BP Turns Russian after Shell Turned Chinese

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BP (NYSE: BP) has decided to sell its 50% stake in its Russian joint venture TNK-BP to Russia’s national oil producer Rosneft (PINK:RNFTF) for $28 billion, paid in cash and stock. According to the deal, BP will receive $12.3 billion in cash and an 18.5% stake in Rosneft. The British energy giant will effectively have a significant stake in Russia’s leading energy firm, which produces 40% of the nation’s total output. Following the deal, two important aspects will emerge from the transaction: BP will become a major player in the world’s biggest energy producing country, and Rosneft will emerge as the biggest listed oil producer of the world. This will be a huge turnaround for Rosneft which, until 2004, was planning to merge with the state-owned natural gas giant Gazprom, which has more than 22% representation in iShares MSCI Russia Capped ETF (ERUS).

Over the long term, this will likely become a win-win situation for both BP and Rosneft. The former will have high growth prospects for decades to come by having a one-fifth stake in Russia’s state-owned firm, which enjoys strong support from the Russian president Vladimir Putin. BP will also get two seats out of nine on Rosneft’s board. Although BP is not expected to have any influence over Rosneft’s strategy, which is dictated by the state, it will have access to the top echelons of Russia’s energy sector. Rosneft, on the other hand, will have an opportunity to work alongside an influential player in the global oil and gas sector.

It is generally believed that Russia has enormous oil reserves, although there are differing estimates of its reserves; these range from 70 billion to 150 billion barrels. However, it is also believed to be home to one of the world’s largest untapped crude reserves (Eastern Siberia), estimated to be around $68 billion barrels. Russia is only behind Saudi Arabia in terms of the size of its reserves. The country sits close to both Europe and China, which makes the reserves even more strategically important. It is already a leading supplier to Europe, and has signed a 20 year supply contract with China about three years ago. The country’s oil and gas sector accounts for 20% of its GDP, more than 60% of exports and 30% of the total FDI. Besides, Russia is also looking for more oil in the Arctic Circle, Sri Lanka, and Cuba.

However, the long rule of President Putin’s conservative regime and infighting between the country’s top politicians, despite the liberal policies of Prime Minister Dmitry Medvedev, has largely prevented leading global oil producers, such as Exxon Mobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-A), from acquiring significant stakes in the Russian energy firms. Earlier this year, the Prime Minister embarked on a mission to reduce the state’s shares in energy companies, which was fiercely opposed by Igor Sechin, a conservative leader, an energy tycoon, and an ally of the President who could not secure a place in Russia’s new official setup. But this did not stop Sechin from lobbying against the privatization measures. Finally, President Putin put an end to the dispute, favoring Sechin by signing a decree that halted the government’s privatization drive. Mr. Sechin was thereafter appointed as the CEO of Rosneft.

Exxon is currently working with Rosneft on a $3.2 billion exploration venture in the Arctic. The Russian oil sector will continue to attract FDI, but Raymond James & Associates believe that no other foreign firm will now have a greater or even similar access to the country’s oil sector as BP. BP has not only achieved first mover advantage, but has also gained the approval from President Putin, while the company’s executive will enjoy a close relationship with Igor Sechin.

Since the start of October, BP’s shares have gone down 2.3%, while Exxon, Shell, and ERUS have also fallen by 1.4%, 2.6% and 2%, respectively, in sympathy with sagging oil prices.  Rosneft’s shares, on the other hand, have gone up by 9% at the London Stock Exchange in the same period.

<table> <tbody> <tr> <td> </td> <td> <p><strong>ERUS(ETF)</strong></p> </td> <td> <p><strong>Rosneft </strong><strong>(LSE)</strong></p> </td> <td> <p><strong>BP</strong></p> </td> <td> <p><strong>Shell</strong></p> </td> <td> <p><strong>Exxon</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>5</p> </td> <td> <p>8.1125</p> </td> <td> <p>7.69</p> </td> <td> <p>8.04</p> </td> <td> <p>9.5</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>2.16%</p> </td> <td> <p>1.45%</p> </td> <td> <p>4.50%</p> </td> <td> <p>4.70%</p> </td> <td> <p>2.50%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> </td> <td> <p>9.98%</p> </td> <td> <p>4.97%</p> </td> <td> <p>7.11%</p> </td> <td> <p>9.48%</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> </td> <td> <p>16.66%</p> </td> <td> <p>15.90%</p> </td> <td> <p>15.29%</p> </td> <td> <p>29.02% </p> </td> </tr> </tbody> </table>

Any softness in oil prices, regardless of the possibility of a global slowdown, will only be temporary as oil has always been priced in gold, and gold will rise as the central banks have no choice but to print to oblivion to keep the GDP game going before the inevitable debt default.  Oil and Gas are derivative plays on this monetary inflation, as well as a bet on the growth of the more populous emerging markets in Southeast Asia, South America, and Africa.  So far, Exxon has given the highest returns, while the other three are similar. Exxon is expanding rapidly in North America, while Shell is set to become the biggest foreign investor in the Chinese shale gas sector. BP has equaled them in the Russian market with this move. Although this investment will not have any considerable impact on BP’s bottom line in the short term, it is setting them up strategically for the long run.   

PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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