Companies. Journal of Corporate Finance Research. 17(3): 93-115. https://doi.org/10.17323/j.jcfr.2073-0438.17.3.2023.93-115.
The journal is an open access journal which means that everybody can read, download, copy, distribute, print, search, or link to the full texts of these articles in accordance with CC Licence type: Attribution 4.0 International (CC BY 4.0 http://creativecommons.org/licenses/by/4.0/).
Abstract
Introduction
The year 2022 witnessed significant geopolitical tension, prompting the exit of numerous foreign companies from the Russian market. The political nature of these decisions, coupled with the diversity of the companies involved, resulted in varying outcomes, including the choice of ultimate buyers and transaction structures. Notably, not all companies that announced their exit from the Russian market fully withdrew.
This paper's relevance is underscored by the prevailing geopolitical environment, which has compelled foreign companies to disengage from the Russian market. The unprecedented scale of this situation, unique in the history of the Russian economy, has sparked academic interest. We aim to conduct a comprehensive study, classifying the exit strategies adopted by these companies and assessing the impact of their decisions to exit the Russian market on various aspects of their operations, such as operational and financial indicators.
The paper's objective is to provide an extensive overview of foreign companies' exits from the Russian market while examining how such exits affect their business. To achieve this, we will use several companies as case studies.
To accomplish our goals, we will:
1) Distinguish between the exit strategies employed by foreign companies leaving the Russian market.
2) Create an exit map based on industries, countries, and exit strategies.
3) Evaluate the impact of exit on oil and gas companies' value using two approaches: Discounted Cash Flow (DCF) and Economic Value Added (EVA).
4) Consider operational metrics relevant to the selected industry.
We have chosen the case study approach as our research method, as it allows for a thorough examination of how exiting the Russian market has impacted companies, taking their unique characteristics into account. Our research focus is five foreign companies in the oil and gas sector: Shell, TotalEnergies, Equinor, ExxonMobil, and BP.
We posit the following hypotheses:
1) Some companies that announced their intention to leave the Russian market did not execute a comprehensive exit strategy.
2) Companies deeply integrated into the local market tend to adopt a «soft» exit strategy.
3) Oil and gas companies with strategically significant assets in Russia will experience the most substantial losses compared to their counterparts in the industry.
4) Companies in the selected industry (oil and gas) exhibit mixed results after their exit.
5) Losses arising from the depreciation of Russian business, as disclosed in the financial statements of oil and gas companies, do not provide a complete picture of their losses.
The academic novelty of this paper lies in:
1) The development of an exit strategy map for foreign businesses leaving the Russian market.
2) A detailed examination of the impact of exit decisions on companies' operations, taking into account operational indicators and the assessment of enterprise value using the DCF and EVA models.
Why and How do Companies Exit the Russian Market
The decision for companies to exit a foreign market is influenced by various factors, as outlined in a paper by K.S. Ozkan [1]. These factors include:
1) Conflict between Company Strategy and External
Market Environment: When a company's strategy is not aligned with the external conditions of the foreign market, it can result in competitive weaknesses and negative financial performance.
2) High or Unpredictable Market Risks: Companies may choose to exit a foreign market when the risks in that market are perceived as too high or unpredictable.
3) Communication Difficulties and Cultural Differences: Problems related to communication, cultural differences, or difficulties with local personnel can contribute to a decision to exit a foreign market.
Additional reasons for exiting a foreign market, identified in other studies [e.g., 2], encompass low profitability, misalignment between the corporate goals and capabilities and the market requirements, and insufficient experience in international operations.
Once a company decides to exit a foreign market, it has to choose among various exit strategies, which are determined by its specific goals and circumstances. Common exit strategies include company liquidation, selling to a local buyer, or facilitating management buyouts.
Influence of the Geopolitical Conflict in Ukraine
The geopolitical crisis involving Russia and Ukraine has brought about a heightened level of uncertainty and risk concerning political and economic consequences. Many foreign companies have encountered challenges related to sanctions, trade and investment restrictions, as well as the potential deterioration of the business climate.
Although this topic remains underexplored, papers dedicated to the withdrawal of foreign businesses from Russia have already appeared. For instance, according to data from Yale University [3], as of May 2023 over 1,000 major international companies had either withdrawn from Russia or were in the process of winding down their operations. Researchers from the university in their study [4] found that these departures accounted for approximately 40% of Russia's GDP.
Furthermore, a study by economists from the University of St. Gallen and IMD Business School in Switzerland [5] revealed that, by the end of November 2022, 8.5% of companies from the EU and G7 had sold at least one of their Russian subsidiaries. This figure is expected to increase as more companies that have announced their intention to exit the market proceed to do so.
However, foreign institutions were not the only ones interested in this topic. In October 2022, the Center for Strategic Research (CSR) in Russia published a report that examined 5,000 foreign companies [6]. As the CSR researchers noted, by the beginning of September 2022, 34% of the largest foreign companies operating in Russia had downscaled their activities in the country, 15% had ceased operations by transferring their businesses to new owners, and 7% had announced a complete exit. According to the research findings, among the companies that decided to sell their businesses in Russia, 33% had already completed the transfer to new owners, 34% were in the process of doing so, and 33% were actively seeking buyers (Figure 1).
Analysis of Strategies Used by Foreign Companies Exiting Russia
To identify the strategies employed by foreign companies exiting the Russian market, we compiled a database consisting of 489 companies that had announced their intention to withdraw from Russia. Notably, the leading sectors in terms of exit activity were companies involved in consumer goods, food and beverages, as well as those in the industrial and automotive sectors.
These exiting foreign companies stem from 25 different countries, which include Germany, France, the USA, Italy, the Netherlands, Sweden, Finland, the United Kingdom, Denmark, Japan, Switzerland, Austria, Canada, Spain, Australia, China, Lithuania, Norway, Poland, Belgium, the Czech Republic, Ireland, Mexico, South Korea, and Taiwan.
Figure 1. Analysis of Companies' Exit Strategies (%) Structure of companies' exit by industries (top 10 industries)
Consumer goods Industrial
Food and beverages Automotive Financial services Oil and gas Logistics Fashion retail IT
Consulting
Structure of companies' exit by countries (top 10 countries)
Germany France USA Italy
Netherlands
Sweden
Finland
Great Britain
Denmark
Japan
The leading industries in terms of foreign companies' exit are consumer goods, industrial, food & beverages and automotive
The leading countries in terms of foreign companies' exit are Germany, France, USA, Italy
In total, our research identified nine primary exit strategies and developed a methodology for creating a map of them:
Search and analysis of news and reports about the exit of foreign business from Russia
Analysis of each exit individually to determine the exit method
Creation of a database of companies leaving Russia
Aggregation the exit methods by groups on the principle based on similarity actions taken by companies
Structuring the base by industry and country
Forming a classification of strategies
1) Joint Venture (JV) Exit (159 companies).
