The Obama administration announced additional economic sanctions against Russia this past week in its latest effort to isolate the Russian economy over its support of separatists in Ukraine.
This latest round of sanctions, announced Wednesday, will prevent certain Russian firms, including Rosneft, the nation's largest oil company, and Novatek, its largest gas company, from accessing U.S. equity or debt markets for long-term financing, potentially hindering their investment plans.
London-based BP (NYSE:BP), which owns a nearly 20% stake in Rosneft, took a hit from the announcement, with its shares slumping nearly 2% over the past week. Given BP's heavy exposure to Russia, do the new sanctions pose a threat to the company's ability to pay and/or grow its dividend?
Largely through its stake in Rosneft, BP is the most heavily exposed to Russia of all the Western oil majors. Russia contributes about 1 million barrels of oil per day to BP's production, representing about a third of its global output, and accounts for nearly a third of its reserves. However, Rosneft's contribution to BP's earnings is much smaller, representing roughly 10% of the British oil giant's first-quarter profit.
And its contribution to BP's cash flow is even smaller. Last year, Rosneft paid $460 million in cash dividends to BP, which represents just over 2% of the $21.1 billion in operating cash flow it generated in 2013. As such, a reduction in Rosneft's cash dividends to BP represents a minimal risk to its dividend.
At any rate, it's unclear whether the new sanctions would actually hinder Rosneft's ability to pay cash dividends to BP, since they are primarily aimed at cutting off its long-term access to Western capital. Specifically, they will block its ability to secure U.S. equity and debt financing with a maturity beyond 90 days. But the company can still tap the Chinese for loans.
Therefore, sanctions are very unlikely to have an impact on BP's dividend, although they could perhaps hinder Rosneft and BP's long-term growth potential. In contrast, a more important risk to BP's dividend growth is a delay in the start-up of its six major oil projects this year and/or weakness in Gulf of Mexico crude pricing resulting from growing production and inventories in the U.S. Gulf Coast region.
Key drivers of BP's cash flow growth
This year, BP expects to generate $30 billion to $31 billion in operating cash flow, a sharp improvement over last year's operating cash flow of $21.1 billion. Three key factors will drive this huge increase: (1) the start-up of six major high-margin oil projects, (2) BP's upgraded Whiting refinery in Indiana, and (3) the reversal of last year's working-capital build.
BP has already started up three of these six projects, Mars B and Na Kika Phase 3 in the Gulf of Mexico and Chirag in Azerbaijan, and plans to bring online the other three -- Kinnoull in the UK North Sea, Total-operated (NYSE:TOT) CLOV offshore Angola, and Husky Energy-operated (TSX:HSE) Sunrise Phase 1 in Canada, by the end of the year. Owing to their heavily oil-weighted production, these projects will be the biggest contributors to the company's cash-flow growth this year.
In addition, BP's Whiting refinery is expected to generate at least $1 billion in operating cash flow this year. The refinery has undergone significant upgrades, including the reconfiguration of its crude unit and the addition of a new gas oil hydrotreater, which will allow it to process much greater volumes of higher-margin heavy, sour crude.
Lastly, BP expects the reversal of working capital build to provide another big boost to this year's cash flow. It hopes to reduce last year's $5 billion build by about two-thirds this year, since it will have less cash tied up in working capital this year as compared with last year.
The latest round of sanctions imposed against Rosneft is unlikely to have a meaningful impact on BP's ability to pay its dividend, given the Russian firm's relatively insignificant contribution to BP's cash flow. The new sanctions could, however, affect BP's long-term production growth potential if they hinder Rosneft's growth plans. Overall, though, BP looks set for above-average dividend growth over the next few years, given expectations for sharply higher cash flows and modestly lower capital spending.