Russian paper Kommersant recently reported that there has been progress in talks between BP (NYSE:BP) and Russian state-owned firm Rosneft (MCX:ROSN) over the sale of BP’s 50% stake in Anglo-Russian venture TNK-BP. The companies have briefed Russian President Vladimir Putin on the status of the negotiations but have made it clear that there is currently no sign of an imminent breakthrough. 
Considerable Progress in Negotiations
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- How Does BP Plan To Manage Its Operating Margins In The Current Commodity Downturn?
- How Will BP’s Production Grow Over The Next Five Years?
- BP Q1 Earnings: Revenues And Profits Suffer Due To Low Oil Price Environment, Cash Outflows Still Greater Than Inflows
- What’s BP’s Fundamental Value Based On Expected 2016 Results?
Rosneft is seeking to buy 25% of the stake for $10-15 billion in cash and the other 25% by offering BP a 12.5% of Rosneft shares. There are also indications that BP will be allowed access to Russia’s Arctic Fields as part of the deal. 
Rosneft is confident that it can receive sufficient debt financing to fund the cash portion of the deal, considering that it currently has no outstanding debt. Based on the company’s market cap of $65 billion, the equity portion would be valued at around $8 billion, taking the total deal to around $18-23 billion.
Independent analysts say that BP’s stake in TNK-BP is valued at $25 billion, which means that BP will probably push for more cash, equity or incentives.
BP to Divest Because of Boardroom Differences and Cash Requirements
TNK-BP was initiated as a joint venture between BP and a group of Soviet-born tycoons in 2003, with BP buying a 50% stake in the venture for $8 billion. The operation has been highly profitable and has paid BP dividends totaling $19 billion since inception ($2 billion per year on average).
BP, however, wants to divest itself of the venture primarily due to tensions between the company and the other stakeholders, and also because it is attempting to free up over $38 billion to settle expenses related to the 2010 Deepwater Horizon oil spill. The stake sale would result in a substantial decline in equity affiliates income.
It recently sold a number of properties, including some fields in the Gulf of Mexico region and is in talks to sell several others. There is also the possibility that the spill liability will rise further after the U.S. government recently opened a case which accuses the company of gross negligence and willful misconduct during the spill.
We currently have a Trefis price estimate of $50 for BP, which is about 15% above the market price.Notes:
- BP would get Rosneft stake in TNK-BP deal: paper, Reuters, September 2012 [↩]
- BP’s Putin Meeting Signals Exploration Deal With Rosneft, Bloomberg, September 2012 [↩]