The Worst-Case Russian Scenario For BP Isn't So Bad

| About: BP p.l.c. (BP)


BP stock has retraced as tensions between Russia and the West escalate.

BP's worst case scenario isn't so bad, as BP's Rosneft stake is only worth $13.2 billion.

BP's dividend should be safe even if it were to lose its Rosneft stake.

BP sports an attractive valuation and dividend.

BP (NYSE:BP) seems to be a lightning rod for controversy. In 2010, one of its oil rigs exploded in the Gulf of Mexico, causing the worst oil spill in U.S. history. Four years later, its crown jewel Russian asset seems like a liability as tensions between the U.S. and Russia continue to escalate because of Ukraine.

As the war of sanctions between Russia and the U.S. become more and more serious, BP stock has retraced significantly. The company's stock is currently down around 11% from its 52-week high of $53.48.

The British super-major is heavily exposed to Russia because it owns 19.75% of Rosneft, Russia's largest oil company. Many fear that BP's Rosneft stake may go down significantly in value because of possible Western sanctions banning investment in Russian energy or potential Russian reprisals on Western energy companies.

Even though the market has voted negatively, in many ways, the worst case scenario isn't so bad.

The worst case scenario for BP

On the surface, BP losing Rosneft would be a disaster, as BP's stake in Rosneft accounts for a significant part of BP's total reserves and production.

But when viewed from a different perspective, it's not so bad.

Based on current market valuations, Rosneft itself is only worth $67 billion, making BP's 19.75% stake only worth around $13 billion. At Rosneft's 52-week high and factoring in the Ruble depreciation, BP's 19.75% stake in Rosneft was worth roughly $18 billion.

$18 billion is roughly the total market capitalization that BP has lost since BP's stock made its 52-week high. By dropping BP's capitalization by roughly the same amount, the market has arguably factored in a significant chunk of the worst case scenario already.

For BP, losing that remaining $13 billion also is not a death blow. The company made $13 billion in profits in 2013 and is forecasted to make around $15 billion over the next year. In the grand scheme of things, losing roughly one year's worth of profits is not a big deal. It won't put BP in a liquidity crisis like Deepwater Horizon did to BP in 2010. It won't threaten BP's dividend either. The company has plenty of liquidity and is still not done with its $10 billion in planned asset sales.

The devil's advocates would say that if BP were shut out of Russia, BP would lose a promising growth opportunity, as Russia does have great potential reserves in the Arctic.

While the detractors are right, those Russian Arctic fields are high risk and will take a lot of time to pay off. If BP were shut out of those investing opportunities, it would be a loss, but it would not be that bad of a loss. For BP, there are still plenty of other attractive investing opportunities around the world such as Argentinean shale, U.S. deep water, Brazilian deep water, Australian LNG, and Canadian tar sands.

Attractive Valuation

With or without its Russian division, BP looks attractive. With a single digit forward PE, BP trades at a lower valuation than Chevron's 11 and Exxon Mobil's 12. Excluding Rosneft, most of BP's assets are in stable geopolitical areas and the company sports an attractive dividend yield of nearly 5%.

The resolution of the Department of Justice lawsuit over Deepwater Horizon also could be a positive catalyst as it would lift a cloud of uncertainty over the company. BP has written down a total of more than $42 billion since Deepwater Horizon occurred, and if Anadarko's (NYSE:APC) $5 billion settlement over the Tronox case is a guide, the total bill for the lawsuit could be less than what most experts estimate.

As a caveat, the market can be irrational and BP could retrace further. There also is some short-term concern over potential crude oversupply. Long term, BP looks like a buy.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.