BP's Hidden Value

BP (NYSE: BP  ) is one of the world's largest oil companies, and thanks to its 4.6% dividend yield, looks like an attractive investment. However, what many investors fail to realize is the fact that there is hidden value in BP's shares. This value comes in the form of BP's holding of Russian oil major Rosneft.

Complicated deal
BP acquired its Rosneft share during 2013, after the company sold its holding in Russian joint venture TKN-BP to the Russian giant. BP originally owned 50% of TNK-BP, which was one of Russia's biggest oil firms before it became part of Rosneft.

The deal was worth billions, BP itself received $17.1 billion in cash and a 12.84% stake in Rosneft for its share. Further, the company promised, on completion of the deal, to spend part of the cash received to increase its share in Rosneft, from the allotted 12.84%, to 19.75%. BP's TNK-BP partners received $28 billion for their stake.

The Russian problem
Russia, despite its failings is the world's largest producer of oil and gas. The region also has the largest reserves of oil and gas, so for BP this is the perfect place to invest.

Unfortunately, Russia's current involvement within Ukraine is denting the region's prospects, but the country's position within the global oil industry is undeniably important.

Rosneft is the largest oil company in Russia, producing 2.4 million barrels of oil per day, similar to Chevron's production. However, including the TNK-BP share, Rosneft has become the largest publicly traded oil company in the world, in terms of production, producing in excess of 4.1 million barrels of oil per day.

Rosneft is not just limited to Russia, the company has assets within North Africa, the Middle East, and South America as well. BP is now Rosneft's largest shareholder -- the company is entitled to two of the nine seats on Rosneft's board.

Boosting production
After including BP's share of Rosneft's production, BP is a company with 3.2 million barrels per day of production and 18 billion barrels of oil equivalent reserves. Effectively this makes BP a larger producer than all but one of its Western publicly traded peers, including Chevron, Shell, and Total. ExxonMobil  (NYSE: XOM  ) is still the largest.

Now, there is no denying that Russia is a tough place to work, both politically, financially, and physically, but it is one of the most attractive regions for the oil and gas industry. BP is uniquely positioned to benefit from this.

Last year, net Russian production attributable to BP was just under 1 million boe/d, compared to ExxonMobil's regional production of 46,000 boe/d.

But BP is also set to benefit from ExxonMobil's expenditure within Russia, if it goes ahead.

ExxonMobil and Rosneft are planning to invest around half a trillion dollars together to explore the Arctic Ocean. An investment of this size is way out of BP's league; however for ExxonMobil and Rosneft together, $500 billion is an acceptable sum.

As well as exploring the Arctic region for oil and gas, ExxonMobil and Rosneft are planning to share technology and reserves to frack shale fields in Siberia, sink a deepwater well in the Black Sea, and build a natural gas export terminal in Russia's Far East.

BP is set to benefit from all of this. As BP is a Rosneft shareholder, the company is able to profit from exploration success but limit downside, as explained by the company's management:

...[the Rosneft holding] provides us with a leading position in production and resources compared to peers. We will also share in the partnerships Rosneft has with other International Oil Companies while carrying a proportionately lower exposure to risk and capital investment. Notably, more than $14bn of financing will be carried by Rosneft's partners during the first phase of Russia's shelf exploration.

The bottom line
The bottom line is the fact that there is value to be found in BP's shares. The company's stake in Rosneft is really attractive and makes BP one of the world's largest oil producers. What's more, as a shareholder in Rosneft, BP can benefit from the company's production within Russia, the world's largest producer of oil and gas, without exposing itself to exploration risks.

Having said all of the above, the current geopolitical situation within Eastern Europe is concerning, and BP is keeping a close eye on the situation. However, over the longer term, BP's relationship with Rosneft should remain strong. 

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