BP (LON: BP) shares are down only 5% at London opening after the announcement that the oil company – formerly British Petroleum – would exit its investment in Rosneft. This is all the result of increasing political pressure over the weekend concerning the Russian invasion of Ukraine of course.
This is more than just urging divestment of Russian investments. Rosneft is intimately linked to the Russian state, through a state shareholding. But more than that Rosneft is run by a close intimate of Putin himself.
The problem for BP is that they own 20% of this – fairly described as – Russian state company. This just isn’t going to be allowed to continue. So, BP announces this morning that they’re going to do something about it. But what?
Which is what the problem is. Clearly, BP needs to sell that stake to someone. But who can BP sell the Rosneft stake to? No western world investor can take it on. No other oil major, it can’t be distributed to BP shareholders. That leaves the idea of Chinese, Middle East state investors perhaps. But forced sellers don’t gain good prices of course. There’s also the other alternative of trying to sell it back to the Russian state. Which really, really, wouldn’t gain a good price.
So, if this is what must happen – BP must dump the Rosneft stake for whatever trivial sum of cash can be gained – then why is the BP share price only down 4% today? That Rosneft stake is, after all, a substantial part of the BP business.
The likely answer is because the market has already thought through all of this. So has BP itself of course. Today’s announcement is not in fact an announcement that BP has dumped the Rosneft stake. Rather, it has just stripped it out of its accounting. As there are no BP members of the Rosneft board any more, then BP is not in any manner a controlling shareholder. So, the Rosneft numbers are not consolidated into the BP accounts.
But that’s all that has happened so far. There will be non-cash write-offs to accompany this but that’s a balance sheet exercise. What has really happened is that the Rosneft business has moved from being accounted for as a part of BP to an investment by BP. It might even be valued at zero on the BP balance sheet, but it’s still there.
Which brings us to the next calculation. How long will it take BP to find a buyer for that stake? Months perhaps? And do we all think that this problem with Russia is going to last months? Well, maybe we do. Maybe we don’t, that’s possibly still up in the air. But there’s the possibility that the “Russia problem” will be resolved and BP can go back to having an investment in a Russian oil firm.
As and when – if – BP actually divests itself of the Rosneft stake then we can expect a significant move in the BP share price. At the moment what has been done is to clear the accounting decks for that to be possible. The thing to monitor is whether the sale actually happens or not.
The reason the BP share price has only moved 5% at pixel time is because nothing very much has changed between BP and Rosneft as yet.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.