BP's Dudley Gets Bested by Russians Again - At Shareholders' Expense

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

Robert Dudley, the American CEO of BP PLC (NYSE: BP), has requested and received a 1 month extension of the deadline to close the Arctic prospecting joint venture and share swap with Russia’s OAO Rosneft. As this $16 billion dollar deal and Dudley’s credibility hang in the balance, he’ll need more than a month; he’ll need a miracle.

There’s another Russian partnership involved that simply won’t let the deal happen unless it goes directly through them. AA Renova, an investment entity that controls BP's current Russian joint venture, TNK-BP, is using aggressive legal tractates to keep BP and Rosenft from joining forces. They claim that the deal they signed with BP obligates BP to do the Rosneft deal through Renova.

Does it? Who-the-heck knows, but it’s tied up in Russian courts and unlikely to be resolved over the course of a 1 month extension that’s half over already.

It’s clear to Dudley, and oil industry analysts everywhere, that if BP wants to get into bed with Rosneft (which it does) it has to get out of bed with Renova. To-that-end Dudley offered Renova a full value buy out deal for Renova’s stake in TNK-BP; just over $27 billion. The offer was rejected out-of-hand.

The four Russian billionaires that own Renova aren’t interested in getting what their shares are worth, they want to make a killing and don’t care if they kill BPs pending deal with Rosenft. The oligarchs running Renova have indicated that they will start listening to offers when the offers reach $35 billion.

The fact that Renova won’t even consider BP’s very fair offer indicates a distinct unreasonableness that does not bode well for the Rosenft deal’s chances. In other words, it is exceedingly unlikely that Dudley will be able to get this important deal done.

Dudley had the right idea when he negotiated the deal with Rosneft; he wanted to get out of the Gulf of Mexico, where the name BP is mud, he wanted to revitalize a wounded company, and set BP up for future long-term growth. Plus, the new CEO wanted to establish himself as an aggressive, forward thinking, can-do leader. Unfortunately, for him and for BP shareholders, he’s less then 30 days from failure.

And, to make matters worse, this isn’t the first time he’s been had by this same group of Russians. In 2008 Dudley was running TNK-BP and things went terribly wrong. Dudley was run out of Moscow when Renova Executives accused him of harassment and bullying after a board meeting that almost came to blows.

Dudley was removed from the leadership of TNK-BP and replaced by Mikhail Fridman, one of the aforementioned Russian billionaires that funded Renova. Fridman is still in charge at TNK-BP and he has run Dudley ragged over this Rosneft deal right from the start.

Fridman and his three partners, Viktor Vekselberg, German Khan and Len Blavatnk, have the home-court advantage on this one and Dudley should have known better then to take them on as his first big move as CEO, especially considering that they’ve beat him badly once before.

So what are Mr. Dudley’s options?

  • He can agree to pay Renova 40% more for their stake in TNK-BP then it is actually worth. That would get the deal done but he’d have to explain to shareholders why his fumble cost them $8 extra billion.
  • He can give in to Renova’s demand and run the Rosneft deal through them. Everyone would make money over time, but at the cost of further embedding Renova into BPs larger operations. And, to accomplish this, he would have to convince Rosneft to agree to partner with Renova. No easy task given that they don’t like Renova any more than Dudley does. Rosneft’s pot would have to be significantly sweetened at the expense of BP’s share.
  • He could sell BP’s stake in TNK-BP to someone else (someone who can go toe-to-toe with the oligarchs). But he’d be jettisoning about 1/5th of BP’s oil reserves and as-much-as 10% of its profits.
  • Finally, he can, for the second time in recent memory, turn tail and flee Russia with his tail between his legs. This would be bad. Bad for Dudley who needed to show strength, and bad for BP who needed to replace the Gulf as the company’s catalyst for growth.

When newly minted CEO Robert Dudley struck a deal with Rosneft he turned BP’s Russian partners into BP’s Russian Rivals. Unfortunately for those of us who own BP, they’ve bested him yet again. Dudley will be forced to yank the Rosneft deal to his embarrassment and at shareholders’ long and short term expense.

Disclosure: Author is long BP.