by Aaron Levitt | October 25, 2012 7:00 am
At this point, integrated giant BP’s (NYSE:BP) woes are pretty much common knowledge. Still reeling from worst oil spill in history — 2010’s Deepwater Horizon drilling disaster in the Gulf of Mexico — the energy firm has undergone a massive $38 billion divestiture program, selling everything from refineries, shale reserves and offshore fields in an attempt to recoup the staggering estimated legal and clean-up costs.
Meanwhile, as the firm has struggled to keep itself together and not “give away the farm,” a series of operational mishaps and infighting within its huge Russian joint venture TNK-BP may be finally coming to a head. A new deal, though, could rid BP of the troubled joint venture and raise some much needed cash.
At first, the joint-venture seemed like marriage made in heaven — a mere $8 billion gave BP unprecedented access to Russia’s vast oil wealth. Overtime, though, TNK-BP turned sour.
The main issue stems from just how the partnership was run. Both BP and a group of Russian oligarchs — the AAR consortium — sit on the board of TNK-BP. Using the board structure, both parties exercise control over key decisions taken by the oil firms management. However, AAR dominates the TNK-BP management committee. Oligarch shareholder German Khan also serves as its executive director.
BP has argued for years that Khan and his colleagues have violated the venture’s shareholder agreement by making decisions without the direct support of the board. This operational infighting has exacerbated other fights between the two groups.
The AAR has accused BP of attempting to use the venture for its own ends, while BP has argued that recent moves by the partnership — it bought other oil properties outside Russia — would conflict with other parts of its own energy empire and once again violated the shareholder agreement. Court battles, spying and even office break-ins followed suit.
These arguments and fighting made for a difficult working environment … that is until today.
BP’s TNK headaches might finally be over as the group has agreed to sell its half of the venture to Russian state-owned oil firm Rosneft (PINK:RNFTF) for $17.1 billion in cash and 12.8% of Rosneft’s shares. BP is also planning on reinvesting roughly $4.8 billion of that cash outlay back into shares of Rosneft, until it reaches 19.75% ownership of the energy company and has two board seats. BP already owns 1.25% of Rosneft, after buying about $1 billion worth of shares during its 2006 IPO.
The deal not only releases BP from its very difficult nine-year relationship with the billionaire oligarchs, but puts some serious cash back on its balance sheet. The roughly $12 billion it will have left after purchasing additional Rosneft shares will go a long way in paying for its spill damages — not to mention all the potential Arctic reserves that they will now have access to through Rosneft.
BP has missed out on the opportunity into the Russian Arctic as a result of its feud with the AAR. Rivals Exxon (NYSE:XOM), Italy’s Eni (NYSE:E) and Norway’s Statoil (NYSE:STO) have all made major deals there over the past year.
All in all, BP may have finally done shareholders right by the deal.
If BP did well, then Rosneft did even better. Not only has it agreed to buy BP’s stake, but it has also announced it will buy the AAR’s as well. For an additional $28 billion, Rosneft could control all of TNK-BP.
Putting that into perspective, the $55 billion deal would be the largest global M&A transaction since 2010. Plus, by absorbing all of TNK-BP, Rosneft would see oil and gas production at about 4.6 million barrels a day. That’s more than other global giants like Exxon and PetroChina (NYSE:PTR). Putting it another way, Rosneft’s output would exceed that of every Middle Eastern country except Saudi Arabia.
The complete buyout will also give Rosneft hefty extra cash flows that it can use to finance exploration of Russia’s vast reserves in order to replace the nation’s aging fields. Rosneft would be able to tap into BP’s expertise in exploring difficult and potentially hazardous conditions. That’s key as much of Russia’s vast reserves lie trapped beneath ice or deep within the sea.
With Vladimir Putin blessing the buyout and Russian government backing the deal, it’s hard to imagine it not going through after the month-long regulatory process.
For investors — and I can’t believe I’m saying this — BP may finally on its way to regaining its mojo. While it isn’t out of the woods just yet in terms of the spill litigation, the sale does go a long way in making that issue disappear. At the same time, it clearly removes the TNK-BP issue off of its to-do list. That makes it a pretty interesting buy, especially considering that some analysts now predict it’s trading for well below its break-up value.
On the flipside, Rosneft will now be one of the largest energy concerns on the planet. Basically, it will be the go-to partner for any other oil firm wanting to drill in Russia. With Russian government backing it, it will be a formidable foe in the energy sector.
For portfolios, buying either firm could make sense in the upcoming months.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.
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