BP’s Stock Holds up Despite Russian Raids & Platform Closures
BP (NYSE:BP) has been taking some lumps in recent weeks. Just this past week the energy major had its Moscow offices raided in relation to its aborted attempt at partnering with Russian giant OAO Rosneft without the consent of its current Russian joint venture partner TNK-BP. Exxon Mobil (NYSE:XOM) capitalized on BP’s fiasco and struck a deal with Rosneft. Then BP was forced to shut down platforms in the Gulf of Mexico as a precaution to an approaching storm. BP competes with vertically integrated oil companies such as Exxon Mobil, Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and Royal Dutch Shell (NYSE:RDS) as well as independent exploration firms such as Anadarko Petroleum (NYSE:APC).
We have a $55 price estimate for BP, which is a 45% premium over its current market price.
No Love Lost in the TNK-BP Venture
BP holds 50% stake in TNK-BP which generated $9 billion in profits last year. [1] The alliance has not been a particularly comfortable arrangement for BP. The remaining stake in the venture is held by a group of Russian billionaires who have created issues for BP in the past. In 2008, present CEO Robert Dudley who was at that time running TNK BP fled Russia to avoid ‘sustained harassment’ after a corporate stand-off between BP and minority interests. [1] [2]
Earlier this year BP’s bid to partner with Rosneft to explore large reserves in the Arctic collapsed as Alfa-Access-Renova (AAR) – a minority stake holder in the TNK BP venture – objected to BP pursuing Russian ventures through other routes. According to a lawyer representing minority stakeholders, the latest raids were held in connection with a lawsuit filed by minority stakeholders in connection with the failed bid citing deprivation of potential profits resulting from the bid being dropped. [1]
However, TNK-BP has been a major success for BP in terms of production. The company contributes to a fifth of BP’s total reserves and reported almost constant production rates in Q2 2011 while BP’s output from other sources dropped pulling down total production by 9% when adjusted for divestment. The company has also been a strong source for cash flows for BP after it had to establish a multi-billion dollar fund last year to cope with the potential liabilities arising from its Gulf of Mexico disaster.
Production shutdowns in the Gulf of Mexico
The company had to face problems on western shores as well with Hurricane Katia forcing companies operating in the Gulf of Mexico to temporarily shutdown production. BP is the largest producer in the Gulf which now supplies 30% of the nation’s supply of oil. 6 of the 8 platforms BP operates in the Gulf are in areas threatened by the storm. [3] The world’s largest platform Thunder Horse which has a capacity to produce 250,000 barrels/day is also among the six platforms affected. Through Thursday however only around 5.2% of the total oil production in the region had been shutdown but more output is likely to be affected with the storm gathering strength.
Production volumes are an important determinant of the company’s revenues. Increasing oil prices have allowed BP to post revenue growth over the last few quarters despite falling volume. As oil prices have declined in the present quarter, the company will have to focus on improving its output to deliver the expected growth.
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Notes:- WHAT’S BEHIND THE RAIDS ON TNK-BP AND BP, The Telegraph [↩] [↩] [↩]
- 2nd Russian Raid On BP’s Offices, NY Times [↩]
- ref:1 [↩]