2) Soft Closing (128 companies) - This category encompasses companies that announced their intention to withdraw from the Russian market but did not take concrete steps toward exit. These companies essentially suspended their marketing and investment operations in their Russian representative offices while continuing their core business activities.
3) Sale of a Legal Entity to a Local Buyer (67 companies).
4) Suspension of Operations in Russia with No Clear Further Steps Regarding Sale or Liquidation (63
companies).
5) Liquidation (28 companies).
6) Local Management Buyout (24 companies).
7) Sale of Shares to a Russian Partner (11 companies).
8) Carve-Out to a Local Legal Entity Operating in Russia (4 companies).
9) Sale of Russian Business to Another Foreign Company (3 companies).
In the course of our research, we developed two maps depicting the relationships between exit strategies and industries and between exit strategies and the country of the company's incorporation.
Table 1. Map of Strategies: Correlation between Strategy and Country of Incorporation
Country Carve-out to local legal entity Suspend mode JV exit Liquidation MBO Sale to a local buyer Sale to a foreign buyer Sale of the share to the partner Soft closing Total
Germany X 9 50 8 7 12 X 1 33 120
France X 10 30 4 4 6 X 1 18 73
USA X 11 7 1 3 11 2 4 20 59
Italy X 12 25 X X 4 X X 13 54
Netherlands 1 9 26 8 1 3 X 1 4 53
Sweden 1 2 17 3 3 5 X 1 9 41
Great Britain 3 2 1 2 X 4 X 1 7 20
Finland 2 2 X X 1 5 X 1 7 18
Denmark X 1 X X 1 3 X X 5 10
Japan X 2 X X X 1 X X 4 7
Switzerland X 1 1 X 1 2 X X 1 6
Austria X X 1 2 X X X X 2 5
Canada X 1 X X 1 1 X X X 3
Spain X X X X 1 1 X X 1 3
Australia X X X X X 2 X X X 2
China X X X X X 1 X X 1 2
Lithuania X X X X X 1 X X 1 2
Norway X X X X 1 X X X 1 2
Poland X X X X X 1 1 X X 2
Belgium X X X X X X X 1 X 1
Czech Republic 1 X X X X X X X X
Ireland X X X X X X X X 1
Mexico X 1 X X X X X X X
South Korea X X X X X X X X 1
Taiwan X X X X X X X X 1
Total 8 63 159 28 24 63 3 11 130 489
Specific exit strategies exhibit distinctive patterns based on the country of the exiting company's origin. Notably, Germany, which leads in terms of exits from the Russian market, frequently employs strategies such as JV exit and soft closing. In contrast, companies from Great Britain tend to favor the sale of their legal entity to a local buyer, while the suspension of operations is characteristic of Italian and American companies. Liquidation as an exit strategy
is equally common among German and Dutch businesses. Representative offices are most often sold to local companies by American and German businesses. Companies from the USA also tend to utilize strategies like selling to third-party foreign companies and transferring shares to local partners. Furthermore, the strategy of soft closing is not exclusive to German companies but is also adopted by French, American, and Italian firms.
Table 2. Map of Strategies: Correlation of Strategy and Industry
Industry 1 7 22 2 2 5 х х 7 46
Food and beverages 1 7 9 2 3 7 х 3 10 42
Automotive х 5 15 х 2 6 х 1 10 39
Financial services 1 4 8 2 1 6 х х 15 37
IT х 1 13 4 х 2 х х 9 29
O&G х 1 12 2 2 4 х х 8 29
Logistics х 2 10 2 2 2 х 1 8 27
Fashion retail х 9 1 1 1 х 1 х 11 24
Consulting 4 1 8 х 2 1 х 1 1 18
Pharmaceuticals х 6 4 х х 1 1 х 4 16
Chemical industry х 1 3 2 х 2 х х 7 15
Electronics х х 9 1 1 1 х х 2 14
Manufacture х х 7 1 х 1 х 1 2 12
TMT х 3 1 1 х 1 х х 6 12
Construction х 1 5 1 х 1 х х 2 10
Agricultural х 2 2 х 1 2 х 1 1 9
Construction materials х х х 1 1 2 х х 4 8
Retail х 2 х х х 3 х 1 2 8
Hotels х 2 х х х х х х 4 6
M&M х х 2 х х 2 х х 1 5
Paper and package х х х х 2 3 х х х 5
Power generation х х 1 х х 1 х 1 1 4
Real estate х х 2 1 х х х х 1 4
Health care х 2 х х х 1 х х х 3
Tourism х 1 1 1 х х х х х 3
Ecology х х 1 х х х х х х 1
Forestry х 1 х х х х х х х 1
Grand total 8 63 158 28 24 63 3 11 130 489
The map of exit strategies reveals that the sale of a legal entity to a local buyer is more prevalent among consulting firms, while the suspension mode is more common in pharmaceutical and fashion retail companies. JV exits tend to be made by firms active in consumer goods, automotive, oil and gas, as well as oilfield services. Soft closing, on the other hand, is favored by companies in the consumer goods, fashion retail, and financial sectors. Liquidation and local management buyouts (MBO) are most frequently associated with consumer goods manufacturers. Additionally, companies producing consumer goods, food and beverages as well as financial institutions prefer selling to a local buyer.
For our further research, we opted to focus on industries favoring the two most common strategies - JV exit and soft closing. We also aimed to explore an industry of significant importance to Russia's economy. Consequently, we chose the oil and gas sector, as the ambiguity surrounding the exit of certain oil and gas companies is a pertinent topic that warrants examination.
Within the oil and gas industry, we selected the two largest companies, TotalEnergies and BP, for the analysis of the soft closing strategy. To study the JV exit strategy, we chose the companies Shell, Equinor, and ExxonMobil.
Evaluating the Influence of the Exit of Oil and Gas Companies on Their Business
Shell
Figure 2. Structure of Assets in the Russian Federation and Strategy for Exiting the Russian Market Strategy: JV exit
| | - exit from Russian assets
1 r 1 1 1 1 1
Salym Petroleum Gydan Energy Sakhalin-2 Networks of filling stations
Development 50% 50% 27.5% and refineries 100%
Following its withdrawal from the Russian Federation, Shell reported a loss of $3.9 billion. In addition to divesting its Russian assets in early March 2023, Shell announced its intention to refrain from purchasing Russian oil in the spot market and extending fixed-term contracts. At the same time, the company emphasized that it still holds long-term contracts for LNG purchases.
