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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.
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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