Which Oil Majors Have the Greatest Exposure to Russia?

As Vladimir Putin continues to test the limits of the Western world's patience with aggressive actions in Ukraine, investors are growing increasingly concerned about Western energy companies' exposure to Russia. With the threat of additional sanctions against Russia looming large, let's take a closer look at some of the major Western integrated oil companies that have the most at stake in the country.

Photo credit: BP plc.

BP: the most exposed oil major
Of all the large Western oil majors, BP plc (NYSE: BP  ) is the most heavily exposed to growing geopolitical risk in Russia through its 19.75% stake in Rosneft. BP acquired the stake back in 2012 in exchange for selling its 50% interest in TNK-BP, one of Russia's biggest oil companies, to Rosneft -- a deal that also brought in $12.5 billion in cash for the British oil giant.

Geopolitical risk aside, the deal has so far been extremely beneficial to BP. In the fourth quarter, Rosneft accounted for about nearly 36% of BP's underlying profit of $2.8 billion. It also contributed production of 985,000 barrels of oil equivalent per day, or boe/d, representing about 30% of companywide fourth-quarter production of 3.2 million boe/d.

So far, BP's business hasn't been affected by Western sanctions, which have mainly included visa bans and asset freezes on Russian individuals and a Russian bank. But some worry that if geopolitical conditions worsen, the West could enforce additional measures aimed at crippling the Russian economy, including sanctions against Russia's energy sector, which would jeopardize BP's close relationship with Rosneft.

Other majors with significant Russia exposure
Other oil majors with a significant presence in Russia include ExxonMobil (NYSE: XOM  ) and Royal Dutch Shell plc (NYSE: RDS-A  ) . Exxon formed a joint venture with Rosneft back in 2011 to explore for oil in western Siberia and in Russia's Arctic seas, ventures for which it will foot the majority of the more than $3.2 billion in exploration costs.

As of year-end 2013, the Irving, Texas-based oil giant held 85,000 net acres in Sakhalin and 11.3 million net acres in the Kara and Black seas through its joint venture with Rosneft. Though it doesn't disclose its production figures for Russia, analysts at Raymond James estimate that its operations in Russia accounted for about 6% of its total production last year.

Similarly, Shell is working with Gazprom on a huge LNG venture in the far east of Russia called Sakhalin-2, which is Russia's first offshore gas project and accounted for about 5% of global LNG capacity in 2012. The Anglo-Dutch oil major also owns a 100% interest in three major Russian exploration and production licenses, as well as a 50% interest in western Siberia's Salym fields alongside Gazprom.

Though Shell has previously stated that it plans to expand Sakhalin-2's capacity by as much as 50% to capitalize on growing gas demand from nearby Asian countries, the company's chief financial officer, Simon Henry, recently stated that Shell won't be "jumping into new investments [in Russia] in the short term."

Should investors be concerned?
BP, Exxon, and Shell all have significant exposure to Russia. If the U.S. and its allies were to impose a ban on the export of Western oil and gas technology to new projects being undertaken by Kremlin-controlled companies, it would probably dash Exxon and Shell's ambitions to explore areas like western Siberia and the Arctic seas.

The fallout would probably be even greater for BP, since the imposition of such sanctions would almost certainly reduce Rosneft's share price even further. On the plus side, however, sanctions currently being prepared wouldn't affect existing projects and therefore would have a minimal impact on these companies' production levels, not including natural declines.

All told, BP, Exxon, and Shell's exposure to Russia is a meaningful risk -- albeit one that may already be priced in -- and one that investors should carefully consider before investing in these companies. While there's a good chance that the situation won't escalate out of control, given the codependent relationship between Russia and the West, there's always the possibility that things could get worse.

I'd stay away from these stocks until the dust settles, because they're just not worth the risk -- especially considering their increasingly challenged business model and generally poor prospects for production growth -- with the exception of BP, whose valuation, strong prospects for cash flow growth, and high dividend yield are quite compelling.

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