The Anglo-Dutch oil giant made the strategic decision to completely sever its business ties with Russia by employing the strategies of JV exit and asset sales to local entities.
Evaluating the Influence of Shell's Exit from the Russian Market on the Enterprise Value: DCF and EVA Models
To assess the impact of the chosen strategy, we constructed DCF and EVA models for Shell and other companies under two scenarios. In the first scenario, the results obtained consider enterprise value (EV) while including revenue from the Russian business. In the second scenario, EV is calculated without factoring in this revenue. The discounted cash flow model (DCF) is employed for evaluating the company based on the present value principle. Using this model, we made forecasts of corporate cash flows for various business areas, taking into account financial statements, our own market analysis, and reports from investment banks. Future cash flows were then discounted
using the calculated discount rate, which considers risks and the cost of equity.
The enterprise value can be calculated using the discounted cash flow method with the following formula:
CFi CF2 CF„
DCF =--+-- +... +-, (1)
(1 + r )2 (1 + r )2 (1 + r)"
where DCF is the discounted cash flow, CF, CF, CF are
1 2 n
the cash flows for specific periods, and r is the discount rate.
We also used the economic value added (EVA) method as an alternative approach to assessing enterprise value. This method is based on the notion that enterprise value is determined by the company's ability to generate economic profit that surpasses the cost of invested capital. To calculate EVA, it is necessary to determine the net operating profit adjusted for the cost of invested capital. The formula for calculating economic value added is as follows:
EVA = NOPAT - (Capital Invested * WACC), (2)
where NOPAT is the net operating profit after taxes, Capital Invested is the invested capital, and WACC is the weighted average cost of capital.
Revenue forecasts were calculated by breaking down the company's activities into areas, including exploration and production, gas and energy, oil products, and chemicals. Growth rates were determined based on market analysis and reports from investment banks. The estimated share of Shell's Russian business (including ownership stakes of 50% in Salym Petroleum Development LLC, 50% in Gydan Energy LLC, 27.5 % in Sakhalin-2, 100% in filling stations and oil refineries networks) accounts for approximately 5% of corporate operating profit.
Average historical turnover indicators were used to calculate working capital, while capital expenditures were assessed based on corporate operating segments (exploration and production, gas and energy, oil products, and chemicals) at historical average levels.
For calculating Shell's weighted average cost of capital (WACC), we used the yield to maturity of 10-year US Treasury bonds, country risk factors, industry average beta, capital structure data from A. Damodaran, and the yield of the company's 10-year bonds (see Table 3).
Table 3. Calculation of the Weighted Average Capital Cost of Shell
Indicator Value Source
Risk-Free Rate 3.40% 10-Y US Treasury
Unlevered Beta 0.90 Damodaran
D/E 11.50% Damodaran
Tax Rate 25% Marginal Tax Rate
Levered Beta 0.98 Calculations
ERP 5.94% Damodaran
Cost of Equity 9.21% Calculations
Pre-tax Cost of Debt 4.55% 10-Y Corp Bond
After-tax Cost of 3.41% Calculations
Debt
We 89.68% Calculations
Wd 10.32% Calculations
WACC 8.61% Calculations
The results of calculating enterprise value using two models for the scenario in which the company maintains its business in Russia are presented in Table 4.
Table 4. DCF and EVA Models for Shell Before Exiting the Russian Market
DCF approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
EBIT (excl. Russia) 42,674 36,455 33,635 34,109 34,783 35,582
EBIT Russia (retail & factory) 2,246 1,919 1,770 1,795 1,831 1,873
As % of Total EBIT 5.0%
Total EBIT 44,920 38,373 35,406 35,904 36,614 37,454
Tax rate 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
NOPAT 33,690 28,780 26,554 26,928 27,460 28,091
D&A 21,019 20,825 21,050 21,629 22,199 22,750
Change in NWC 8,913 (1,227) (1,898) - - -
Capex (22,600) (26,106) (29,614) (31,623) (33,133) (34,146)
FCFF 41,022 22,272 16,093 16,935 16,526 16,694
WACC 8.6%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
DCF X 21,371 14,218 13,776 12,378 11,512
NPV, USD bn 73
Terminal Value, USD bn 178
TGR 2%
EV, USD bn 250.9
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
NOPAT 33,690 28,780 26,554 26,928 27,460 28,091
Capital Invested 239,141 279,354 284,925 297,184 309,655 322,424
Total IC 239,141 279,354 284,925 297,184 309,655 322,424
99 Higher School < f Economics
Journal of Corporate Finance Research / New Research Vol. 17 | № 3 | 2023
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
EVA X 4,729 2,024 1,342 801 332
236,145 239,108 244,679 253,573 263,403 273,688
WACC 8.6%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
Discounted EVA X 4,538 1,788 1,092 600 229
NPV,USD bn 8
Terminal Value, USD bn 4
Invested capital, USD bn 239
TGR 2%
EV, USD bn 250.9
The data in Table 4 shows that Shell's value for the first scenario amounts to $250.9 billion. We then calculated the enter-
prise value for the second scenario (Table 5).
Table 5. DCF and EVA Models for Shell After Exiting the Russian Market
DCF approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
EBIT (excl. Russia) 42,674 36,455 33,635 34,109 34,783 35,582
Gain / loss from exit 176
Total EBIT 42,850 36,455 33,635 34,109 34,783 35,582
Tax rate 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
NOPAT 32,138 27,341 25,226 25,582 26,087 26,686
D&A 21,019 20,825 21,050 21,629 22,199 22,750
Change in NWC 8,913 (1,227) (1,898) - - -
Capex (22,600) (26,106) (29,614) (31,623) (33,133) (34,146)
FCFF 39,470 20,833 14,765 15,588 15,153 15,290
WACC 8.6%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
DCF x 19,990 13,045 12,680 11,349 10,544
NPV, USD bn 68
Terminal Value, USD bn 163
TGR 2%
EV, USD bn 230.3
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
NOPAT 32,138 27,341 25,226 25,582 26,087 26,686
Capital Invested 239,141 279,354 284,925 297,184 309,655 322,424
Total IC 239,141 279,354 284,925 297,184 309,655 322,424
EVA 100 x 3,290 696 (4) (572) (1,073) Higher School of Economics
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
WACC 8.6%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0,69
Discounted EVA x 3,157 615 (3) (429) (740)
NPV, USD bn 3
Terminal Value, USD bn (11)
Invested capital, USD bn 239
TGR 2%
EV, USD bn 230.3
The obtained results indicate that the enterprise value decreased after exiting the Russian market by $20.6 billion, dropping from $250.9 billion to $230.3 billion.
