28th Feb 2022 14:40
(Alliance News) - BP PLC's exit from Russian state-backed oil firm Rosneft raises questions over the identity of a potential buyer and the wider implications it will have on the oil major's future finances.
The London-based firm on Sunday said its decision to offload its near 20% stake in Rosneft will not harm its ability to increase payouts.
BP said it will sell its 19.75% stake in the Russian oil producer, which it co-owns with the Kremlin, after facing pressure from the UK government. The UK oil major has held its holding in Russia's state-owned gas company for the past 10 years, making it the second-largest shareholder.
Chief Executive Bernard Looney is resigning from the Rosneft board with "immediate effect", BP said. Looney was one of two BP-nominated directors, having held the position since 2020. The other is former BP CEO Bob Dudley, who has also resigned.
"Russia's attack on Ukraine is an act of aggression which is having tragic consequences across the region," said BP Chair Helge Lund. "BP has operated in Russia for over 30 years, working with brilliant Russian colleagues. However, this military action represents a fundamental change."
UK Business Secretary Kwasi Kwarteng held a call with Looney for around 20 minutes on Friday to discuss the company's position.
BP said the exit from Rosneft shareholding does not change its distribution guidance and its financial frame guidance remains unchanged. The oil major said it still expects to have capacity for 4% annual increases in dividend through 2025. It also still expects to deliver a 7% to 9% compound annual growth rate in earnings before depreciation and amortisation to 2025, based on oil prices of USD50 to USD60 a barrel.
Brent oil was trading above USD100 a barrel on Monday afternoon in London.
In addition, BP said it will report a material non-cash charge in its first-quarter results in May, due to the required changed accounting treatment of the Rosneft stake. BP now will need to treat its Rosneft interest as a financial asset at fair value, rather than being able to equity account for its interest.
The charge will be for the difference between the fair value of the holding and its carrying value of USD14 billion. BP also will need to take foreign exchange losses accumulated since 2013 against its income statement. These losses totalled USD11 billion at the end of 2021, the company said.
Attention now turns to how BP will affect an exit and likely bidders for its stake as the company did not elaborate.
"There could be interest from Qatar, which already has its own position in Rosneft, or perhaps another name in the Middle East or China whose relations with Russia are less toxic," said AJ Bell's Russ Mould. "Ultimately the company is in a weak negotiating position and may have to accept a cut price deal. There is also a continuing risk that Moscow intervenes to take the Rosneft holding itself before BP has the chance."
In addition, the loss of the stake would be felt on a financial level as BP said it would no longer recognise a share in Rosneft's net income, production and reserves.
"While Rosneft was previously contributing a significant part of BP's reported earnings and production, 12% and 33% respectively, the dividend income stream was the key contribution," said Jamie Maddock, equity analyst at Quilter Cheviot.
"As a result, earnings downgrades due to the Rosneft contribution loss will be significant, as will reported production and booked reserves, though the cash flow impact and the basis for BP's distribution policy will be more modest," added Maddock.
By Arvind Bhunjun; [email protected]
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