BP Plc’s (BP) long-awaited share-swap agreement with Russia's state-operated oil company, Rosneft collapsed on May 16, at midnight. The extended deadline to complete the transaction passed with the companies failing to come up with a meaningful conclusion.
BP and Rosneft had initially planned to wrap up the deal a month ago. Subsequently, the two companies extended the deadline so as to give BP the time it needed to resolve the dispute with its Russian partner, TNK-BP.
In mid-January 2011, BP and Rosneft entered into a share-swap agreement to jointly explore and develop three offshore licenses in the prospective Siberian Artic region. Under the agreement, the U.K. oil major offered 5% of its ordinary shares, valued at $7.8 billion, in exchange for 9.5% of Rosneft’s shares.
However, the British group faces a court injunction held by TNK-BP, which alleges BP of keeping its Russian partner in the dark about the share-swap deal and violating their joint venture (JV) shareholder agreement. TNK-BP is Russia’s third largest oil company, held 50% by BP and 50% by the Alfa-Access-Renova (AAR) Consortium.
Failing to complete the Rosneft deal marks a huge blow for BP, which is constantly striving to come out of last year’s disastrous oil spill episode in the Gulf of Mexico. The deal was supposed to grant BP access to the Kara Sea, which has become a key focus for international oil majors. It would have also allowed BP, which already owns 1% of Rosneft, to strengthen its position in the Russian hydrocarbon reserve, which was previously off limits to foreign companies.
Although BP said that the company is in talks with both Rosneft and TNK-BP for future alliance, we believe it will be hard for the British company to secure the original deal, making future growth in the region uncertain. The deal was also the first major transaction focusing on BP’s exploration potentials in emerging markets like Russia and India since Robert W. Dudley was appointed as chief executive last year in October.
Last year, the Gulf of Mexico oil spill had hit the company hard. However, it managed to come out of the disaster through various upstream activities. While the deal with Rosneft has affected BP’s share performance, we expect the company to come out of the scenario through upcoming projects with the Russian giant including Sakhalin joint venture as well as German refining business.
Despite the collapse of the Rosneft deal, BP continues to hold an advantageous position in Russia as compared with other western oil companies like Chevron Corp. (CVX) or ExxonMobil Corp. (XOM).
BP shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Longer-term, we maintain our Neutral recommendation.
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