15 October 2003 01:56
Unique among `Three Sisters` in having upside potential in Russia: The TNK venture has caused a few heartaches but BP chairman Lord Browne will be at pains to persuade investors that it holds more promise than they assume, writes Carola Hoyos
It is with quiet satisfaction that Lord Browne, head of BP, watches the
lengthening queue of western oil companies trying to get into Russia.
Having sealed a joint venture with TNK in June, he has beaten his closest
rivals, including ExxonMobil and ChevronTexaco, to a seat at the table of the
world's second-largest oil producer and largest holder of natural gas
reserves.
But the honeymoon period for BP is quickly drawing to a close and the
company's stock price already reflects the neutral reaction of the
Russia-wary equity market.
At akeenly anticipated event in London tomorrow, Lord Browne is expected to
try to persuade his investors that there is more promise to the partnership
than they assume.
JJ Traynor, analyst at Deutsche Bank, said in a recent report: "BP,
uniquely among the three sisters, now carries an upside potential in Russia -
whereas the export-oriented plays in the ExxonMobil and Shell production
sharing agreements are more likely to be already discounted in their share
prices."
But to convince analysts that BP - which is trading below Exxon but at an 8
per cent premium to Royal Dutch/Shell - can realise that potential, it will
have to answer a number of questions. Listing them, Jon Rigby, analyst at
Commerzbank, said: "What is the joint venture? How does it perform? What
is its effect on BP? And what will this give us in the future?"
More than 450 analysts expected at tomorrow's event will also want to
know two more things - how much oil production BP expects to gain from its
newly acquired fields in Siberia and the number of oil reserves the company
is likely to be able to exploit.
Neither query has a simple answer. BP has shied away from giving production
numbers after it failed to meet its company-wide targets three times in 12
months.
Nonetheless, the company is expected to surprise analysts by revealing more
optimistic expectations than the 10 per cent growth for 2003 and 4 per cent
thereafter they had been anticipating.
Such news would be good news, analysts say. "The future importance of
Russia as a growth area is extremely important in assessing BP's
competitive position," said Mr Rigby.
Quantifying the oil and gas reserves that the deal brings has been a touchy
subject for BP since it admitted that TNK-BP would be able to book only 3.2bn
barrels of reserves under the Security and Exchange Commission's strict
guidelines, rather than the initially announced 5.2bn estimate.
However, Wood Mackenzie, the independent Edinburgh-based consultants,
believes overall reserves could be closer to 30bn barrels, a number BP is
expected to float tomorrow.
Replacing depleted oil and gas reserves - critical to the health of any oil
company - is becoming increasingly difficult as the vast deposits of the
Middle East, at least for now, are off-limits.
BP has set itself an even tougher challenge by announcing this year that it
would restructure its portfolio and sell its maturing assets - a strategy
that, Wood Mackenzie said, has knocked almost 1m barrels of reserves and
230,000 barrels of oil and gas production a day off its books.
The Russia deal was critical to overcome those cutbacks, analysts said. It
has made Russia one of BP's new core areas.
BP now has 13 per cent of its capital employed, 15 per cent of the
group's production and 9 per cent of its refining in Russia.
But BP is not the only company with large stakes in Russia. ExxonMobil and
Shell have multi-billion dollar direct investments in Sakhalin, Russia's
far eastern island.
Meanwhile, ExxonMobil and ChevronTexaco are both vying for a stake in
YukosSibneft, Russia's largest energy group.
Many analysts see TNK-BP as an enlightened deal that has put Lord Browne
ahead of his competitors.
But Mr Traynor at Deutsche Bank said: "Is there a TNK-BP because BP
couldn't get in to Sakhalin and Yukos? Is it a good idea to buy old
Soviet assets where you get cash flow more quickly but there are risks?"
Analysts will expect BP to explain tomorrow how it will handle those risks.
A consultant working with BP said: "One of the challenges is
understanding what the appropriate technology to use is for brownfield
development, enhancing, in some cases, Russian technology, in other cases
adopting western technology with Russian resources, people and
equipment."
The consequences of getting the balance right are large productivity gains
and higher oil recovery rates, while getting it wrong could have reputational
consequences, especially if health, safety and environmental standards are
not met, he added.
BP has estimated that TNK is nominally 10 years behind BP in terms of those
standards.
But analysts are cautious about the Russian business environment.
In the TNK deal, which BP is estimated to have paid a 30 per cent premium to
other Russian oil companies, BP delayed some of its payments - Dollars 1.25bn
(Pounds 740m) each year to 2006 - to mitigate the risk of again being taken
for a ride.
But in a recent report, Deutsche Bank analysts warned of a potential clash of
interests.
Alfa and Access/Renova, the Russia investors in TNK, are likely to want to
maximise cash flows as they look for TNK's market ratings to improve and
close the gap with BP.
Lord Browne, on the other hand, relies on the partnership for growth.
Deutsche Bank said in its report: "We see the alignment of objectives as
a critical issue," warning that at about the time BP's payments
end, TNK-BP would face key investment decisions on developing new fields.
BP would be keen to show investors that it has learned from its failures in
the late 1990s. It intends to push down costs quickly before a drop in oil
prices undermines its investment.
Deutsche Bank warned that the TNK-BP deal may be accretive at current high
oil prices but that it struggles to hit BP's 13 per cent target for the
company-wide return on average capital employed at the Dollars 16 price that
BP and other companies use as their measure.
Lord Browne might not be able to foretell oil prices but at tomorrow's
conference he is expected to take a significant step towards explaining
whether shareholders should give him more credit for beating his rivals in
the race to partner with Russian oil companies.
[FTI [The Financial Times]] |
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