BP Bows to the Inevitable in Russia

Game, set and match to Rosneft.

The state-owned Russian oil giant  (ROSN.RS) is poised to secure 100% of TNK-BP (TNBP.RS), the oil company now jointly owned by BP (BP) and oligarch group Alfa Access Renova. The oligarchs have a memorandum of understanding to sell their 50% stake for $28 billion, according to a person familiar with the deal; BP should get an offer in the next few days for a similar amount in cash and shares worth up to 20% of Rosneft, according to people close to BP. For the U.K. company, this is not an ideal outcome.

Sure, BP will get a hefty lump of cash, though the precise amount is not yet decided. If BP receives the same for its stake as AAR, it could get $13.5-$20.7 billion in cash, and 10%-20% of Rosneft’s shares, based on Rosneft’s market price on Wednesday. BP shareholders hoping for a special dividend may be disappointed. BP is still trying to settle legal claims arising from the 2010 Gulf of Mexico oil spill. A big dividend payout would be a red rag to U.S. Department of Justice officials negotiating an out-of-court settlement.

Nor does owning a sizeable stake in Rosneft look appealing. BP will argue it can bring technical and management expertise to Rosneft, in the same way it built a financially successful operation at TNK-BP. But even 20% ownership is unlikely to give BP major influence at Rosneft, which is run by Igor Sechin, an ally of Russian President Vladimir Putin. Rosneft could benefit from synergies in buying TNK-BP, especially in Western Siberia, where the two companies have neighbouring oil fields. But no value has been estimated for such synergies yet, and execution risk will be high, a BP source admits.

For BP, an illiquid stake in a company that pays meager dividends is undoubtedly second best to retaining its half of TNK-BP in partnership with Rosneft. But in reality, it has little choice but to sell to a state behemoth determined to consolidate control of the Russian oil sector. BP can put a brave face on the situation. But in Russia there’s usually only one winner.

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