Evaluating the Influence of Shell's Exit from the Russian Market on Operational and Other Indicators
1) Reserves
As of the end of 2021, Shell's proven and probable oil reserves totaled 9.4 billion barrels of oil equivalent (BOE). These reserves decreased by approximately 2 billion BOE, which accounts for about 21% of the company's total reserve volume.
2) Extraction Volume
In 2021, Shell's oil output amounted to 344 million BOE, with about 4 million BOE produced in the Russian Feder-
ation. As a result, the losses in oil production were relatively low, approximately 1%.
3) Premium Asian Market
Since the majority of the gas produced by the Sakhalin-2 project is directed to the Asian market, primarily to Japan, Shell has experienced a 23% reduction in its LNG supplies to the Asian market. However, considering the geographical proximity of Sakhalin Island to the main LNG market in Japan, the logistic costs for transportation from Sakhalin to Japan are approximately four times lower than from Qatar and more than two times lower than from Malaysia and Brunei, where Shell has substantial gas assets.
TotalEnergies
Figure 3. Structure of Assets in the Russian Federation and Strategy for Exiting the Russian Market Strategy: Soft closing
I - partial exit from Russian assets
I I- exit from Russian assets TotalEnergies
1 . u 1 i
NOVATEK Yamal LNG Arctic LNG 2 Terneftegaz Kharyaga Production Sharing
19.4 % (20%) (10%) (49%) Agreement (20%)
Following its withdrawal from a portion of Russian assets, TotalEnergies reported a loss of $4 billion. The company also announced that it had ceased investments in the Russian Federation, halted purchases of Russian oil and LNG in the spot market, but continued to procure
LNG under long-term contracts with Yamal LNG. TotalEnergies still maintains shares in Russian assets, from which the company continues to receive dividends. In 2022, these dividends amounted to 60 billion RUB.
TotalEnergies adopted the soft closing strategy, as it retained ownership of its key assets, including PAO Novatek, Yamal LNG, and Arctic LNG 2. The company only exited from less significant assets.
Evaluating the Influence of TotalEnergies' Exit from the Russian Market on the Enterprise Value: DCF and EVA Models To assess the impact of TotalEnergies' exit from Russian assets, such as CJSC Terneftegaz and the Kharyaga Production Sharing Agreement, on the enterprise value, DCF and EVA models were employed. A revenue forecast was calculated, considering the geographical position and breaking down by the company's business areas, which include exploration and production, refining and chemicals, and integrated gas. The growth rates were determined based on market analysis and investment banks' reports. The share of the Russian business (CJSC Terneftegaz and the Kharyaga Production Sharing Agreement) constitutes approximately 0.3% of TotalEnergies' operating profit, accounting for its share in these projects (49% and 20%, respectively).
The calculated results for the weighted average capital cost (WACC) for TotalEnergies are provided in Table 6.
Table 6. Calculation of the Weighted Average Capital Cost for TotalEnergies
Indicator Value Source
Risk-Free Rate 3.40% 10-Y US Treasury
Unlevered Beta 0.90 Damodaran
D/E 11.50% Damodaran
Tax Rate 33% Marginal Tax Rate
Levered Beta 0.97 Calculations
ERP 5.94% Damodaran
Cost of Equity 9.16% Calculations
Pre-tax Cost of Debt 4.90% 10-Y Corp Bond
After-tax Cost of Debt 3.28% Calculations
We 89.68% Calculations
Wd 10.32% Calculations
WACC 8.55% Calculations
Now, let us analyze the results of evaluating the enterprise value for the first scenario, as shown in Table 7.
Table 7. DCF and EVA Models for TotalEnergies Before Exiting the Russian Market
DCF approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
EBIT (excl. Russia) 50,522 32,944 31,024 32,692 32,740 33,252
EBIT Russia (Russia) 166 108 102 108 108 109
As % of Total EBIT (average) 0.33%
Total EBIT 50,688 33,052 31,127 32,799 32,848 33,361
Tax rate 33.0% 33.0% 33.0% 33.0% 33.0% 33.0%
NOPAT 33,961 22,145 20,855 21,975 22,008 22,352
D&A 12,316 12,175 12,121 12,130 12,128 12,131
Change in NWC 7,620 (1,026) - - - -
Capex (9,773) (11,589) (13,008) (13,405) (13,330) (13,588)
FCFF 44,124 21,706 19,967 20,701 20,806 20,896
WACC 8.6%
Discount factor by year 1.00 0.96 0,88 0,81 0.75 0.69
DCF x 20,833 17,655 16,862 15,612 14,444
NPV, USD bn 85
Terminal Value, USD bn 225
TGR 2%
EV, USD bn 310.3 1.08
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
NOPAT 33,961 22,145 20,855 21,975 22,008 22,352
Capital Invested 242,824 183,347 190,874 198,222 204,259 210,592
Total IC 242,824 183,347 190,874 198,222 204,259 210,592
EVA x 6,465 4,531 5,024 4,540 4,343
236,145 239,108 244,679 253,573 263,403 273,688
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
WACC 8.6%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
Discounted EVA x 6,205 4,007 4,092 3,407 3,002
NPV, USD bn 21
Terminal Value, USD bn 47
Invested capital, USD bn 243
TGR 2%
EV, USD bn 310.3
Table 7 indicates that TotalEnergies' enterprise value for Now, let us calculate the enterprise value of TotalEnergies for the first scenario is $310.3 billion. the scenario in which it exits CJSC Terneftegaz and the Khar-
yaga Production Sharing Agreement, as shown in Table 8.
Table 8. DCF and EVA Models for TotalEnergies After Exiting the Russian Market
DCF approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
EBIT (excl. Russia) 50,522 32,944 31,024 32,692 32,740 33,252
Gain / loss from exit 45
Total EBIT 50,567 32,944 31,024 32,692 32,740 33,252
Tax rate 33.0% 33.0% 33.0% 33.0% 33.0% 33.0%
NOPAT 33,880 22,072 20,786 21,903 21,936 22,279
D&A 12,316 12,175 12,121 12,130 12,128 12,131
Change in NWC 7,620 (1,026) - - - -
Capex (9,773) (11,589) (13,008) (13,405) (13,330) (13,588)
FCFF 44,043 21,633 19,899 20,629 20,734 20,823
WACC 8.6%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
DCF x 20,764 17,594 16,803 15,558 14,393
NPV, USD bn 85
Terminal Value, USD bn 224
TGR 2%
EV, USD bn 309.2
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
NOPAT 33,880 22,072 20,786 21,903 21,936 22,279
Capital Invested 242,824 183,347 190,874 198,222 204,259 210,592
Total IC 242,824 183,347 190,874 198,222 204,259 210,592
EVA x 6,393 4,463 4,952 4,468 4,269
WACC 8.6%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
Discounted EVA x 6,136 3,946 4,033 3,352 2,951
103 Higher School of Economics
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
NPV, USD bn 20
Terminal Value, USD bn 46
Invested capital, USD bn 243
TGR 2%
EV, USD bn 309.2
The results show that TotalEnergies' enterprise value decreased by $1.08 billion after its exit from two Russian projects, falling from $310.3 billion to $309.2 billion. This relatively small loss in value is primarily attributed to the limited contribution of the Russian assets to the company's overall revenue structure.
