I`m considering buying BP. Here is my question and puzzle. Once the TNK-BP sale is finalized and BP receives its 17B in Cash and then makes an Equity purchase in Rosneft shares, what I can`t grasp or decipher is how does BP get paid for its interest in Rosneft. Based on the terms of the deal, BP will end up owning approximately 20% of Rosneft. Upon completion of the TNK_BP buy out from both partners, I read somewhere that Rosneft will be producing about 4M bpd x 365 = 1,460,000,000. barrels annually. BP`s share would equate to about 292,000,000. barrels annually and @ $100.00 Oil, BP`s share of production equates to approx. $ 29 Billion. Since I don`t have an accounting degree, how does BP get it`s hands on or credit for the $29 Billion of Production Dollars since Rosneft sold and collected the Gross Sales Proceeds. I know that there is a cost of production and let`s say BP`s share of the Net Profit is 5 Billion by way of example. How does BP get the 5 Billion on it`s books for Accounting purposes. Does Rosneft issue BP a check for 5 Billion? If not, BP gets nothing for it`s investment? Right! I do know that BP would receive a Dividend based on the shares it owns, if one is declared. But I`m still missing how BP gets credit for its share of the net Production Dollars. Can someone please clarify this for me. I just don`t see the cash trail leading to BP!
Hi blackjack, all,
First, income isn't profit. Cash flow of $29 billion doesn't mean a potential dividend anything like that. That $100/bbl has to pay for everything, from production costs to new investment to the janitors in Novosibirsk.
Second, profits from TNK-BP were outstandingly bandit-like, but (a) they weren't getting paid due to the battle between BP and AAR, and (b) they were looking at a long downward curve: BP had rejuvenated a bunch of old fields, hence the high profits, but those fields are now largely into decline, and there was little new stuff to replace them on the horizon. We were never going to see profits like those again, no matter what the fate of TNK-BP was.
Third, the price BP nominally got was fair. The buyer was the only one in town, and it gets BP out of the frying pan. But the Russians were never going to allow BP to take all that money away, as many said beforehand.
Four, BP needs a national friend with resource potential, now that the US is no longer friendly. It had to be Russia, possibly China, Brazil or a Middle East OPEC state. It's the only way for BP to get large enough projects to be worth investing on. It can't remain a major IOC if it just has bits here and there in 40 different countries. The North Sea is done, the US is now trouble if not actually closed to BP, and nowhere else has the scale.
Five, Rosneft needs a major IOC. Their technology hasn't kept up in all respects, although they aren't stupid. BP brings them technology, modern company management (don't laugh!) and a high quality little black book of contacts in high places.
Six, BP gets several benefits. The dividend is much smaller, but not to be sneezed at, and I have no doubt it will be paid - this is Russia's public face on display now, not a bunch of oligarchs. Rosneft's share price will probably grow as the company becomes more transparent, cuts costs and expands into harsher places, all using BP's skills. Logically that share price could be realised if BP sold down its shareholding at some future date. And BP and Rosneft can be happy partners in pillaging the smaller but useful prizes still out there, since their little black books are probably a good fit, with Rosneft welcome where BP is not well known, and vice versa. The old Alliance between BP and Statoil is a good analogy.
Sure, it may fall over. But I'm optimistic.
It will be similar to the process with BP shares----whenever and if the BD declares a dividend
and how much !!!!!!. For example, we don't get the 48 cents quarterly until the BP board
declares a dividend. Yes it is a concern to me. What if Roseneft decides to put all earnings
in growth projects.
Lets hope rosneft does just that - put all earnings in to growth projects. Who do you think is going to supply the "growth?" Oil doesn't jump from the ground on its own. BP will, of course, be the one providing the services to promote growth, and they ain't working for free.
Sentiment: Strong Buy
I read your post a few times, and I completely understand where you are coming from.
[ At the outset please understand that BP`s Investment in TNK_BP was a Joint 50% Partnership which was equally owned by BP and AAR - or the four Russian Oligarchs, whereby they would equally share the Profits and Dividend Distributions. ] That is not the case with the current Rosneft Buyout of TNK_BP. Rosneft will end up owning TNK_BP completely and will integrate it with their operations...read on.......
The Financial Agreement that BP and Rosneft entered into is explained as follows...
BP will first sell its 50% stake in TNK-BP, which owns 95% of the listed TNK-BP Holding, to Rosneft for about $26.8 billion, including $17.1 billion in cash and a 12.84% Rosneft stake. Once that is completed, AAR, an investment vehicle controlled by four Russian-born billionaires, will then sell its half-share of TNK-BP to Rosneft for $28 billion in cash.
London-based BP said it would use $4.8 billion of the cash from the sale to buy a further 5.66% of Rosneft, taking its stake in Russia's largest oil company to 19.75%, including 1.25% it holds already. BP's initial 12.84% stake will come from Rosneft shares held in treasury, while it will pay $8 per share for the remaining 5.66% stake, which is currently owned by Rosneft parent OAO Rosneftegaz.
