An $8 Billion Investment for BP (NYSE:BP)

Brian Hicks

Written By Brian Hicks

Posted March 25, 2013

BP (NYSE:BP) announced Friday that it will be buying back $8 billion worth of its stock after it sold its 50 percent stake in Russian TNK-BP (MM:TNBP).

The deal with Rosneft (MM:ROSN), which purchased BP’s share on Thursday, is concluded to be worth $55 billion. It also adds to BP’s 1.25 percent stake in Rosneft, bringing its share to 19.75 percent; this makes BP its largest shareholder behind only the state of Russia itself, reports the Financial Times.

The oil industry has never seen a takeover quite this big, and it is hands down the largest corporate deal in Russian history. This week, it will be the number one publicly traded oil producer, producing 40 percent of all Russian oil and 5 percent of the world output, the Financial Times reports, and generating $160 billion in revenue from its 4.2 million-4.3 million barrels a day.

Rosneft also bought the other half of TNK-BP from a group of Russian oligarchs known as AAR for $27.7 billion. This deal will further tighten the hold Rosneft already has on Russian oil.

Eliminating AAR from the picture strengthens BP’s allegiance with Rosneft, as there had been disputes when the oligarchy shut down attempts to form an alliance in the past. BP was then forced to watch as Rosneft inked deals with all of its major competition—ExxonMobil (NYSE:XOM), Eni (NYSE:E) and Statoil (NYSE:STO)—for Arctic exploration.

oil rig picNow BP has the chance to make a run in the Arctic, as Rosneft has many future prospects in the region—41 oil and gas licenses in all. And despite Rosneft’s deals with BP competition, opportunity is bountiful.

When asked about business ventures with BP competitors, BP chief executive Robert W. Dudley told The New York Times, “We all applaud Rosneft’s progressive approach of strategic ties with international oil companies.”

BP will do nothing but benefit from the success of its competitors now that it has a nearly 20 percent interest in Rosneft; it’s a win-win.

“We expect our stake in Rosneft will generate long-term value for BP and its shareholders,” BP Chairman Carl-Henric Svanberg said in a statement to The Washington Post. “But this buy-back program should also allow our shareholders to see benefits in the near-term from the value we have realized by reshaping our Russian business.”

The $8 billion share buyback—the same amount BP invested for its share of the company in 2003—should take roughly 12 to 18 months for completion.

In the ten years since 2003, BP has received $19 billion in dividends, and the venture accounted for one quarter of BP’s production and a fifth of its reserves, according to the Financial Times.

The buyback exceeds expectations—it’s twice what analysts calculated BP would pay after it promised last October that any waning effects from the TNK-BP sale on stock prices would be offset. The buyback is designed to increase the value of stock prices, but $8 billion does more than bring balance to earnings-per-share.

It also accounts for the $38 billion in divestments that BP has made since 2010 as a result of the Deepwater Horizon rig explosion and oil catastrophe in the Gulf of Mexico—the single worst man-made disaster in the history of the United States; 11 people died, and BP has sold assets ever since to aid in recovery efforts and liabilities. It cut dividends in 2010 and didn’t resume payments until 2011, and BP is currently still in court over the matter, according to Reuters.

BP closed in London on Friday up 1.85 percent on the buyback announcement, but the company is still well short of earnings that were seen before the April 2010 Gulf of Mexico oil spill—30 percent lower. Investors still fear for the state of BP’s success while lawsuits and other liabilities are looming, reports The New York Times.

BP will use $4.48 billion in the sale of its TNK-BP interest to relieve some of its debt.

Through all of its recent trouble BP is pulling itself from the trenches of 2010 and proving its resilience with the moves it made last week. As technology has aggressively changed the oil industry, Russia can begin to exploit and develop more and more of its resources—offshore oil, shale gas, and tight oil

Drill practices may be more expensive and technical, but paired with the expertise of BP, these are obstacles that can easily be hurdled.

The two companies are already collaborating on future projects. There’s an offshore venture in the Arctic, a tight oil reserve in Siberia, and fuel marketing ventures that would take place on a global scale, reports the Financial Times.

The synergy that this partnership creates has no bounds and has already pushed Rosneft to be the largest producer of gas and oil ahead of ExxonMobil, which produces 4.2 million barrels a day. As a result of the deal, Rosneft should be producing close to 4.6 million barrels a day, The Washington Post reports. 


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