BP's Had Enough Of Russian Roulette

Published in Company Comment on 1 June 2012

BP looks like ending its big Russian partnership. Is this good news or bad for the shares?

FTSE 100 giant BP (LSE: BP) has received unsolicited indications of interest in its shareholding of 50/50 Russian joint venture TNK-BP.

At a closing share price on Thursday of 395p, I'm surprised it didn't receive indications of interest in the whole company!

When I looked at BP's first quarter results a month ago, I explained that the TNK-BP joint venture generates more than 25% of production, but the company doesn't have the direct control we shareholders would prefer to see. TNK-BP is owned equally by BP and Alfa Access Renova (AAR).

So today's news is unequivocally good news in my opinion. And the market likes it so far; the shares are up almost 3% at 406p at the time of writing.

If any deal is struck, it would see the end of what has been both a profitable but troubled partnership, freeing up a dollop of cash to help meet the continuing costs of the 2010 Gulf of Mexico oil spill, and the potential fines still to be settled with the US and state governments.

A marriage made in hell

More importantly, it removes the uncomfortable uncertainty that the market hates. But there's more to the potential sale than meets the eye. The truth is that the marriage between the oil giants and its Russian billionaire-owned partner was one made in hell.

On Monday, one of these billionaires, Mikhail Fridman, resigned as CEO of TNK-BP citing a breakdown in relations with BP.

BP has said there is no guarantee of a sale, and there have been suggestions that it's a tactical move, which could see BP buying out AAR's stake instead.

Either option would be good news for us shareholders. The partnership has yielded $19bn in dividends for BP since its inception in 2003, and typically accounts for around 10% of profits. But the market has never been comfortable with it, and it's been a drag on BP's valuation.

The partners disagreed over the issue of an offshore exploration and $16bn share-swap deal with Russian government majority-owned Rosneft last year. AAR won a court order to block the agreement, then refused a $32bn buyout offer from Rosneft and BP for its 50% interest in TNK-BP.

The big questions are how much BP will receive for its 50% stake and what it will then do with the cash. The answer to the second question lies in the eventual outcome of the Gulf litigation. A sale should raise around $30 billion for BP.

Any developments both to move away from the troubled partnership and put the Gulf spill to bed have to be welcomed in my opinion. These are the big strategic issues and developments to address them are good news.

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> David owns shares in BP.

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ANuvver 01 Jun 2012 , 11:54am

This "unsolicited approach" - Sechin/Rosneft involved, by any chance? Guess we'll know in the fullness.

Bob Dudley was always the wrong choice to operate in Russia. However good he may be on hydrocarbons, politically speaking he's a ham sandwich.

mull1 01 Jun 2012 , 3:25pm

Bob Dudley went into hiding when he was working with BP-TNK, due to possible threats on his life. Given that he brazoned out that period, I think he was the perfect choice to operate in Russia. Also he seems to be doing a steady job of bringing BP round after the Gulf spill, but yes he may be a political ham sandwich, but given what he has gone through he gets my vote!!

Dozey1 01 Jun 2012 , 4:31pm

If the Kremlin chooses to take out BPs share of BP-TNK they can then sort out the other Russian director/oligarchs shares easily, bullets and poison spring to mind - they have used both on previous occasions. That would leave the 'state' owning the lot and probably for a knockdown price. Moral: do not go to bed with oligarchs, even if you think you are a big boy..

ANuvver 01 Jun 2012 , 6:51pm

Bullets and poison - perish the thought! Show trial and confiscation, on the other hand...

I do feel sorry for Durak Dudley on a personal level, but where's the line between naivety and arrogance? Perhaps if he had demonstrated anything like the geopolitical antennae necessary to run BP I might be interested in the shares.

* Durak is Russian for fool, BTW.

matchmade 02 Jun 2012 , 8:32am

In Russia, one gets the impression that an "unsolicited interest" may be equivalent to a Godfather-style "offer you can't refuse".

ayshf 02 Jun 2012 , 12:49pm

BP will be ripped off. The only people who can make a turn on this deal are people who can if necessary liquidate the Russian mafia that BP inadvertently got into bed with.

That would be the Russian state and I expect a firesale price to be paid.

In Russia you need to have guys with machines guns on your side if you want to operate.

For Western companies Russia is best avoided despite the perceived opportunities

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