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BP hit by fall out from sanctions against Russia and oil price crash

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How BP Got Impacted From Exposure In Rosneft Oil Co (RNFTF) During Q4

Bidness Etc looks at how the western sanctions against Russia and the lower crude price have impacted BP during the fourth quarter due to its exposure in Rosneft Oil

By: MICHEAL KAUFMAN
Published: Jan 5, 2015 at 9:01 am EST

BP plc (ADR) (NYSE:BP) acquired a 20% stake in the Russian oil giant Rosneft Oil Co (OTCMKTS:RNFTF) in 2013. It was considered as one of the most important investments for BP as it was expected to deliver long-term value for the company. Russia is considered as the world’s largest oil producer; hence, BP was looking to exploit its investment in Rosneft to spread its scope in Russia.

However, things did not go as BP had planned. Following the annexation of Crimea, an autonomous region in Ukraine, the west imposed sanctions on Russia. The western sanctions made it impossible for the western companies to collaborate with Russian companies in shale, deepwater exploration, and to provide long-term financing.

Since the sanctions were imposed, the Russian ruble has declined significantly. The current exchange rate of the US dollar against the Russian ruble stands at one dollar to 58.7 Russian rubles. This shows a decline of 47% over the last three months. The falling ruble has made it difficult for BP to operate in Russia.

In addition to the depreciating Ruble, prices of crude oil and natural gas have fallen significantly since June. The front-month futures of West Texas Intermediate were trading at $51.6 per barrel on Monday during pre-market hours, while Brent crude was trading at $55.4 per barrel. Currently, crude oil is trading at its five-and-a-half year low.

Citigroup Inc (NYSE:C) analysts estimated that the London-based company would face an estimated loss of $750 million in the fourth quarter of 2014 due to its investment in Rosneft. This is the first time that BP would incur a loss since acquiring the stake in the Russian oil major, which accounts for one-third of BP’s total production. In the previous quarter, BP reported a profit of $110 million, indicating an 86.4% year-over-year decline.

An analyst at BMO Capital Markets, Ian Reid, has indicated that the company might be exposed to a net loss of $630 million in the fourth quarter. He backed this view by indicating that Rosneft’s debt would be denominated in Euros and Dollars. However, the general accounting rules will make the company convert the amount to Rubles at the end of each quarter. Therefore, this adjustment would adversely affect Rosneft and contribute to the fourth-quarter loss. BMO has also predicted earnings for the company to drop to five cents in the upcoming quarter. BMO expects dividends for BP to decline 75% to $173.25 million, compared to what the company received in July 2014.

Tudor Pickering Hold, an investment bank, expects a much greater loss for the British integrated Oil and Gas Company. The bank predicts the net loss to come in at $750 million. The bank claims depreciating currency and falling export revenue to be the major factors associated with the loss. The bank predicts that BP in the next quarter would not be able to enjoy the dividend benefits from Rosneft.

BP stock declined 21% last year. On January 2 when the market closed, the stock was trading at $38.12. The company may also decide to write down the value of its equity in Rosneft. The value in 2013 was estimated to be $13.6 billion and is accordingly adjusted every quarter.

SOURCE ARTICLE

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Extract

ROYAL DUTCH SHELL PLC’s earnings per share declined by 6.7% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years.

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