It is a sign of just how bad things had got for BP in Russia that the decision to take a minority stake in a government-controlled oil company is widely seen as a good way out. Still, it is hard to quibble with the logic of BP's decision to sell its 50 per cent of TNK-BP to Rosneft. The U.K. company gets out of the TNK-BP nightmare and instead gets a well-connected partner. BP put $8-billion (U.S.) into TNK-BP in 2003, and since then has taken $19-billion in dividends. It is now selling its stake for $26-billion.
But while the logic is fine, the details are not ideal. The valuation looks fair on a discounted cash flow basis, but AAR – BP's partner in TNK-BP – is selling its 50-per-cent stake for almost $2-billion more, and it is receiving all cash. And while BP is selling its stake in TNK-BP for an enterprise value that is four times earnings before interest, tax depreciation and amortization, it will be paying the Russian government more than 5 times EBITDA for a 6-per-cent stake in Rosneft. Finally, BP is making vague and unnerving noises about plans to "offset any dilution to earnings per share" as a result of the disposal. But with a fine in the U.S. coming up and exploration to fund, the last thing the company should be considering is a share buyback.
For its part Rosneft stands to become the world's largest oil and gas company by volume produced. It should also be able to extract cost savings from integrating TNK-BP, and the combined cash flow will help to finance exploration. But before that happens it has to digest BP's and AAR's stakes, which would take net debt to $64-billion, or over two times the combined EBITDA.
BP's two board seats will give it some clout over Rosneft, but the Russian government, which will still own 70 per cent, will call the shots. BP's Russian position is healthier than it was a week ago, but it is left with $14-billion tied up in a company over which it has little control.