BP, Rosneft deal: All about Earnings? Oh these Bankers!!

BP, Rosneft deal: what the analysts say

By Ben Harrington 

Michele della Vigna at Goldman Sachs

"This transaction would be earnings dilutive for BP, as we estimate that BP would only be allowed to book its share of Rosneft dividends in the P&L (c.0.2pc of BP’s net income), while the share count would get diluted by 5.2pc. This is likely to lead to c.5% EPS dilution for BP from this deal."

"On the positive side, this deal would provide BP with a 33pc share in a highly prospective area of frontier exploration that, according to BP, could be compared to the UK North Sea – both in size and potential. Obviously the area will require years to explore, will be very challenging and is unlikely to generate any production before the end of the decade."

"However, we think that this is a unique opportunity for
BP to gain access to a prospective new frontier area, where direct access as a non-Russian company would not have been possible."

Goldman Sachs reiterated its "buy" rating on the stock.

Jon Rigby of UBS

"Although we see the transaction as initially dilutive on earnings (perhaps by 4pc in 2011), we see the arrangement as significantly de-risking BP’s existing activities in Russia and giving the company material access to one of the most prospective areas of the offshore Arctic (a major coup in terms of competitive positioning). Hence we see the deal as potentially adding considerable value."

"Also positive that BP is making progress post-Macondo One of the key dangers for BP is that in the aftermath of the Gulf of Mexico spill it would either be nervous about doing deals, or that it would simply be blocked because of reputational issues. Neither appears to be the case and the evidence suggests it is building its exploration portfolio and has not lost its appetite for bold strategic initiatives – a key strength of the company, historically."

UBS reiterated its "buy" rating on the stock.

Iain Reid at Jefferies.

"The initial financial effect will be some earnings dilution, as BP will only be able to book its share of Rosneft's dividend as earnings."

Risks include normal exploration uncertainties. There may also be some political pushback, with some concern that the Russian state is effectively becoming the largest shareholder on BP's register, although the UK government is evidently very supportive of the deal."

Jefferies has a "hold" rating on the stock.

Culled from: http://www.telegraph.co.uk/finance/markets/8263933/BP-Rosneft-deal-what-the-analysts-say.html

NUTSHELL:

It appears that earnings and eps (earnings per share) dilution is the focus of this deal by the various analysts. Oh.... these are all bankers. Now that doesn't sound strange anymore. Afterall, in recent history, the bankers may not be the best authority on making judgements about longterm, sustainable business (case in point: August 2007 Financial Crash). The BP-Rosneft deal is currently facing a backlash from the U.S- having recently being called names such as Bolshoi Petroleum (Rep Edward Markey). This deal should be about more than just earnings. In my opinion, BP is in this deal for reserves (quite obvious) but more significantly, an analysis of this deal should be wholistic and must consider BP's safety record, the myriad of law suits against the company in the US, the company's corporate culture and the brand goodwill or otherwise.

The anglo-saxon classical business view pervades the UK economy- where BP has its base; as such the impact on earnings will significantly form a basis for making a judgement on performance of the company. However BP operates across the ''world''; as such the company must recognize that its stakeholders space enlarges significantly. The Rosneft deal is an indication and a statement of intent- that BP is focused on doing business as usual- which is good but the downside is the fact that it has gone to Russia- an economy which cannot boast of transparency as a hallmark in its business dealings. Let us not forget the BP-TNK experience. Financially, the share swap deal is a good deal as it gives BP access to Rosneft's reserves and guarantees market penetration in Russia but on the whole this is a deal with the potential of leaving BP and its stakeholders with a sour taste in the mouth. Some will argue, great financials can build a great business but the contextual environment will determine whether that business is on a sustainable path to growth. In my opinion BP could perform better on the latter...and this is something the bankers will not tell you; and you can take that to the bank (excuse the pun...lol). Tony Hayward was a financial genius but failed woefully on safety and risk. Let's see how Bob Dudley will perform over time.