BP's 19.75% stake will make it Rosneft's No. 2 shareholder behind the Russian state. About 15% of Rosneft is in free float. BP will gain two seats on the Rosneft board.
The acquisition will boost Rosneft's share of Russian oil production to more than 40%, making it the largest publicly traded oil producer in the world, with daily output of about 4 million barrels of oil, up from 2.3 million.
Upon completion of the Buyout, all BP will have is a 19.75% Equity Interest in Rosneft, ie, BP will own 19.75% of the Outstanding shares of Rosneft Inc....Admittedly, BP`s Cash Flow will be somewhat negatively impacted after the Buyout, but you must understand that with an initial Investment of 8 Billion in TNK-BP in 2003, BP has been Paid and Distributed Approx 19 Billion in Dividends to date! The bottom line is that BP made out like a bandit!!! Not a bad pay off!
Once the BP`s buyout of TNK-BP is completed, BP will hold an Equity Interest in Rosneft of 19.75%. BP will very likely not receive any Income Distributions from Rosneft, other then Dividend Distributions, as determined by the board of Rosneft!
BP will Account for it`s interest in Rosneft via Equity Method of Accounting.
[ Equity accounting is a method used by companies to record the undistributed profits earned by their investments in other companies. The income earned from the investment is reported on the investing company's income statement based on the percentage of the other company that it owns. In many cases, the corporation never actually receives the profits from the company that's owned. ]
After the buyout, what BP has on the line is its 19.75% Minority Interest in Rosneft which approximates about 14-15 Billion of Capital. It would appear to me, that BP`s Biggest Objective is to get paid Compensation for Improving Rosneft`s Inferior Infrastructure, enter into Major Production Agreements, and Leverage its Scientific and Technology know how! This in itself, could very well be worth Billions of Dollars to BP! Let`s face it, with a Minority Interest, BP isn`t going to Perform and Employ its Engineers/Technicians/Consultants for a song and dance! It`s time for Rosneft to paid up!
Obviously there aren`t to many educated/informed investors on this board that are capable of offering an intelligent reply to my question! How can you invest in a company and not know the basics...It appears that the majority are just traders hoping for instant gratification!
Well, I just got my answer to my question. I called BP in Houston, Texas and a financial administrator in their Finance Department is sending me a write up on the topic!
Obviously, if you want to learn some thing, don`t rely on a bunch of hooligans on a message board!
blackjackkid41 - Did you ever get a copy of that report from the BP financial admin? If so, could you share (or send to me).
On another note, does anyone have any ideas whether the amount of equity was intentionally kept below 20% (at 19.75%)? I know BP will still be using an equity method, but typically this is anything between 20-50%.
Hi guys, I want to personally that you all for your kind and thorough feed back to my question. I now feel that after having read your posts that I have a much better understanding of of an equity interest vs a controlling interest.
Forgive my negative comment, which was the result of one poster having made a sarcastic remark about my post. Not being an accountant, I thought that I had presented the facts, as best as I could, before asking my question. I didn`t ask a twenty part question. He obviously, didn`t take the time to read my post to begin with. Hopefully, he learned something as well.
Your question is excellent. My contribution will be qualitative. I own BP shares.
My take is that BP's investment will turn out to be problematic, and not deliver the pro-forma results as would be indicated by the deal structure. Profits will be locked in Rosneft undistributed, and those locked up profits will have Russian politics, game playing, and fumbling at work.
I would expect the deal to fall apart, and for BP to sell out at a fire sale price just like it has fire sold other recent problematic assets. In theory, BP traded a $35B income stream over the next 10 years with TNK-BP for a Rosneft income stream of $5B over the same period, and will probably end up selling the Rosneft stake in less than 10 years for pennies on the dollar.
The upshort is that I believe we lost $10-$20B of value in the process. BP's market value has already adjusted something of that order of magnitude as a result. This is not the growth and asset realization we wanted.
Well what an angry message. The deal has just been announced and - true - most of us do not yet know how the equity will be accounted for.
The press release stated this: Therefore, on completion of the proposed transaction, BP would acquire a total 18.5 per cent stake in Rosneft and net $12.3 billion in cash. This would result in BP holding 19.75 per cent of Rosneft stock, when aggregated with BP’s 1.25 per cent current holding in Rosneft. At this level of ownership, BP expects to be able to account for its share of Rosneft’s earnings, production and reserves on an equity basis. In addition BP expects to have two seats on Rosneft’s nine person main board.
This is a Heads of Agreement so some details have to still be worked out.
EQUITY ACCOUNTING is the practice of showing in a company's accounts the share of undistributed profits of another company in which it holds equity ownership (usually below 50%). The share of profit shown is usually equal to its share of the equity in the other company. The profit may not actually be paid over, but the equity holding company has a right to this share of the undistributed profit.
So BP will be booking profits as owner's equity but will not necessarily receive equivalent cash from Rosneft. It depends on dividend policy amongst other things. How they unlock that value over the years remains to be seen.