Evaluating the Influence of TotalEnergies' Exit from the Russian Market on Its Operational and Other Indicators
1) Reserves: As of the end of 2021, TotalEnergies' total reserves were approximately 12 billion barrels of oil equivalent (BOE). The reserves associated with its Russian assets, specifically CJSC Terneftegaz and the Kharyaga Production Sharing Agreement, accounted for about 0.5 billion BOE, representing roughly 4% of TotalEnergies' proven reserves.
2) Extraction Volume: In 2021, TotalEnergies' total extraction volume was around 193 million BOE. The extraction volume attributable to the Russian assets from which the
company withdrew in the same year, in proportion to its participation share, was about 14 million BOE, equivalent to approximately 7% of the company's overall extraction volume.
3) Logistic Costs: TotalEnergies procured a significant portion of its oil from Russia, which was transported to the Leuna oil refinery in East Germany at a rate of 240-250 barrels per day through the Druzhba pipeline owned by PJSC Transneft. It is expected that TotalEnergies will replace the Russian oil with oil from the Middle East. However, it is worth noting that the transportation of oil through the Druzhba pipeline incurred lower costs than sea transport from the Middle East.
Equinor
Figure 4. Structure of Assets in the Russian Federation and Strategy for Exiting the Russian Market Strategy: JV exit
| | - exit from Russian assets
0 »
equinor
1 i
Angara Oil (33.33%) SevKomNeftegaz (33.33%) 2 geological surveyance JV (49%) Kharyaga Production Sharing Agreement (30%)
The Norwegian company Equinor took the initiative to exit the Russian market by transferring its Russian assets to PJSC Rosneft for a nominal amount of 1 Euro. This strategic move allowed Equinor to free itself from obligations to invest $1 billion as stipulated in their agreements. In 2022, Equinor became the first oil and gas company to completely withdraw from Russia.
In this exit, Equinor followed the joint venture (JV) exit strategy. While the specific recipient of Equinor's shares in the Kharyaga Production Sharing Agreement was not disclosed, it is likely to be the project's operator, JSC Zarubezhneft.
Evaluating the Influence of Equinor's Exit from the Russian Market on the Enterprise Value
To evaluate the impact of Equinor's exit from its Russian assets, such as Angara Oil LLC, SevComNeftegaz LLC,
and two geological surveyance joint ventures, we employed the discounted cash flow (DCF) and economic value added (EVA) models. These models allowed us to forecast revenues, considering the geographical location and breaking down for Equinor's business areas, which include exploration, production, refining, and liquefied natural gas (LNG) production. The growth rates were determined based on market analysis and data from investment banks.
In 2021, the revenue generated from Equinor's Russian business represented approximately 0.3% of the company's operating profit, taking into account Equinor's varying share percentages in these projects (33.3%, 33.3%, 49%, and 30%, respectively).
We calculated the weighted average capital cost for Equinor as shown in Table 9.
Table 9. Calculation of the Weighted Average Capital Cost for Equinor
Indicator Value Source
Risk-Free Rate 3.40% 10-Y US Treasury
Unlevered Beta 0.90 Damodaran
D/E 11.50% Damodaran
Tax Rate 33% Marginal Tax Rate
Levered Beta 0.97 Calculations
ERP 5.94% Damodaran
Cost of Equity 9.16% Calculations
Pre-tax Cost of Debt 4.60% 10-Y Corp Bond
After-tax Cost of Debt 3.08% Calculations
We 89.68% Calculations
Wd 10.32% Calculations
WACC 8.53% Calculations
Table 10 displays the enterprise value of Equinor for the first scenario. Table 10. DCF and EVA Models for Equinor Before Exiting the Russian Market
DCF approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
EBIT (excl. Russia) 74,941 47,397 47,793 41,743 37,971 37,044
EBIT Russia 205 130 131 114 104 101
As % of Total EBIT (average) 0.27%
Total EBIT 75,146 47,526 47,924 41,857 38,075 37,146
Tax rate 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%
NOPAT 22,544 14,258 14,377 12,557 11,423 11,144
D&A 8,879 9,061 9,132 9,269 9,250 9,212
Change in NWC 692 405 - - - -
Capex (7,772) (9,998) (11,800) (12,284) (12,164) (12,007)
FCFF 24,343 13,726 11,710 9,542 8,509 8,348
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
DCF x 13,176 10,356 7,776 6,389 5,775
NPV, USD bn 43
Terminal Value, USD bn 90
TGR 2%
EV, USD bn 133.7 0,47
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
NOPAT 22,544 14.258 14,377 12,557 11,423 11,144
Capital Invested 79,156 83,344 86,546 90,082 92,633 95,053
105 Higher School of Economics
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
Total IC 79,156 83,344 86,546 90,082 92,633 95,053
EVA x 7,148 6,994 4,872 3,520 3,035
236,145 239,108 244,679 253,573 263,403 273,688
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
Discounted EVA x 6,861 6,186 3,970 2,643 2,099
NPV, USD bn 22
Terminal Value, USD bn 33
Invested capital, USD bn 79
TGR 2%
EV, USD bn 133.7
Table 10 illustrates that TotalEnergies for the second scenario, as presented ;' value for the first scenario is $133.7 billion. Next, we in Table 11. calculated its enterprise value
Table 11. DCF and EVA Models for Equinor After Exiting the Russian Market
DCF approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
EBIT (excl. Russia) 74,941 47,397 47,793 41,743 37,971 37,044
Total EBIT 74,941 47,397 47,793 41,743 37,971 37,044
Tax rate 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%
NOPAT 22,482 14,219 14,338 12,523 11,391 11,113
D&A 8,879 9,061 9,132 9,269 9,250 9,212
Change in NWC 692 405 - - - -
Capex (7,772) (9,998) (11,800) (12,284) (12,164) (12,007)
FCFF 24,282 13,687 11,670 9,507 8,478 8,318
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
DCF x 13,138 10,322 7,748 6,366 5,754
NPV, USD bn 43
Terminal Value, USD bn 90
TGR 2%
EV, USD bn 133.2
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
NOPAT 22,482 14,219 14,338 12,523 11,391 11,113
Capital Invested 79,156 83,344 86,546 90,082 92,633 95,053
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
Total IC 79,156 83,344 86,546 90,082 92,633 95,053
EVA x 7,109 6,955 4,838 3,489 3,004
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
Discounted EVA x 6,824 6,151 3,943 2,620 2,078
NPV, USD bn 22
Terminal Value, USD bn 32
Invested capital, USD bn 79
TGR 2%
EV, USD bn 133.2
The results obtained from evaluating the enterprise value for the scenarios of exiting and continuing business in Russia indicate that the enterprise value decreased by $0.47 billion after exiting four Russian projects, resulting in a total value of $133.2 billion. This minor decline in value is attributed to the relatively small share of Russian assets within the company's overall revenue structure.
