BP Sells Oil Stake in Russia, Getting the Best of Both Worlds

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If you were to stop at the headlines, it would appear BP (NYSE: BP  ) announcing the sale of its 50% share in the TNK-BP partnership is a sign it wants out of the Russian oil market. Which seems odd, considering Russia has long been viewed as an area of growth for BP, and it remains the No. 1 producing oil market in the world. Moving beyond the headlines reveals, not surprisingly, that BP is by no means leaving the Russian oil scene. Though the U.S. market appears less than enamored with the move -- BP shares are down over 1% at the open -- in many ways, the deal gives BP the best of all worlds.

It's trite, but true -- this is a win-win
Russian president Vladimir Putin has made no secret of his desire to privatize Rosneft, which is already the No. 1 oil company in Russia. As big as the Russian oil market already is, dated equipment and untapped reserves have hampered production. The new deal, with a total value of $55 billion, immediately catapults Rosneft into a major, global oil producing player.

Though the deal, expected to close in the middle of 2013, still needs to meet with Kremlin approval, Putin has already gone on record supporting it. Of particular interest to Russian government officials is the combination of the privatization of a significant, Russian-based oil producer while maintaining the expertise of BP (more on that shortly) management.

BP's a winner, too
So, what does BP get out of all this? BP's end of the bargain is valued at $27 billion and entails a combination of cash and stock. In addition to $17.1 billion in cash, BP receives shares equal to nearly 13% of Rosneft. The intention is to use $4.8 billion of the cash to add to BP's existing 1.25% stake in Rosneft, plus the 13% included in the bargain, bringing its total ownership to 19.75%. Even after purchasing the additional shares of Rosneft, BP is left with a hefty $12.3 billion.

According to the BP press release, CEO Bob Dudley fully expects the stake in Rosneft to continue producing solid returns for years to come. And if need be, Dudley intends to use the excess cash to buy back shares if earnings are diluted as a result of the deal. If everything goes as planned, the $12.3 billion will strengthen an already healthy $15.4 billion balance sheet.

On top of the cash and securities, BP receives two seats on the Rosneft Board of Directors. The board seats not only gives BP a say in protecting its investment,but  Russian officials support the notion of including BP's expertise in helping to drive Rosneft's growth into one of the world's biggest oil companies.

Finally, the megadeal will end BP's profitable, but sometimes contentious, TNK partnership. As it stands, Rosneft will give TNK, consisting of a group of billionaire businessmen, a cool $28 billion in cash. Though the deals are independent of each other, from BP's perspective, ridding itself from a group it didn't always see eye-to-eye with is a win all by itself.

Now what?
BP continues to answer questions about the deepwater Gulf of Mexico oil spill, and with the threat of civil lawsuits and various proposed settlements in the works, the ultimate impact on BP is uncertain. But it's fairly certain there will be billions of dollars involved, and the Rosneft deal doesn't mitigate that. However, what the agreement will do is pad the balance sheet, preparing BP for whatever is on the horizon while letting it take advantage of the outstanding growth opportunity Russia offers.

By comparison with other major energy producers, BP offers investors an intriguing opportunity. With a dividend yield of 4.45%, BP more than holds its own with competitors Royal Dutch Shell's (NYSE: RDS-A  ) 5%, ExxonMobil's (NYSE: XOM  ) 2.47% dividend, and Chevron's (NYSE: CVX  ) 3.2% payout. And at 7.9 times earnings, BP is on the low-end of the industry. Though, there are reasons for BP's valuation relative to its peers.

BP's operating margin of 10.3 is only slightly less than Shell's 10.9, and it's considerably lower than both Exxon and Chevron. Gross margins? Net profit margins? Same story in these key areas, too, as BP continues to struggle out from under Gulf-related expense and set-asides.

BP looks like a bargain, at least on paper, but don't be fooled. The opportunity for Chevron in its Alaskan deepwater drilling adventure (to be resumed next season) and Shell's 5% dividend yield are tough to beat right now. But for long-term, relatively conservative growth and income investors, the Russian deal is a much-needed win for BP that will pay off in more ways than one.

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Tim Brugger has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2012, at 2:59 PM, InspectorJavert wrote:

    Nicely said - well balanced article.

    The only area I disagree with you on is BP's concern with The DoJ and Macondo. After this quarter, the fund for the GoM is fully paid for, after having made the necessary divestitures, BP should be in the clear as far as all of that goes.

    BP trades at significant discounts in P/Sales, P/Book, P/proven reserves, and as you noted, P/Earnings. BP is a steal here, and within the next 52 weeks, I'll bet we finally get a chance to see that realized.

  • Report this Comment On October 22, 2012, at 4:35 PM, timbrugger wrote:


    Thanks for the response and post, good points, all.

    My primary concern/question re: Macondo involves the possibility of civil suits - from politicians in search of headlines, and individuals. Those have a way of popping up at the most unusal times, including well after the fact. Other than that, I think your time frame (52 weeks and out) is right on track for those willing and able to give BP a chance.

    Thanks again, that's good insight. Tim.

  • Report this Comment On October 23, 2012, at 9:58 AM, InspectorJavert wrote:

    BP has a literal army of lawyers that can tie any frivilous lawsuits up in court for many years (a la Exxon Valdez). IOCs like XOM, BP and CVX live in court - it's just the nature of the beast. They have already set aside the $7.9 billion to settle up the civil lawsuits, sure a few will bugger around for some years to come, but won't amount to anything. The market isn't giving BP it's due praises, as you point out in your article. That will be along soon enough. In the mean time, on days like today, I'm a buyer.

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