BP has unveiled the terms of the agreement for the sale of its stake in the troublesome TNK-BP business to Russian state oil firm Rosneft, drawing mixed reactions -at best- from analysts. While some observers´ first response was that the cash portion of the transaction was better than expected, that was by no means a consensus opinion. Furthermore, some investors seemed worried by the potential for current shareholders to be diluted as a result of the transaction.

The deal itself is being done in two stages. Initially, BP will get $17.1bn in cash and shares representing 12.84% of Rosneft, for a total consideration of $26.8bn. BP then intends to use $4.8bn of this cash to purchase a further 5.66% of Rosneft from the Russian government at a price of $8 a share.

On completion of the deal BP will hold 19.75% of Rosneft's equity capital, including BP's existing holding of 1.25%, and will have received $12.3bn in cash.

This deal catapults Rosneft into the major oil league, while also giving BP a large minority stake in Rosneft. BP expects to have two seats on Rosneft's nine person board of directors.

Separately, Rosneft has announced that it has agreed heads of terms with the AAR consortium to acquire the remaining 50% of TNK-BP for a cash consideration of $28bn.

When asked if the AAR consortium got a slightly better deal out of Rosneft, a BP spokesperson commented: "Our deal is structured differently. We are getting a significant shareholding in Rosneft, which we believe will be a valuable investment that we will hold for a significant period of time."

BP details

In accordance with the heads-of-terms, BP and Rosneft have an exclusivity period of 90 days to negotiate fully-termed sale and purchase agreements. After signing the definitive accords, completion would be subject to the customary closing conditions, including the procurement of the pertinent governmental, regulatory and anti-trust approvals.

The transaction is currently anticipated to close during the first half of 2013.

In addition, BP will agree not to dispose of any of the Rosneft shares acquired in the above transaction for at least 360 days following the completion of the deal.

BP's Chairman Carl-Henric Svanberg said: "This is an important day for BP. Russia is vital to world energy security and will be increasingly significant in years to come. Russia has also been an important country for us over the past 20 years. Our involvement has moved with the times. TNK-BP has been a good investment and we are now laying a new foundation for our work in Russia.

"Rosneft is set to be a major player in the global oil industry. This material holding in Rosneft will, we believe, give BP solid returns. We consider that this is a deal which will deliver both cash and long term value for BP and its shareholders. It provides us with a sustainable stake in Russia's energy future and is consistent with our group strategy."

Commenting on the speculation and the various reports which were already floating about the market place before the announcement, this is what analysts at Nomura were saying: "While a mooted price of $27bn is modestly ahead of what we carry in our BP net asset value (NAV) estimate of 555p/share (based on a long-term oil price of USD 95/barrel), we argue that if the reports of a cash payment of up to $13bn to BP are confirmed, this will be less than some (including ourselves) would have hoped for.

"We acknowledge that removing the uncertainty around BP will support the shares (as it has already done recently), however with limited visibility on the long term, we believe it is difficult to argue for a more meaningful re-rating given the shares now trade largely in line with the group on our estimates."

Share buybackA newswire report apparently cites BP's Russian head saying they are mulling over whether to do a share buyback with proceeds of the TNK-BP deal.

This comes in response to concerns that the deal may have a slightly dilutive effect on earnings. A spokesperson for BP in London confirmed that "we will look at this when we complete the transaction and see what we need to do".

Lastly, and on a more positve note, this is what Jefferies had to say on the matter: "The deal will be viewed positively as it halves exposure to Russia whilst upgrading BP's partnership and reviving hopes of an Arctic entry."

"[...] BP is promising to offset the dilution effect of the deal and, whilst this is unlikely to be implemented before a Gulf Settlement, this could be around $10bn, we think."

Shares of BP ended the day down by 1.54% at 443.45p.

CM

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