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To be big or not to be big

1 June 2012 By Chris Hughes

BP has had a lot of grief from its Russian joint venture and may now sell out of TNK-BP altogether. The UK oil major would then solve one problem by creating another. The world’s best energy assets are generally in difficult places and involve challenging partnerships. Awkward alliances are the norm for Big Oil – assuming BP wants to stay in the superleague.

TNK-BP’s quality as a production asset doesn’t mean the approaches BP says it has received will turn into a lucrative deal. The pool of potential buyers is likely small, and Russian. Alfa Access Renova, BP’s joint venture partner, may want to move to 100 percent at the right price. Alternatively, state-backed energy groups Rosneft and Gazprom, or some new Kremlin-backed entity, could take BP’s place as AAR’s partner. That makes for a weak auction.

BP offered around $32 billion to buy out AAR’s share last year, according to a person familiar with the situation. But at the time it was part of a wider strategy to explore new Russian fields with Rosneft. TNK-BP’s listed shares today value BP’s stake at $17.4 billion, although the small free float isn’t a great guide. Analysts at Citi argue the stake is worth around $25 billion, or 20 percent of BP’s market capitalisation.

An all-cash deal would nearly wipe out BP’s $29 billion of net debt. BP reckons its optimal capital position is to have 10-15 percent gearing, so a special dividend might then be possible. The snag is that the BP rump would be much less cash-generative: dividends from TNK-BP funded 20 percent of BP’s $17 billion in shareholder distributions in 2011.

In an ideal world, BP would rapidly invest the proceeds in politically safer long-term projects, either through raised capex or M&A. But those don’t exist. That’s why BP has tolerated the unhappy marriage with AAR for so long, and why Repsol exposed its shareholders to a grabby government in Argentina.

The fact is that BP has recouped its original $8 billion investment in TNK-BP more than twice over in dividends received. The exit will force the company into existential questioning. Difficult partnerships are its fate – and they’re worth it.


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