BP’s Russian Sale May Mark A Strategic Shift

June 4th, 2012 by Trefis Team
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Oil major BP‘s (NYSE:BP) decision to look into the possible sale of its stake in Russian subsidiary TNK-BP is being seen as a major step in the move to become more focused on new exploration. [1] Since the Gulf of Mexico disaster, BP has been selling assets to meet spill expenses as well as to focus on new upstream projects.

While the company’s production levels have fallen, BP seems to be focusing on the exploration of new reserves. The sale of TNK-BP could pull down BP’s production output to below 3 Million barrels of oil equivalent / day (MBOE/d) for the first time since 1997. Analysts estimate that BP’s stake in the TNK-BP could net the company up to $30 billion. Already, BP has sold more than $20 billion in assets since the Macondo spill in 2010.

We have a $59.51 price estimate for BP, which is at a 60% premium to its current market price.

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Strategic shift

Under its new CEO Bob Dudley, BP has shed assets in Venezuela and Alaska as well as refining assets to focus on business with higher returns. In its growth plans, the company has focused on offshore exploration projects in the North Sea, [1] offshore Africa as well as in the Gulf of Mexico in the period and is focused on making new discoveries, a key pillar of the new CEO’s strategy for the company’s future growth.

This marks a departure for BP from the traditional model for vertically integrated majors, which have a strong focus on production. From 1995 to 2007, BP focused on increasing output levels through mergers and deals such as its $8 billion investment in TNK-BP in 2003. However, since the 2010 spill, the company’s production levels have seen a decline, hit by a temporary ban of drilling in the U.S. GoM and asset sales. The company’s possible pull-out from TNK-BP could shrink its production even further, lowering output to around 2.5 MBOE/d. TNK-BP accounts for more than a quarter of BP’s overall production and about 40% of its global oil output.

BP’s announcement that it was looking to sell its stake in its Russian subsidiary came after TNK-BP’s CEO Mikhail Fridman quit the company. BP’s rocky relationship with its Russian partners has resulted in multiple squabbles and governance issues in the company over the past few years. A possible sale could have a significant impact on our model for BP, lowering output levels while boosting the company’s cash reserves.

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Notes:
  1. Russia Exit Heralds End of Browne’s BP as Production Dips, Bloomberg [↩] [↩]