BP to sell stake in Russian joint venture TNK-BP to Rosneft

BP is to sell its 50% stake in the Russian oil group TNK-BP to the Kremlin-controlled Rosneft in a deal worth around $27bn (£17bn) to the British company, both parties announced on Monday.

The transaction, which will eventually see the UK-based group receive $12.3bn in cash plus an 18.5% stake in Rosneft, was unveiled as the Russian oil major also announced a separate deal to acquire the other half of TNK-BP for the slightly higher price of $28bn from its owner, AAR.

In a statement, BP chief executive Bob Dudley, said: “BP intends to be a long-term investor in Rosneft – an investment which I believe will deliver value for our shareholders over the next decade and beyond.”

He did not comment on the price, while the company also declined to explain why AAR appeared to be getting a premium for its 50%, although BP retains the prospect of at least working on future profitable projects with the state-controlled company.

Igor Sechin, president and chairman of the management board of Rosneft and a former spy who flew to London last week to take control of the long-running negotiations, said: “I strongly believe that we would benefit from BP’s experience and its track record of implementing best international practices in Russia. I am especially pleased that BP has chosen to remain as one of the largest foreign investors in the Russian economy recognising the potential of both Rosneft and the Russian oil and gas sector.”

The announcement of the deal finally gives BP an exit from a venture which has provided a series of difficulties, including Dudley fleeing Russia in 2008 when he was head of the TNK-BP. AAR then scuppered BP’s hopes of an Arctic tie-up with Rosneft.

However, TNK-BP has also being seen as a huge commercial success for BP. In return for its $8bn investment, the British group has taken out $19bn in dividends – although the frequent rows between the joint venture partners have resulted in those payments being blocked.

As a result of the constant tension between each side of TNK-BP, a deal had long been expected by the oil industry and Dudley had already told his board that he backed Rosneft’s cash and share offer for the TNK-BP stake. The windfall will eventually allow him to hand out billions to BP shareholders. In its statement, the company said: “BP intends to retain the shares resulting from the proposed transaction, and will evaluate how the cash proceeds will be utilised. At minimum BP’s intention is to offset any dilution to earnings per share as a result of the sale of its interest in TNK-BP as well as continue with its progressive dividend policy.”

The agreement to sell BP’s 50% stake in TNK-BP to Rosneft, which still has to be signed off by the Russian government, is scheduled to be conducted in two stages. Firstly, a payment by Rosneft to BP of $17.1bn in cash plus shares in Rosneft representing 12.84% of the company. Secondly, BP will then use $4.8bn of that cash windfall to buy a further 5.66% stake in Rosneft from the Russian government. The second deal values Rosneft shares, which were trading at $7.13 last week, at $8 a share.

The net result will be that BP will hold 19.75% of Rosneft shares, including its existing stake of 1.25%, as well as receiving $12.3bn in cash, while the Kremlin’s stake – which totalled 86% through two vehicles – will fall to 70%.

There has also been speculation the Kremlin will reduce its stake in Rosneft to as low as 50% plus one share. Igor Shuvalov, Russia’s deputy prime minister, has said the government would consider further privatisation in an attempt to soothe any concerns among BP investors about the influence of the Kremlin over such a crucial part of the UK oil firm, whose share price is yet to recover from the Deepwater Horizon disaster in the US in April 2010. BP gets a quarter of its production from the existing Russian venture.

The TNK-BP announcement was greeted tentatively well by the City, with BP’s shares effectively remaining steady.

Stuart Joyner, an analysts at Investec, wrote in a note to clients: “The deal will be viewed positively as it halves exposure to Russia whilst upgrading BP’s partnership and reviving hopes of an Arctic entry. In accordance with the heads of terms, BP and Rosneft have an exclusivity period of 90 days to negotiate fully termed sale and purchase agreements. After signing definitive agreements, completion would be subject to governmental, regulatory and anti-trust approvals, and is currently anticipated to occur during the first half of 2013.”

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