BP
(
quote
) is selling to mother Russia. Now there is a bigger global
major oil company in state-owned Rosneft (
RNFTF
,
quote
) with major ties to Exxon Mobil (
XOM
,
quote
) via arctic circle joint ventures, and BP - two of the
standard bearers in global oil/gas. This is ultimately a
$55 billion deal
, making it the third biggest deal in all history.
[caption id="attachment_74028" align="alignright" width="300"
caption="Rosneft headquarters near the Kremlin, across the Moskva
river."]
[/caption]
Mother Russia comes away form this as a victor, and the deal
ultimately raises the corporate governance bar for Russia. TNK-BP
is one of the best-run oil companies in Russia, which spins off
close to $6 billion in free cash flow per year for Rosneft and
BP.
Rosneft will pay BP $17.1 billion in cash plus shares for its
half of TNK-BP. By the end of the transaction, BP will hold
19.75% of Rosneft and have two board seats.
BP will use $4.8 billion of the $17.1 billion in cash to buy
another 5.66% of Rosneft + the 12.85% treasury stake swap.
This deal is good for Russia, and is a watershed for BP. It
ticks off one of two boxes, with the next being the Macondo
settlement for the Deepwater Horizon tragedy. After that shares
should re-rate back into line with BP's peers, suggesting a share
price over £500.
The whole shebang is yielding $25.5 billion in value to BP,
above the +/-$20 billion the market wanted to see BP get for
TNK-BP, but lower than the $27-28 billion recent press reports
suggested.
Another reason why BP shares may have come off a bit is that BP
is paying the Russian government a 20% premium to acquire the 5.66%
stake ($4.8 billion = an $85 billion market cap for Rosneft vs. the
$71 billion actual current market cap).
This deal will not cause BP to increase dividends. It will use
the cash to help pay off its Macondo/Deepwater Horizon liabilities,
and it also needs to reinvest to try and make up for loss of the
TNK-BP venture's contribution to earnings and cash-flow. BP
re-based dividends after Macondo because it was previously
over-distributing. Stock yields 4.9%, so it's still decent for
income funds.
Rosneft will have until December 3 to come to final terms.
Rosneft CEO Igor Sechin said BP is getting its Rosneft
shares at a good price, at a meeting with Russian President
Vladimir Putin near Moscow. The deal between the three
companies valued at $61 billion is 72% of Exxon Mobil's deal
value for its 1999 merger worth $85.2 billion.
Rosneft and TNK-BP's output as of August was a combined 3.84
million barrels per day. Exxon Mobil's output was 4.15 million
barrels per day in the second quarter this year.
UBS suggests BP may use the cash it receives to buy back $6
billion worth of shares after the deal goes through, presenting a
huge windfall for BP shareholders.
Bloomberg reports that BP said yesterday it will try to
compensate stockowners for reduced profit. The deal suggests a
dilution of BP's earnings-per-share of as much as 5%,
according to Macquarie Capital Europe.
"It's too premature to say what we're going to do with
the cash," BP's Chief Financial Officer Brian Gilvary said in
a telephone interview with Bloomberg yesterday. "But we are
making sure we minimize the dilution to earnings-per-share as
well as continue with our progressive dividend policy. We're
not looking to go
out and make an acquisition with it."
BP CEO Bob Dudley has spent two years trying to strengthen
the company's balance sheet from asset
sales, following the oil spill in the Gulf of Mexico that
erased a third of the company's market value. A trial over
liability for the accident is set to begin on Jan. 14, with BP
facing pollution fines of as much as $17.6 billion under the
Clean Water Act.
Macquarie analyst Jason Gammel said to Bloomberg that
countering lower earnings-per-share "would mean you'd either
have to boost earnings by 3% to 5%, or more likely buy back $5
billion to $7 billion of shares. But I wouldn't expect any
detail on that until after a settlement with the U.S.
government."
BP will initially lose about 100,000 barrels of oil a day
in production and gain about 700 million barrels of oil
reserves.
