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After deal for Russian subsidiary, BP hard to value

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Missing you already, TNK-BP! That is one explanation for the frosty welcome on Tuesday for BP PLC's second-quarter results. The oil company's shares fell 5 per cent after it appeared to miss forecasts. But the picture is not so bleak. The main problem is that it remains unclear just what BP is getting from its new position in Russia. This all-new post-TNK, post-Macondo BP will take a bit of getting used to.

BP sold its 50 per cent stake in TNK-BP, its Russian oil and gas production unit, to Rosneft almost a year ago, in exchange for a 19.75 per cent stake in Rosneft and $12.3-billion (U.S.) in cash. That did not replace like with like. TNK-BP was a governance nightmare, but it was churning out lots of oil and cash. BP is using two-thirds of the stake's cash proceeds to fund its $8-billion share repurchase programme. Its shares were up 13 per cent in 2013, before retreating in recent days.

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What is the value, in the short and long term, of the stake in Rosneft? The Russian company is the world's biggest listed oil and gas producer, accounting for 5 per cent of global daily production. Owning a fifth of that is a big deal, but Tuesday's numbers did not get much of a boost from the stake. BP booked just $218-million of Rosneft's second-quarter net income in its own second quarter, compared to roughly $1.3-billion of TNK-BP's net income booked in the third quarter of 2012.

The integration of Rosneft and TNK is a work in progress, so its earnings are neither as visible nor as predictable as those at TNK-BP. Its second-quarter net income was up 75 per cent year-on-year, but the Russian rouble has weakened sharply in recent weeks – poor timing for BP. The quality of Rosneft's earnings should improve as it gets more comfortable with its enormous size.

BP has set a lot of operational and financial targets for 2014, including $30-billion of operating cash flow (its 2013 run rate so far is about $22-billion). Rosneft will help it reach them. But the two companies need to get better acquainted first.

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