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BP Applies Some Bid Repellant

BP Chief Executive Bob Dudley (L) looks towards state-run Russian firm Rosneft’s President Eduard Khudainatov (R) before signing an agreement to form a global and arctic strategic alliance.

By Edward Tan, JANUARY 20, 2011

BP and Rosneft presented their $7.8 billion stock swap as solidifying an exploration alliance in Russia’s South Kara Sea.

The Rosneft deal, however, served another purpose for BP — scaring off potential acquirers that might see the U.K. firm as vulnerable following its recent disaster in the Gulf of Mexico.

BP’s new CEO, Robert Dudley, needs time to overhaul his company’s safety program and rebuild its competitiveness in the global race for petroleum reserves. He doesn’t need the distraction of, say, Royal Dutch Shell inquiring about a merger while BP’s shares continue to trade 25% below pre-Deepwater Horizon levels.

Dudley simply wants breathing room to prove that BP is capable of recovering without help. He’s likely to get it: Any would-be buyer now has two companies to tangle with, one of them closely tied to the Russian state.

A BP spokesman denied that the swap with Rosneft was motivated by a desire to repel suitors.

What does Rosneft get in return? Funding for capital expenditures. Russian Deputy Prime Minister Igor Sechin said Russia would count on BP to provide the initial funding of $1.4 billion to $2 billion for exploring the South Kara Sea concession — despite the fact that ownership of the South Kara JV is split 33% for BP and 67% for Rosneft.

It’s no secret that Rosneft is interested in cutting a slimmer financial figure. A Rosneft representative confirmed the company reduced capital expenditures in 2009 from the previous year and has a goal of keeping net debt near 1x Ebitda.

It was also convenient that Rosneft had a billion treasury shares on hand, acquired through its absorption of Yukos Oil Company. These shares were swapped with BP as part of the deal.

This is not to say there is no strategic upside for BP. Rosneft was awarded five exploration licenses in 2010, with more expected over the next two years. This provides BP with ample opportunities to sink more money into possible future exploration efforts. But with Russian oil export taxes at roughly 50%, on top of an 18% mineral extraction tax and 20% corporate income tax, the returns from any Russian investment are well into the future. Furthermore, the joint venture does not expect to be drilling its first exploratory well until 2015 or 2016.

Fortunately, the stock swap with Rosneft has one clear-cut benefit in the short term. It provides protection from unwanted suitors as BP recovers its footing, for at least the two years that Rosneft has agreed to hold the stock.


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