BP looking for a huge cash windfall

The energy giant is looking to sell its 50% stake in Russia's No. 3 oil company.

By Benzinga Jul 27, 2012 5:34PM
Image: Oil drums (© Kevin Phillips/Digital Vision/age fotostock)By Gordon Wilcox, Benzinga Staff Writer

A big deal could be brewing in the energy sector and it probably will not involve any of the U.S. oil majors. BP (BP) is looking to part with its 50% interest in TNK-BP, the British oil giant's highly lucrative but highly problematic joint venture with Russian oligarchs.


Estimates for the value of BP's stake ranges from $20 billion to $30 billion. Even at the low end of that range, BP would exit the venture with quite a windfall. BP paid $7 billion to acquire the interest in TNK-BP, Russia's third-largest oil company, in 2003. Since then, BP has reaped $19 billion in dividends alone, Reuters reported.


BP's willingness to sell its interest in TNK-BP, which accounted for 29% of the British company's production and 27% of total reserves last year, has likely been greeted warmly by an array of buyers. OAO Rosneft, Russia's largest oil company, appears to be the most likely suitor at this juncture, but acquisition-happy Chinese oil majors could enter the picture as well.


What is clear is when BP walks away from TNK-BP, it will do so with a sizable chunk of change and plenty of options regarding how to spend it. Those options include:


Legal bills

Earlier this year, BP lowered its costs associated with the Gulf of Mexico oil spill, the largest spill in U.S. history, to $37.2 billion from more than $40 billion following settlements with various parties. In March, the company agreed to pay $7.8 billion to resolve plaintiffs' economic hardship claims.


BP's total spill liabilities are still not 100% clear at this point. However, it is clear selling the TNK-BP stake at the midpoint of the estimated range, or $25 billion, would go a long way toward helping BP put the spill tragedy behind it.


Raise the dividend

With a dividend yield of close to five%, it might not appear that BP should raise its dividend, but consider the following: Prior to the spill, the company was paying a dividend of 84 cents per quarter on its American depositary receipts. The dividend is now 48 cents per ADR per quarter. With a windfall from the sale of the TNK-BP stake, BP could easily boost its dividend and still have plenty of cash left over.


Buy Range Resources

Several times over the past few years, a rumor about BP's bitter rival, Royal Dutch Shell (RDS-A), buying Range Resources (RRChas surfaced.


Range is still an independent company, but one with a market value of less than $10 billion, meaning BP could buy Range right now if it wanted to. The sticking point here would be that even though Range is looking to increase its oil output, the bulk of its production is still natural gas. Range said it expects to produce just 7,600-7,800 barrels of oil per day in the current quarter.


Buy Anadarko Petroleum

This scenario is extremely far-fetched, but it is not impossible to imagine, either. Anadarko Petroleum (APC) and BP previously knocked heads because the former held a 25% non-operating interest in the Macondo well project. It took a while, but Anadarko eventually paid a $4 billion settlement to BP to avoid expensive and extensive litigation.


So it is fair to say these two companies are not best friends. Still, that does not make a deal impossible. The issue would boil down to price. Anadarko has a market value of almost $36 billion. Assuming a 25% premium, BP would be forced to shell out $45 billion for Anadarko. That means the sale of the TNK-BP stake would not be enough to cover the purchase of Anadarko.


Add in the potential of its Ghana and Mozambique wells, and Anadarko might be worth more than $45 billion. In other words, Anadarko will not come cheap and it would likely take a big price tag to get the company to even come to the negotiating table.


However, BP needs to recoup lost production, particularly if it sells its TNK-BP interest. The company's asset sales program, started soon after the Gulf of Mexico spill, has trimmed output and the loss of TNK-BP's contribution to BP's overall production could take decades to organically replace. An Anadarko purchase would quickly solve BP's production problems.


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1Comment
Jul 27, 2012 6:27PM
avatar
Well, how 'veddy British' of them.  I guess this means the Gulf Coast is back to normal, as in pre-spill? Hmmm....?
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