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The Globe and Mail

BP split from TNK joint venture would fuel more problems

A BP logo is seen at BP Zhuhai chemical factory in Zhuhai, Guangdong province.

© Siu Chiu / Reuters/REUTERS

BP has had a lot of grief from its Russian joint venture and may now sell out of TNK-BP altogether. The U.K. oil major would then solve one problem by creating another. The world's best energy assets are generally in difficult places and involve challenging partnerships. Awkward alliances are the norm for Big Oil – assuming BP wants to stay in the super league.

TNK-BP's quality as a production asset doesn't mean the approaches BP says it has received will turn into a lucrative deal. The pool of potential buyers is likely small, and Russian. Alfa Access Renova, BP's joint venture partner, may want to move to 100 per cent at the right price. Alternatively, state-backed energy groups Rosneft and Gazprom, or some new Kremlin-backed entity, could take BP's place as AAR's partner. That makes for a weak auction.

BP offered around $32-billion (U.S.) to buy out AAR's share last year, according to a person familiar with the situation. But at the time it was part of a wider strategy to explore new Russian fields with Rosneft. TNK-BP's listed shares today value BP's stake at $17.4-billion, although the small free float isn't a great guide. Analysts at Citi argue the stake is worth around $25-billion, or 20 per cent of BP's market capitalization.

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An all-cash deal would nearly wipe out BP's $29-billion of net debt. BP reckons its optimal capital position is to have 10 to 15 per cent gearing, so a special dividend might then be possible. The snag is that the BP rump would be much less cash-generative: dividends from TNK-BP funded 20 per cent of BP's $17-billion in shareholder distributions in 2011.

In an ideal world, BP would rapidly invest the proceeds in politically safer long-term projects, either through raised capex or M&A. But those don't exist. That's why BP has tolerated the unhappy marriage with AAR for so long, and why Repsol exposed its shareholders to a grabby government in Argentina.

The fact is that BP has recouped its original $8-billion investment in TNK-BP more than twice over in dividends received. The exit will force the company into existential questioning. Difficult partnerships are its fate – and they're worth it.

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