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BP Cuddles A Russian Bear

Saturday January 15th 2011

There was a smile was a mile wide on the face of BP CEO, Bob Dudley has he said “This is a historic moment for BP”.

 The British oi and gas l giant is no stranger to historic moments that resonate with the general public following the disaster in the Mexican Gulf at the Deepwater Horizon well. If ever an event hit the headlines and raised the hackles in DC and amid an affected comunity that was it. That incident caused the share price to tumble 53.78% from the 2010 peak of 655.40 on April 20th to the June 29th low of 302.90.

Since the clean up has began and BP replaced Tony Heyward with Mr Dudley so the share price has stormed ahead by 64.90%. However, since June 29th BP is only the 4th best performing European oil stock although it’s gain is almost 3 times that achieved by major Europeans Royal Dutch Shall and Total. BP’s share price at the Friday close in London was 499.50. It had closed above 500p for 3 days this week.

A New Year, A New Deal:

BP has signed a JV agreement with Russian energy firm Rosneft. The two will seek to develop the potentially huge deposits of oil and gas in Russia’s Arctic shelf. From a technical perspective, both firms stand to gain as the JV will allow both parties to exchange expertise in exploring the region. From a financial perspective the two will entwine themselves  as Rosneft will take 5% of BP’s shares in exchange for 9.5% of Rosneft’s shares.

This is a major piece of good news for BP and has clearly been on the cards for sometime although it is being driven by the price of crude which has been on a steady path of price improvement since February 18th 2009 when it was at $54.56 a barrel Since then the spot level has peaked at $93.55/b in march 2010 and closed on January 14th at $91.54/b. Still it has a long way to run before threatening the all time “price” or “nominal” high of $143.37 that was printed for the close on July 14th 2008.

I have to wonder if the former CEO Tony Heyward had any influence in the deal…after all he was well known in Russia and would be well placed to ensure that BP did not leave any loose ends in the contract. What tax breaks has BP secured? How secure are they?  I say this because Russia has a “different” way of doing business and as oil companies have found out in the past. The rules of engagement may say one thing in the morning, and another n the afternoon. After all Rosneft’s stake in BP is worth £5Bn and the Russian oil operator is 75% state owned.

Given the past history of Mr Dudley and the Russians the deal is pleasing although surprising. He was CEO of Russian joint venture TNK-BP, and was forced out of the country in 2008 after falling out with other shareholders.

That will raise a few eyebrows as it gives the Russian government influence over a western oil company that has interests in strategically important oil reserves all over the world, including the United States. US Congressman Edward Markey, who is leading Democrat on the House Natural Resources Committee, called for a review of the deal by US regulators. I doubt that will actually come close to derailing this agreement.

 As crude threatens to break the $100/b level BP is willing to enter a “liaison dangereuses”   as what clearly matters for  BP is that the Russian Arctic that will be explored is estimated to the potential to produce as much oil as the North Sea in its heyday. The firms will explore in 3 areas titled EPNZ 1,2,3 – on the Russian Arctic continental shelf. The area covers 125,000 km2 in an area of the South Kara Sea.

Lessons Learned:

As to the Deepwater Horizon incident Mr Dudley stated that the firm had “learned many lessons over the past year”. When something has cost over $40Bn, a hard lesson has to be absorbed.

He also said the Russian deal had not been precipitated by the backlash it had experienced in the US because of the Gulf of Mexico spill. Since the rig disaster in the US Gulf of Mexico BP has examined what went wrong and has made a decision to streamline operations and so it has been disposing of assets.

Whilst striking out the asset book many exposures, BP has looked for new ventures. The deal with Rosneft is typical of a planned process of diversification. 

BP and Rosneft will also establish an Arctic technology centre in Russia which will work with Russian and international research institutes to develop technologies for the extraction of hydrocarbon resources from the Arctic shelf.

I see this as being a good step for BP as BP gets access to resources; Rosneft gets access to expertise and knowledge. For an investor it is appealing especially as in November BP announced it was back in profit in the 3 months to September 30th after last quarter’s record loss. BP will contnue to make higher price gains in 2011…bar any unforeseen issues in their operations.  Target 572p as BP will start to outperform the FTSE 100. Currently the 12 month Beta is 1.00…that will rise as BP and energy overall will perform well in 2011.

Stephen Pope ~ Managing Partner Spotlight Ideas

January 15th 2011

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