BP's Newest Moves In Russia Will Boost Long-Term Gains
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Russia is an enigma that most oil corporations still haven't been able to understand. While there are billionaires who seem to control much of the robust oil industry in the former Soviet republic, the government has a major say in everything that happens regarding oil and natural gas exploration. In spite of the skirmishes between foreign oil companies, the Russian billionaires, and politicians, Russia is one nation that no one can ignore. Whichever company manages to explore and drill within Russia will be successful in maintaining a healthy financial profile for years to come.
BP (NYSE: BP) hasn't had a very good history in Russia. BP has a 50% stake in the TNK-BP, but things have remained far from satisfactory. BP has been struggling to maintain a cordial relationship with the consortium of Soviet-born billionaires who have insisted that BP is not doing what it should and have accused it of diverting its attention to other oil fields within Russia. The consortium alleges that BP has no right to explore anywhere else in Russia and that it must devote all its efforts towards making sure that TNK-BP is profitable.
Considering how limited its options would be if it continues to deal with the billionaires, BP went ahead and put its 50% stake up for sale. Russian government owned Rosneft has now come forward to purchase BP's stake and help the company to look for other options to stay in Russia. This might work surprisingly well for BP, as Putin has been trying to attract foreign investment to Russia. Exxon Mobil (NYSE: XOM) recently signed lucrative deals after cozying up to Putin and his loyalists.
Putin also knows that he is more important than all the billionaires in Russia put together. This is clearly why he is ready to trade a 12.53% stake in Rosneft in exchange for BP's 50% stake in TNK-BP. What's more, his government will also get $15 billion in cash when the deal is struck. This would allow Putin to control the private oil sector in Russia stronger than ever before. It would allow the government to ensure that it acts as the sole authority when it comes to foreign oil companies like Exxon Mobil and BP.
On the other hand, BP will have more freedom to choose where it wants to explore and drill. If one were to consider previous statements and rumors, BP will likely explore in Siberia, which is far away from the Arctic area that Exxon Mobil has agreed to explore. Signing a 30 year bond with the Russian government also ensures that BP has access to valuable oil and gas fields for a very long time. The company needed this dea,l as it can no longer continue to work with the Russian billionaires and it has also had to sell some of its properties in order to make up for the losses encountered during the infamous Gulf of Mexico oil spill.
The future looks bright for BP, even though its recent past has been mired in controversies, losses, and sour relationships with partners. BP has a very strong and committed relationship with the Russian government, and it is steering clear of competitors like Exxon Mobil. Rosneft will most probably assign BP to drill in Siberian oil and gas fields or even Sakhalin in order to avoid confrontations with Exxon Mobil.
We must remember that Exxon has signed deals with Putin as well, and the Russian government will ensure that rivalries among foreign companies are avoided. Chevron (NYSE: CVX) has a major stake in Russia too, but its operations are concentrated in the southern part of the county. The company is a major investor in the south, and has invested more than $2.2 billion in the Caspian Pipeline Consortium (CPC) pipeline construction. The company has also dabbled with transportation and infrastructure development in Russia, along with consumer products and technology licensing.
Royal Dutch Shell (NYSE: RDS-A), on the other hand, has been facing problems related to its Sakhalin oil spill, which stretched along 5 kilometers of coast. The spill left many local residents ill, and environmentalists have criticized the tardy way Shell has handled the situation. It remains to be seen how far this spill will damage Shell's operations in other parts of the world, as the company was also in trouble in Nigeria and was asked to clean up oil spills there
BP trades at around $42 and has a market cap of $134 billion. With an enterprise value of $165 billion, it is one of the most successful oil companies in the world. It has a lower profit margin and operating margin than Exxon at 4.58% and 6.15%, respectively. Exxon, on the other hand, has a profit margin of 10.37% and an operating margin of 11.44%. Nevertheless, BP is a stable investment option, and though there will be fluctuations in the short term, it is one of the few 'safe' investment options in the oil industry. The one downside is that BP has a total cash of $15 billion and a total debt of $47 billion, which may be a concern for investors.
By getting rid of its 50% stake in TNK-BP and exploring elsewhere in Russia, BP will be able to fill the deficits and improve its financials in the long-term. This is one stock that can be purchased as a long-term option. After all, its future certainly looks stable, though the company is struggling to deal with all the negative press it has received recently. I think investors should buy BP now and hold for the long-term.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. 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.