This post was written in 2012–2013 and reflects thinking at the time. For current views and topical discussions, please see recent articles.
Firstly, apologies for the bad pun in the title...
I have written not long ago about BP's long courtship with Rosneft. Now we are about to see a marriage of sorts, with an equity swap of BP's 50% holding in TNK-BP for 18.5% of Rosneft's stock (plus cash). In parallel, Rosneft will be buying out the consortium of Russian "oligarchs" who own TNK-BP's other 50%.
Much has been written about this in mass media since the deal was announced on Monday, so I wasn't going to add my own two pence' worth of wisdom. However, media commentary has included one motive that to me appears to be plain wrong. It is said that BP acquired Rosneft's shares at a 12% premium to the share price, while usually shares-and-cash deals attract a discount on the share element. What this ignores, though, is that Rosneft, while being a quoted company, is an NOC so cannot be measured by the same criteria.
Rosneft's P/E ratio is estimated around 7.2 for 2012; BP itself, despite the negative investor sentiment ever since the Macondo disaster, is estimated to close 2012 with 7.8. Shell has a 2012 estimate of 8.1, Statoil of 8.3, Chevron 8.6, and ConocoPhilips 10.1. (By contrast, another Russian oil major Lukoil is expected to close the year on 4.5 for ADR.)
What this illustrates is that most of big Russian companies have been traditionally under-valued in the markets. There have been good reasons for that, such as historically volatile political, regulatory and fiscal environments. However, the last 12 years have been an era of stability on all those fronts. I would argue that BP's 20% investment in Rosneft (it already had a 1.5% stake) is its least risky asset. Compare it with a field in offshore West Africa or any asset at all in the US. Which would make you lose more sleep?
This deal is a vindication of Bob Dudley's long-term strategy. For years he has doggedly pursued collaboration with sovereign oil interests in Russia, even when he, as then the CEO of TNK-BP, was being thrown out of the country at the instigation of his oligarch "partners". That doggedness has now paid off and the company has completed the re-focusing of its long-term strategy. Compare this with the shambles that Shell got itself into a few years ago over its own Russian investment, Sakhalin 2.
Having pushed through an outrageously one-sided production-sharing agreement with the Russian government in the mid-1990s, Shell thought that it didn't have to play by the rules. Costs were being inflated to show low profitability; localisation requirements on procurement were being ignored; environmental impact was being disregarded. When a few years later Russia acquired a functioning government, all this quickly came to an end and Shell, threatened with having its licence revoked, was forced to sell its interests to Gazprom.
By contrast, Bob Dudley understands the rules of the game and recognises that in order to take, an investor also needs to give. I feel this will be a good deal all around, which opens new opportunities for BP in the Arctic, Russian Far East and the Caspian, as well as joint projects with Rosneft in other parts of the world. Well done, Bob.
I have written not long ago about BP's long courtship with Rosneft. Now we are about to see a marriage of sorts, with an equity swap of BP's 50% holding in TNK-BP for 18.5% of Rosneft's stock (plus cash). In parallel, Rosneft will be buying out the consortium of Russian "oligarchs" who own TNK-BP's other 50%.
Much has been written about this in mass media since the deal was announced on Monday, so I wasn't going to add my own two pence' worth of wisdom. However, media commentary has included one motive that to me appears to be plain wrong. It is said that BP acquired Rosneft's shares at a 12% premium to the share price, while usually shares-and-cash deals attract a discount on the share element. What this ignores, though, is that Rosneft, while being a quoted company, is an NOC so cannot be measured by the same criteria.
Rosneft's P/E ratio is estimated around 7.2 for 2012; BP itself, despite the negative investor sentiment ever since the Macondo disaster, is estimated to close 2012 with 7.8. Shell has a 2012 estimate of 8.1, Statoil of 8.3, Chevron 8.6, and ConocoPhilips 10.1. (By contrast, another Russian oil major Lukoil is expected to close the year on 4.5 for ADR.)
What this illustrates is that most of big Russian companies have been traditionally under-valued in the markets. There have been good reasons for that, such as historically volatile political, regulatory and fiscal environments. However, the last 12 years have been an era of stability on all those fronts. I would argue that BP's 20% investment in Rosneft (it already had a 1.5% stake) is its least risky asset. Compare it with a field in offshore West Africa or any asset at all in the US. Which would make you lose more sleep?
This deal is a vindication of Bob Dudley's long-term strategy. For years he has doggedly pursued collaboration with sovereign oil interests in Russia, even when he, as then the CEO of TNK-BP, was being thrown out of the country at the instigation of his oligarch "partners". That doggedness has now paid off and the company has completed the re-focusing of its long-term strategy. Compare this with the shambles that Shell got itself into a few years ago over its own Russian investment, Sakhalin 2.
Having pushed through an outrageously one-sided production-sharing agreement with the Russian government in the mid-1990s, Shell thought that it didn't have to play by the rules. Costs were being inflated to show low profitability; localisation requirements on procurement were being ignored; environmental impact was being disregarded. When a few years later Russia acquired a functioning government, all this quickly came to an end and Shell, threatened with having its licence revoked, was forced to sell its interests to Gazprom.
By contrast, Bob Dudley understands the rules of the game and recognises that in order to take, an investor also needs to give. I feel this will be a good deal all around, which opens new opportunities for BP in the Arctic, Russian Far East and the Caspian, as well as joint projects with Rosneft in other parts of the world. Well done, Bob.
