BP’s bruising Russian exit almost worth the pain

LONDON, Feb 28 (Reuters Breakingviews) - Bernard Looney is removing an increasingly awkward appendage. In a seismic move, the BP chief executive said on Sunday the UK oil giant would exit its 19.75% stake in Rosneft (ROSN.MM), opens new tab, the state-controlled Russian energy major read more . In financial terms the timing couldn’t be worse. But Looney may still get something of a consolation.

BP’s relationship with Rosneft has been a mixed blessing ever since the British company’s TNK-BP joint venture unravelled in 2013, leaving the British company with a $12 billion pile of cash and its equity stake. Owning a fifth of one of the world’s largest oil companies allowed BP to last year add 1.1 million barrels of crude oil a day to its output of 2.2 million and $2.7 billion of profit before interest and tax. Yet Rosneft’s proximity to the government made some investors increasingly edgy. President Vladimir Putin’s decision to invade Ukraine made BP’s position untenable.

Getting out now is financially painful, though. BP valued its Rosneft shares at $14 billion at the end of last year. Their market value on Friday was almost half that amount. Given the obvious lack of buyers, Looney may have to write off the entire amount. Throw in another $11 billion hit from foreign exchange losses that BP previously only reflected on its balance sheet, and Looney could this year face a $25 billion charge to his bottom line.

While writing off the investment won’t cost BP any cash, the hit to its balance sheet means net debt rises from 25% of total capital at the end of last year to as much as 28%, according to Breakingviews calculations. Looney also loses $2 billion from the $40 billion of EBITDA he expects by 2025 to help finance the group’s investments in renewable energy.

BP could have avoided that mess by exiting earlier. It is hardly alone, though. French rival TotalEnergies (TTEF.PA), opens new tab faces a similar conundrum over its 19% equity stake in $46 billion gas group Novatek (NVTK.MM), opens new tab, while Shell and Exxon Mobil (XOM.N), opens new tab have big interests in Russia. BP is rid of an asset that presented an increasing headache on environmental, social and governance grounds. In time, shareholders may even reward its remaining earnings with a higher multiple. Without the crisis in Ukraine, it’s a decision BP may not have made at all.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

- BP on Feb. 27 said it plans to abandon its 19.75% stake in oil giant Rosneft in the wake of Russia’s invasion of Ukraine, ending its 30 years of operating in the oil-rich country.

- BP Chief Executive Bernard Looney and Bob Dudley, the oil giant’s former CEO, will resign from Rosneft’s board.

- BP said it would take an accounting charge to reflect the difference between the carrying value of the asset on BP’s balance sheet, which stands at $14 billion, and its fair value.

- The company will also take a charge to reflect accumulated foreign exchange losses which had been previously charged against the company’s equity, but not its earnings. At the end of 2021 these stood at about $11 billion, BP said.

- Looney said he had been “shocked and saddened” by the situation in Ukraine which had caused the company to “fundamentally rethink” its Rosneft investment. BP Chairman Helge Lund said Russia’s military action “represents a fundamental change”.