BP Shares Drop as Investors Weigh Cost of Exit From Russia

(Bloomberg) -- BP Plc’s shares fell about 5% as investors weighed the cost of its decision to exit Russia against the reputational benefits of ending the controversial alliance with Rosneft PJSC. 

The London-based company warned that it could take a writedown of as much as $25 billion as a result of quitting Russia in President Vladimir Putin’s invasion of Ukraine. Several analysts predicted a financial hit on that scale was the most likely outcome, as economic sanctions imposed by the West make it hard to find a buyer. 

Yet BP’s quick decision removes other risks, such as the reputational damage from its partnership with the Kremlin-controlled company and questions about how Russian oil and gas fits in with its pledge to pivot to clean energy. 

“Walking away at this time is obviously not ideal from a shareholder value perspective,” RBC analyst Biraj Borkhataria said in a note. “Monetizing the stake for fair value looked difficult even in more ‘normal’ times, and now, to us, it looks extremely challenging. That said, the exit from this stake ultimately removes one of the concerns with the long term investment case.”

Shares of the company dropped as much as 7.5% and were 6.5 lower at 354.05 pence as of 12:43 p.m. in London. That’s a relatively modest move considering that Rosneft accounted for about a third of BP’s reported oil and gas production. 

While BP’s stake in the Kremlin-controlled oil producer had a lot of symbolism, marking the continuation of three decades of operating in the country, in some practical ways the alliance was shallower than it appeared.

While BP reported its share of Rosneft production, reserves and profit for accounting purposes, it didn’t have direct stakes in any of Rosneft’s fields nor physical access to the hydrocarbons they produced. 

BP’s principal financial benefit from the stake was to receive a dividend, which last year was $640 million and in 2020 was zero. BP’s total operational cash flow in 2021 was $23.6 billion. 

Exiting Rosneft is significant, but “is only a 5% adjustment to projected Ebitda in 2025,” said Allegra Dawes, an analyst at Third Bridge. “Furthermore, oil prices are up strongly today, and given that the non-Russian parts of BP’s production are higher margin barrels, the impact to shareholders is not devastating.”

Fundamental Change

Sunday’s surprise move from the British company was the latest sign of how far Western powers are willing to go to punish Putin. BP has been in Russia for three decades and just weeks ago was staunchly defending its presence there. But it was coming under growing pressure from the U.K. government over the alliance with Rosneft. 

Chief Executive Officer Bernard Looney was summoned by U.K. Business Secretary Kwasi Kwarteng to explain the company’s Russian links last week. Kwarteng welcomed BP’s move on Sunday.

“This military action represents a fundamental change,” BP Chairman Helge Lund said in a statement. “It has led the BP board to conclude, after a thorough process, that our involvement with Rosneft, a state-owned enterprise, simply cannot continue.”

Looney will also resign with immediate effect from the Russian company’s board, as will his predecessor Bob Dudley. BP will also exit its other business in Russia, which include three joint ventures with a carrying value on its books of about $1.4 billion.

The company didn’t say whether it was planning to sell its roughly 20% stake in Rosneft, or simply walk away. Any potential buyer would have to navigate a tightening web of economic sanctions that would make any transaction extremely difficult. 

“Given the circumstances and Russia’s aggression in Ukraine, finding such a buyer may prove very challenging,” said Banco Santander SA analyst Jason Kenney. As it stands right now “a write-off is likely” although the situation in changing fast. 

In a memo to employees, Looney said there would be “financial consequences” from the move that would show up in its next quarterly results. A spokesperson said there could be a writedown of as much as $25 billion. 

“We are strongly supportive of the board’s decision and applaud them for taking swift action following the events of the last week,” said Andrew Millington, head of U.K. equities at abrdn plc. “While there may be a significant financial cost to BP in exiting Rosneft it is unquestionably the right thing to do.”

Even before the invasion of Ukraine, BP had been subject to growing criticism about its interest in the Russian company. Unlike BP, which has pledged to gradually shift from hydrocarbons to cleaner forms of energy, Rosneft remains staunchly committed to fossil fuels and is planning a massive new oil and gas development in the Arctic. 

Financial Shock

The decision to split from Rosneft came as a surprise. In early February, Looney was still arguing that BP could “avoid politics” in Russia, which was “a large member of the energy system.” The shock of Putin’s large military incursion into Ukraine made that position untenable. 

BP has a longer history in Russia than many of its peers. It was one of the first Western oil majors to establish a presence in Russia after the collapse of the Soviet Union. 

John Browne, the chief executive officer at the time, bought a stake in Sidanco in the 1990s, which eventually morphed into TNK-BP, a joint venture with a group of billionaires. That gave BP direct operational control of Russian oil fields, with large numbers of expat staff in the country. 

It was highly profitable, but also fraught with tension between the oligarchs and their Western partners. A bitter battle for control in 2012 ultimately resulted in BP exchanging its stake in TNK-BP for $17 billion in cash and a large chunk of Rosneft shares.

Rosneft said BP’s decision “destroys the successful 30-year cooperation” of the two companies. “The decision was made under unprecedented pressure from politically engaged forces,” it said in a statement on its website.

Norway’s biggest energy company Equinor ASA joined BP on Monday in starting to withdraw from Russia.

TotalEnergies SE’s has operations in Russia representing around $1.5 billion of its total cash flow, or around 5%. It has a stake in gas producer Novatek as well as a large interest in the Yamal LNG project.

Shell Plc has a large holding in the Gazprom PJSC-led LNG facility Sakhalin Energy. Exxon Mobil Corp. operates the Sakhalin-1 oil project in partnership with Rosneft. Chevron Corp. has a presence in lubricants.

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