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May 29, 2012 8:12 pm
With the sudden departure of its chief executive on Monday, TNK-BP, BP’s Russia joint venture, is heading towards an uncertain future. The same could be said for BP.
The UK oil major is in limbo. It is facing tortuous litigation over the 2010 Deepwater Horizon spill and is still smarting from the collapse of its big strategic tie-up with Russia’s state oil company Rosneft last year. The latest turmoil at TNK-BP only deepens the sense of drift.
“BP has major issues outstanding that are constraining its options and preventing it moving forward,” says Ivor Pether, a senior fund manager at Royal London Asset Management, which owns £315m in the oil group’s stock.
Others are more forthright.
“What is their strategy exactly?” says one top 10 investor. “We need some clear guidance as to what kind of energy company they want to be. And they need to make sure it’s not just more of the same.”
The latest setback came on Monday when Mikhail Fridman, the Russian billionaire and one of BP’s partners in TNK-BP, quit as chief executive – the climax of a governance crisis at the Russian oil producer. The tensions have evoked memories of the bitter shareholder battle of 2008 that ended with Bob Dudley, TNK-BP’s CEO at the time, being forced to quit Russia.
Tensions are showing no signs of easing soon. The company’s board has not met since last December, when two independent directors quit, and there is little likelihood that BP will receive a dividend from TNK-BP until the board is back up to its full strength.
That hits the UK oil group where it hurts: TNK-BP has returned $19bn to BP since its formation in 2003, $3.7bn of that in 2011 alone. That represented a massive 17 per cent of BP’s cash flow from operations last year.
However, the turmoil at TNK-BP is just one of the problems facing the UK group. Its share price is still more than a third down on pre-Gulf of Mexico oil spill levels, and still trails peers such as Royal Dutch Shell. Its inability to draw a line under the Deepwater Horizon incident – and to calculate its ultimate cost – is weighing heavily on its stock.
Some progress has been achieved in clarifying the final bill. Last March, BP reached an agreement with lawyers representing individuals and businesses affected by the spill, which included an estimated $7.8bn in payments for economic loss and medical claims. That could finally bring an end to civil litigation with private plaintiffs.
But civil litigation with the US federal government and US states along the gulf coast has yet to be resolved. The Department of Justice is also continuing its criminal investigation. One big unknown is if BP will be found guilty of gross negligence over the spill – a move that will significantly increase the scale of the fines for which it is liable.
Any failure to settle with the DoJ means a trial “which could take years to conclude and leave the dispute over whether there was gross negligence overhanging the shares,” says Mr Pether.
BP insists it is recovering from the near-fatal blow it suffered in 2010. It has restored its dividend: and once it has finished paying into the $20bn escrow fund it established in 2010 to pay for Deepwater Horizon-related costs and claims, its cash position will change dramatically. Operating cash flow is due to increase 50 per cent by 2014 compared with 2011, half of that thanks to new upstream projects in high-margin areas such as the North Sea, Angola and the Gulf of Mexico. And it says half of the increase will be paid out to shareholders and used to pay down net debt, which at the end of March was $31.2bn, compared with $27.5bn the previous year.
BP denies that it lacks direction. “We spent all of 2011 stabilising the company,” it says. “And we’ve now set out a very clear direction, with clear targets and milestones over the next few years.”
Indeed, investors have welcomed the promises on cash flow. “But they do need to communicate to the market how that cash is going to be deployed,” says Jason Gammel, an oil analyst at Macquarie Securities. “And you’re not going to get a full answer to that until you’ve got clarity with the DoJ.”
For now, the picture that investors have of the company is pretty uninspiring, says Mr Gammel.
“There’s a relative lack of opportunity in BP’s portfolio,” he says. “It has major capital projects that will basically offset the decline rates elsewhere. But outside Russia, it doesn’t appear to us to be a growth company.”
Others are more upbeat. “BP is fighting back,” says Will Riley, co-manager of Guinness Global Energy Fund. “Investors need to be patient while they try to right the ship.”
Meanwhile, the dispute with its Russian partners in TNK-BP, the AAR consortium, rumbles on. BP tried and failed to buy AAR out last year with Rosneft’s help for about $34bn, but the deal fell apart. AAR says that it would itself like to buy BP out, but that outcome, too, is unlikely.
Moscow is currently awash with rumours that Igor Sechin, Russia’s energy tsar, who was recently appointed CEO of Rosneft and has been empowered by the return of his friend Vladimir Putin to the Russian presidency, could make a move against AAR, perhaps folding their stake into Rosneft.
Meanwhile, investors watch bewildered from the sidelines. “With TNK-BP, the only way you know what’s going to happen is when it’s happening,” says one former executive at the company.
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