Evaluating the Influence of Equinor's Exit from the Russian Market on Operational and Other Indicators 1) Reserves: At the end of 2021, Equinor's proven reserves totaled approximately 5.4 billion barrels of oil equivalent
ExxonMobil
Figure 5. Structure of Assets in the Strategy: JV exit
| | - exit from Russian assets
ExxonMobil opted for the JV exit strategy and publicly announced its complete withdrawal from Russia, revealing a loss of $2.3 billion.
Evaluating the Influence of ExxonMobil's Exit from the Russian Market on the Enterprise Value: DCF and EVA Models To assess the impact on the enterprise value resulting from the decision to exit the Russian project Sakhalin-1, we began by using the DCF and EVA models to calculate a revenue forecast. This forecast considered the geographical location and breakdown by the company's business ar-
(BOE). The Russian assets of the Norwegian company jointly accounted for roughly 90 billion BOE. Therefore, the decrease in the reserve volume amounted to about 1.7% of the total volume of proven reserves.
2) Extraction Volume: In 2021, Equinor produced approximately 760 billion BOE. The Russian assets accounted for about 1% of the total extraction volume of the company. Thus, Equinor's exit from the Russian market should not have a significant impact on its financial performance due to the small reserves and extraction volumes in the Russian Federation.
eas, including oil and gas production, refining and sales, and the chemical industry. Growth rates were determined based on the market analysis conducted by the research team and reports from investment banks. The revenues generated from Russian business (Sakhalin-1) account for approximately 2.9% of the operating profit for the group of companies, taking into account ExxonMobil's 30% share in the project.
Table 12 presents the calculation of the weighted average capital cost for ExxonMobil.
Russian Federation and Strategy for Exiting from the Russian Market
E^onMobil
Sakhalin-1 (30%)
Table 12. Calculation of the Weighted Average Capital Cost for ExxonMobil
Indicator Value Source
Risk-Free Rate 3.40% 10-Y US Treasury
Unlevered Beta 0.90 Damodaran
Indicator Value Source
D/E 11.50% Damodaran
Tax Rate 33% Marginal Tax Rate
Levered Beta 0.97 Calculations
ERP 5.94% Damodaran
Cost of Equity 9.16% Calculations
Pre-tax Cost of Debt 4.10% 10-Y Corp Bond
After-tax Cost of Debt 2.75% Calculations
We 89.68% Calculations
Wd 10.32% Calculations
WACC 8.50% Calculations
Now, let us examine the results of assessing the enterprise value for the first scenario, as presented in Table 13.
Table 13. DCF and EVA Models for ExxonMobil Before Exiting the Russian Market
DCF approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
EBIT (excl. Russia) 91,230 60,471 57,451 57,863 57,154 57,725
EBIT Russia 2,594 1,719 1,634 1,645 1,625 1,641
As % of Total EBIT (average) 2.8%
Total EBIT 93,824 62,190 59,084 59,508 58,779 59,367
Tax rate 28.0% 28.0% 28.0% 28.0% 28.0% 28.0%
NOPAT 67,553 44,777 42,541 42,846 42,321 42,744
D&A 23,740 20,324 21,127 21,966 22,653 22,880
Change in NWC (194) (196) (198) (200) (202) (204)
Capex (22,472) (21,136) (21,460) (21,470) (21,470) (21,685)
FCFF 68,628 43,769 42,009 43,143 43,302 43,735
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.82 0.75 0.69
DCF x 42,020 37,173 35,186 32,550 30,301
NPV, USD bn 177.2
Terminal Value, USD bn 475.7
TGR 2%
EV, USD bn 653.0
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
NOPAT 67,553 44,777 42,541 42,846 42,321 42,744
Capital Invested 318,445 242,247 240,713 240,347 239,299 241,692
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EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
Total IC 318,445 242,247 240,713 240,347 239,299 241,692
EVA x 24,194 22,088 22,425 21,988 22,208
236,145 239,108 244,679 253,573 263,403 273,688
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.82 0.75 0.69
Discounted EVA x 23,228 19,545 18,289 16,529 15,387
NPV, USD bn 93.0
Terminal Value, USD bn 241.6
Invested capital, USD bn 318.4
TGR 2%
EV, USD bn 653.0
Table 13 indicates that ExxonMobil's value for the first scenario is for the second scenario, as shown in Table 14. $653 billion. Next, we calculated the enterprise value
Table 14. DCF and EVA Models for ExxonMobil After Exiting the Russian Market
DCF approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
EBIT (excl. Russia) 91,230 60,471 57,451 57,863 57,154 57,725
Total EBIT 91,230 60,471 57,451 57,863 57,154 57,725
Tax rate 28.0% 28.0% 28.0% 28.0% 28.0% 28.0%
NOPAT 65,685 43,539 41,364 41,661 41,151 41,562
D&A 23,740 20,324 21,127 21,966 22,653 22,880
Change in NWC (194) (196) (198) (200) (202) (204)
Capex (22,472) (21,136) (21,460) (21,470) (21,470) (21,685)
FCFF 66,760 42,531 40,833 41,958 42,132 42,553
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.82 0.75 0.69
DCF x 40,831 36,132 34,220 31,670 29,482
NPV, USD bn 172.3
Terminal Value, USD bn 462.9
TGR 2%
EV, USD bn 635.2
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
NOPAT 65,685 43,539 41,364 41,661 41,151 41,562
Capital Invested 318,445 242,247 240,713 240,347 239,299 241,692
Total IC 318,445 242,247 240,713 240,347 239,299 241,692
EVA x 22,956 20,912 21,240 20,818 21,026
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.82 0.75 0.69
Discounted EVA x 22,039 18,504 17,323 15,649 14,568
NPV, USD bn 88.1
Terminal Value, USD bn 228.7
Invested capital, USD bn 318.4
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
TGR 2%
EV, USD bn 635.2
The data in Table 14 reveals that ExxonMobil's enterprise value decreased by $17.75 billion after exiting the Russian market, specifically the Sakhalin-1 project, falling from $653.0 billion to $635.2 billion.
