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In wake of TNK deal, BP looks a tempting target

BP's Russian resolution helps put the British oil major more firmly in play. Monday's deal to sell its half of the fractious TNK-BP joint venture to Moscow-backed Rosneft removes a poison pill. A reasonable settlement with U.S. authorities for the Gulf of Mexico disaster – possible before the year-end – would remove another. Add weakened management and a soggy share price, and predators may be tempted.

The agreement over TNK-BP ends BP's tricky but lucrative nine-year partnership with four Russian billionaires, collectively known as AAR, that owned the other half of the venture and whom Rosneft also plans to buy out. BP emerges with $12.3-billion (U.S.) in cash and, including an existing 1.25-per-cent holding, a total 19.75-per-cent stake in Rosneft.

Valuation-wise, this seems a solid result given the very short list of potential buyers for TNK-BP. Some of the remaining cash could eventually find its way to shareholders through a big dividend or buyback. BP cedes ownership of a dividend-gushing producer focused on mature Siberian oil fields. But it hopes this will be the start of a long association with Rosneft, which is fast eclipsing Gazprom as Russia's new national champion in natural resources. Post-deal, Rosneft becomes the world's top-producing listed oil company.

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After AAR torpedoed his first major initiative, an Arctic alliance with Rosneft, this agreement could help repair the standing of chief executive officer Bob Dudley. But some investors may yet have reservations about the deal's complexities. Two board seats may not count for much at such a Kremlin-dominated partner. Gauging BP's value will from now on rest partly on assessments of Rosneft's prospects. And any eventual exit from Rosneft would need to be negotiated with extreme delicacy.

For now, the market continues to punish BP for its past misdeeds: valuing the company at a meagre 7.2 times earnings. That and its crash diet post-Macondo mean it has a market capitalization of about £88-billion ($141-billion). In most other industries that would look Brobdingnagian. But that contrasts with the $425-billion market value of Exxon Mobil – a fellow Rosneft ally – or Chevron's $222-billion, or even Royal Dutch Shell's £139-billion. In that company, BP starts to look vulnerable.

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