The Commodity Investor: What Can Investors Expect from BP?

Columnist Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the bestselling Commodities For Dummies, published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities. 

Just a couple of years ago it seemed that BP (LSE:BP,NYSE:BP) couldn’t get anything right. In April 2010, Deepwater Horizon, its deep water offshore oil rig, exploded in the Gulf of Mexico and caused one of the worst oil spills in history. As a result of the disaster, BP was faced with a series of lawsuits, blamed by politicians across both sides of the aisle, painted as an evil corporation by media around the world and vilified by the public. Its stock price was halved, its CEO forced to resign and it entered an environmental and public-relations disaster that it’s still facing today.

Almost a year after the tragic oil spill, BP committed another corporate blunder, this time in another key oil country: Russia. BP was keen to score a “coup” after the Deepwater tragedy and was looking at ways to increase shareholder value and diversify its strategy. In an attempt to achieve these aims, BP announced what it claimed was a historic deal with Russian oil giant Rosneft (LSE:ROSN) to explore for oil in the Russian Arctic. Quite predictably, that deal went down the drain as BP was contractually and legally prohibited from pursuing deals in Russia outside the scope of its TNK-BP joint venture in the country.

Following its environmental and corporate debacles in the United States and Russia, it seemed that the British company was running out of options fast. Its stock price kept dropping and its litigation costs related to the Gulf spill kept rising — as a result, BP was forced to sell many of its prized assets around the globe in order to stay afloat. All hope seemed to have been lost; it wasn’t until the final months of 2012 that things began to change for BP.

A change of fortune

In October 2012, BP’s fortunes began to improve. First, the company was able to benefit from rising oil prices in key markets around the world, such as the United States and Asia. As a result, its gross revenues saw a slight increase to $94 billion in the first months of 2012 versus $93 billion in Q4 2011. Second, while it’s been forced to sell some of its key assets, its position is strong enough that it’s been able to keep many of its prized assets under its wing.

In addition, the company is in final negotiations with US regulators and class-action lawsuit plaintiffs to settle its costs for the horrendous Gulf of Mexico oil spill. While the negative environmental, social and economic legacy will remain with BP for years (if not decades) to come, the company will be able to look forward with greater visibility regarding its liabilities surrounding this tragic event. At the time of this writing, BP is close to a $7.8 billion settlement with the class-action plaintiffs who were negatively affected by the 2010 spill.

A deal for the history books

Perhaps the single event that will help BP get back on track is the announcement of the mega deal surrounding its Russian assets. In the final weeks of October, BP announced that it will sell 50 percent of its share in TNK-BP, its highly-profitable, but highly-problematic, joint venture in Russia. BP entered into this joint venture in 2003 with a group of Soviet investors who had profited from the privatization of state-owned energy assets during the break-up of the Soviet Union.

While TNK-BP was one of BP’s best investments of the century — it bought in at $5 billion and received close to $20 billion in dividends over a period of 10 years — the joint venture was problematic due to friction with its Soviet-era partners. At one point, BP’s current CEO, Bob Dudley, faced so much harassment in Russia that he had to flee the country for safety reasons. In addition, BP faced legal restrictions and couldn’t pursue deals inside of Russia. For many months it seemed that BP was going to have to exit Russia in a disgraceful manner.

But things changed when Rosneft, the state-owned energy giant, announced that it will acquire 100 percent of TNK-BP from BP and AAR (the Soviet-era investors) in a deal worth up to $60 billion. In addition to being one of the biggest energy deals ever announced, this acquisition provides BP with $26 billion in cash and a 20 percent ownership stake in Rosneft. In one swoop, BP has significantly strengthened its balance sheet and has become the second-largest shareholder in Russia’s biggest energy company.

BP could not have dreamed of a better scenario. With this deal, BP has firmly aligned itself with the Russian state and has as important a role in the Russian economy as any foreign company can. By being a shareholder in Rosneft it not only buys into a profitable company, but also becomes the partner of choice for future energy deals. With this deal, BP’s future in Russia — barring any diplomatic, political or economic catastrophe — is secure for decades to come.

While BP still has many legacy issues to deal with, its Russian deal is a step in the right direction. The Commodity Investor recommends closely monitoring BP shares and believes investors should begin accumulating them once the company’s legal troubles in the United States are behind it, and as soon as its transition to being the second-largest Rosneft shareholder is complete.

Securities Disclosure: Amine Bouchentouf doesn’t have any positions in the stocks mentioned.