Evaluating the Influence of ExxonMobil's Exit from the Russian Market on Operational and other Indicators
1) Reserves: As of the beginning of 2022, ExxonMobil's proven reserves totaled approximately $18.6 billion barrels of oil equivalent (BOE). The reserves associated with the Sakhalin-1 project, considering the company's ownership share, amounted to approximately 1.7 billion BOE, representing about 9% of the company's total proven reserves.
2) Extraction Volume: In 2021, ExxonMobil had a daily production rate of 4 million barrels of oil equivalent, which translates to an annual output of 1.5 billion BOE. The reduc-
BP
tion in production resulting from the company's withdrawal from the Sakhalin-1 project amounted to 40,000 BOE per day, roughly 1% of the company's total production.
According to the Russian government, ExxonMobil discontinued the operations of the Sakhalin-1 project by decreasing the daily extraction volume from 220,000 to 10,000 barrels of oil equivalent. The estimated losses incurred by the Russian Federation due to this reduction amounted to RUB 20 billion. Therefore, this loss could potentially be subtracted from the final compensation to be received by the American company for its share in the project.
Figure 6. Structure of Assets in the Russian Federation and Strategy for Exiting from the Russian Market Strategy: Soft closing ^P
I - partial exit from Russian assets - exit from Russian assets
BP chose a soft closing strategy and, as a consequence of its exit from Russia, incurred losses of $24.4 billion [27], which have been documented in its first-quarter 2022 company performance report. Additionally, the company continues to receive dividends from its Russian assets [28-29], although it does not include them in its financial statements.
Evaluating the Influence of BP's Exit from the Russian Market on the Enterprise Value: DCF and EVA Models
To evaluate the impact of BP's decision to exit Rosneft and its associated projects on the company's value, we began
by using the DCF and EVA models. This entailed generating a revenue forecast, factoring in geographical considerations, and breaking down the forecast across BP's various business sectors. These sectors encompassed oil and gas production, low-carbon energy, filling stations, and a joint venture with Rosneft. The growth rates were established through market analysis and input from investment banks. The revenue from BP's Russian operations constituted approximately 9.9% of its overall operating profit, considering BP's shares in Rosneft projects (20%, 49%, and 49%, respectively). Table 15 details the calculation of BP's weighted average capital cost.
Table 15. Calculation of the Weighted Average Capital Cost for BP
Indicator Value Source
Risk-Free Rate 3.40% 10-Y US Treasury
Unlevered Beta 0.90 Damodaran
D/E 11.50% Damodaran
Tax Rate 33% Marginal Tax Rate
Levered Beta 0.97 Calculations
ERP 5.94% Damodaran
Cost of Equity 9.16% Calculations
Pre-tax Cost of Debt 4.70% 10-Y Corp Bond
After-tax Cost of Debt 3.15% Calculations
We 89.68% Calculations
Wd 10.32% Calculations
WACC 8.54% Calculations
Now, let us analyze the results obtained from evaluating the enterprise value for the first scenario, as presented in Table 16.
Table 16. DCF and EVA Models for BP Before Exiting the Russian Market
DCF approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
EBIT (excl. Russia) 47,076 40,410 38,489 38,376 37,571 36,759
EBIT Russia 5,171 4,439 4,228 4,216 4,127 4,038
As % of Total EBIT 9.9%
Total EBIT 52,247 44,849 42,717 42,592 41,698 40,798
Tax rate 34.3% 40.0% 40.0% 40.0% 40.0% 40.0%
NOPAT 34,307 26,909 25,630 25,555 25,019 24,479
D&A 15,163 15,219 14,505 15,584 15,457 17,780
Change in NWC 8,128 4,809 3,343 214 2,417 -8,568
Capex (22,892) (18,748) (18,440) (16,501) (15,140) (15,238)
FCFF 34,706 28,189 25,038 24,852 27,753 18,453
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
DCF x 27,058 22,143 20,249 20,834 12,762
NPV, USD bn 103
Terminal Value, USD bn 199
TGR 2%
EV, USD bn 302.2
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
NOPAT 34,307 26,909 25,630 25,555 25,019 24,479
Capital Invested 125,733 139,895 140,573 144,601 149,096 154,049
111 Higher School of Economics
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
Total IC 125,733 139,895 140,573 144,601 149,096 154,049
Econ profit x 14,965 13,628 13,209 12,289 11,326
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
Discounted econ profit x 14,364 12,052 10,762 9,225 7,833
NPV, USD bn 54
Terminal Value, USD bn 122
Invested capital, USD bn 126
TGR 2%
EV, USD bn 302.2
Table 16 reveals that BP's value for the first scenario is $302.2 billion. We then calculated the enterprise value for the second scenario, as shown in Table 17.
Table 17. DCF and EVA Models for BP After Exiting the Russian Market
DCF approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
EBIT (excl. Russia) 47,076 40,410 38,489 38,376 37,571 36,759
Tax rate 34.3% 40.0% 40.0% 40.0% 40.0% 40.0%
NOPAT 30,911 24,246 23,094 23,026 22,542 22,056
D&A 15,163 15,219 14,505 15,584 15,457 17,780
Change in NWC 8,128 4,809 3,343 214 2,417 -8,568
Capex (22,892) (18,748) (18,440) (16,501) (15,140) (15,238)
FCFF 31,310 25,526 22,502 22,323 25,276 16,030
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
DCF x 24,501 19,899 18,188 18,975 11,087
NPV, USD bn 93
Terminal Value, USD bn 173
TGR 2%
EV, USD bn 265.6
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
0 0.5 1.5 2.5 3.5 4.5
NOPAT 30,911 24,246 23,094 23,026 22,542 22,056
112 Higher School of Economics
EVA approach, USD mn 2022 2023E 2024E 2025E 2026E 2027E
Capital Invested 125,733 139,895 140,573 144,601 149,096 154,049
Total IC 125,733 139,895 140,573 144,601 149,096 154,049
EVA x 12,301 11,091 10,679 9,812 8,903
WACC 8.5%
Discount factor by year 1.00 0.96 0.88 0.81 0.75 0.69
Discounted econ profit x 11,808 9,809 8,701 7,366 6,158
NPV, USD bn 44
Terminal Value, USD bn 96.06
Invested capital, USD bn 125.73
TGR 2%
EV, USD bn 265.6
According to Table 17, BP's enterprise value decreased by $36.5 billion after exiting two Russian projects, falling from $302.2 billion to $265.6 billion. These significant losses are primarily attributed to BP's substantial involvement in Russian projects, notably its 19.75% share in Ros-neft, accounting for approximately 10% of the overall company's operational profit.
