BP Loses The Russian Arctic To Exxon

Published in Company Comment on 31 August 2011

Is the final nail in the Rosneft deal good news for BP shareholders?

In a move that removes remaining uncertainty over BP's (LSE: BP) involvement with state owned Russian oil company Rosneft in the Arctic, it appears that US company ExxonMobil (NYSE: XOM.US) has the gig.

Botched deal

Botched negotiations between BP and Rosneft were scuppered earlier this year when Russian partners in TNK-BP, BP's other Russian joint venture, applied for an injunction to stop the deal going through.

The group of Russian billionaires, collectively known as Alfa-Acces-Renova (AAR), believed that they had a contractual right to be included in any deals that BP made in Russia. They were right, and on 6 May, BP announced that an arbitral panel had ruled that the deal could only proceed if it included TNK-BP.

Despite ongoing negotiations, Rosneft was not keen, and today's news appears to deliver the final blow to BP's Russian Arctic aspirations. It also ends the uncertainty over the affair. Investors will heave a collective sigh of relief for that.

Value

Russia appears to have weighed heavily on BP's share price for most of the year. Prior to that, it had been recovering from the battering it took over the Gulf disaster and had rallied, in 2010, from below 300p to in excess of 500p. Today, the shares stand at just around 400p, valuing the company at £76bn.

To me, the shares look attractively valued with a forward yield of around 4.7% and a price to earnings multiple of around 5.5 for 2012. This compares to rival Royal Dutch Shell (LSE: RDSB) on a forward yield of around 5.4 and a multiple of about 7 for 2012, according to analyst's estimates.

Recovery

Financially, the recovery from last year's oil disaster is going well with BP reporting a net inflow of $10.25bn cash, despite an outflow of $6.6bn to gulf-related expenses, during its half-year ended 30 June. It had net debt of $27bn up from $23.2bn a year ago, throwing up a net gearing figure of about 25%.

There is still the risk of Gulf-disaster litigation, but the company is financially strong now, and with each earning period, brings home the cash. The collapse of BP's Russian negotiations could give the shares a fillip.

Last word

In a final twist, Exxon's deal with Rosneft appears to include exchanging some of its Gulf of Mexico acreage for the Arctic. Remembering last year's treatment of BP, one wonders how the US administration might react should Rosneft suffer a blow-out in the Gulf. Perhaps we should buy baked bean tins rather than oil company shares!

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> Kevin owns shares in BP.

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Comments

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Max878 31 Aug 2011 , 4:07pm

I'm very comfortable with BP. Bought loads when they were really cheap... thanks Mr Obama.
I sold half of them a month ago and bought RDS, and I'm comfortable with them, too.
Don't know about anyone else, but I've got a feeling that the Russian Arctic oil thing is going to be trouble. Just a gut feeling. Good luck to Exxon shareholders (but not at the expense of BP and RDS, obviously)

The problem is my Billiton shares, which I bought at 22 quid :(

v8ninety 31 Aug 2011 , 9:20pm

I bought BP a few weeks ago and am still happy with my purchase although not much movement in share price yet. I don't see any need to panic at this time and am happy for it to sit on the back burner for a while.

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