Evaluating the Influence of BP's Exit from the Russian Market on Operational and Other Indicators
1) Reserves: At the end of 2021, the company's proven reserves stood at 16,954 billion barrels of oil equivalent (BOE). However, in 2022, the company did not include information about its joint ventures with Rosneft in its operating results. Consequently, the reserves decreased to 7,183 billion BOE, marking a 55% decline. Similarly, at the end of 2021, the proven gas reserves amounted to 39,615 billion cubic meters (billion m3). However, the company did not record the joint ventures with Rosneft in its 2022 operating results, resulting in reserves declining to 18,481 billion m3, a decrease of 53%.
2) Extraction Volume: At the end of 2021, the company's extraction volume was 3,316 billion BOE. In 2022, the reported extraction volume decreased to 2,438 billion BOE, representing a 26% reduction. Furthermore, in 2021, the company produced 7,915 billion m3 of gas. By the end of 2022, the reported gas extraction volume had decreased to 7,101 billion m3, indicating a 10% reduction in production.
Conclusion
Our research has successfully achieved its intended purpose by compiling a comprehensive database related to the exit of foreign companies from the Russian market. We have analyzed key trends, including the industries from which companies withdrew and the countries of incorporation of exiting companies. Furthermore, we identified nine primary exit strategies employed by these companies.
Our analysis reveals that the majority of exits were carried out by German, French, and American companies. Sectors such as consumer goods, commodities, food and beverages, and automotive manufacturing saw the highest number of withdrawals. The most common exit strategies included joint venture exits and soft closings, characterized by a reduction in investment project funding, marketing termination, and a lack of a clear and unambiguous exit plan from Russia. This trend was particularly prominent in the oil and gas industry, Russia's largest and most strategically significant sector.
Our study of selected companies resulted in the following conclusions:
1. Shell's decision to withdraw from the Russian market led to a substantial decrease in enterprise value, amounting to $20.6 billion when assessed using two valuation models (DCF and EVA). This loss exceeded the write-off of Russian assets reported in the corporate financial statements. Shell employed a strategy involving the exit from a joint venture and the sale of assets to a local player. Operationally, the company experienced significant losses in reserves, approximately 21% of the total volume, while extraction volumes were only minimally impacted (1%). The loss of approximately 23% of gas supplies to Asia had a significant impact due to the low transportation costs of LNG to Japan from Shell's Russian assets.
2. TotalEnergies' fundamental value decreased by $1.1 billion following its decision to exit Russia. The company adopted a soft closing strategy, retaining its key assets such as PAO Novatek, Yamal LNG, and Arctic LNF 2 while divesting less significant assets, including the Kharyaga Production Sharing Agreement and CJSC Terneftegaz. The exit resulted in a 4% decrease in reserves and a 7% reduction in extraction volumes compared to 2021 figures.
3. Equinor's withdrawal from the Russian market resulted in the smallest decrease in enterprise value, amounting to
$0.5 billion. This exit is not expected to significantly impact the company's financial performance due to its small reserves and extraction volumes in the Russian Federation: the company's total reserves decreased by approximately 1.7% of the total amount, while its extraction volumes decreased by only 1%. Equinor applied a joint venture exit strategy.
4. ExxonMobil lost $17.8 billion in value as determined by the DCF and EVA models. Lost reserves, proportionate to the company's participation share, accounted for approximately 1.7 billion barrels of oil equivalent or about 9% of ExxonMobil's total volume of reserves. Extraction volume decreased by just 1%. The company employed a strategy of exiting from the Russian joint venture.
5. BP utilized a soft closing strategy, declaring its withdrawal from Rosneft's capital while still retaining its status as a shareholder. However, BP cannot record dividends received from Rosneft in its cash flows. As a consequence of this exit, the company reported losses of $24.4 billion. The decision of leaving Russia cost the company $36.5 billion of fundamental value, the largest amount among the oil and gas companies considered here. BP also incurred significant losses in oil reserves (55%) and gas reserves (26%) as a percentage of the company's total reserves. Oil production decreased by 53%, and gas production by 10% of the total amount, indicating substantial strategic losses related to the company's exit from its joint venture with Rosneft, which has implications for the company's future reserves (Table 18).
Table 18. Comparison of Company Losses Caused by Exiting the Russian Federation
# Criterion
Loss caused by withdrawal from Russia, as reflected in company reports, $ billion
Shell ExxonMobil TotalEnergies Equinor
(24.4) (3.9)
(2.3)
(4)
(1)
BP
1
2 ^¡T ofucompanyilosses by the DCF (36.5) (20.6) (17.7) (1.1) (0.5)
and EVA methods, $ billion
3 Decrease in the reserves volume in o.e., % 50%) (= 21%) (= 9%) (- 4%) (- 1.7%)
Decrease in the extraction volume in o.e., 4 % 30%) (= 1%) (= 1%) (- 7%) (= 1%)
5 Loss of convenient logistics in strategically yes yes yes NO NO
important markets
Based on a comprehensive analysis of the strategies employed by Western oil and gas companies when exiting the Russian market, the evaluation of their value before and after withdrawal, and an examination of the impact on their operational indicators, the following conclusions can be drawn:
The Norwegian company Equinor incurred the least significant losses as a result of its exit from Russia. This can be attributed to its limited engagement in Russian operations compared to other Western oil and gas companies. This validates the hypothesis that companies with stronger ties to the local market experienced more substantial losses.
BP recorded the most substantial reduction in value. At the same time, companies involved in strategically important projects, such as BP and TotalEnergies, adopted a soft exit strategy from the Russian market. This finding aligns with one of our hypotheses. Despite their decision to withdraw from Russia, these companies continue to receive dividends and maintain ownership stakes in assets, the impairment reflected in their financial statements notwithstanding.
Some companies refrained from procuring Russian hydrocarbons in the spot market after their exit, but they still engage in long-term contracts for such procurement. For instance, TotalEnergies continues to purchase LNG from the Yamal LNG project, and Shell, even after exiting the Sakha-lin-2 project, still acquires LNG from the Sakhalin Field.
In summary, our research confirms the hypotheses proposed at the beginning of the study. In fact, the actual losses incurred by oil and gas companies exceed the losses reported in their financial statements. The overall impact of exiting the Russian market on these companies is complex and multifaceted.
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Contribution of the authors: the authors contributed equally to this article. The authors declare no conflicts of interests.
The article was submitted 06.07.2023; approved after reviewing 08.08.2023; accepted for publication 14.09.2023.
