BP Russia Talks Stoke Rally for TNK-BP Bonds, Erasing Loss Since Oil Spill

Talks between Russia’s government and BP Plc’s newly appointed Chief Executive Officer Robert Dudley are stoking the best rally in 17 months for bonds of TNK-BP on expectations asset sales will help the Moscow-based affiliate.

TNK-BP’s $1 billion of 7.5 percent bonds due 2016 rose for a 13th day, the longest rally since March 2009, according to prices on Bloomberg. The yield fell to as low as 5.536 percent yesterday, dropping for the first time below the level before the April 20 oil disaster in the Gulf of Mexico.

The worst oil spill in U.S. history has brought Dudley back to Moscow two years after he fled Russia as the chief of TNK-BP, citing “sustained harassment” and visa difficulties. Dudley met yesterday with Igor Sechin, Prime Minister Vladimir Putin’s deputy for energy. TNK-BP, Russia’s third-largest oil producer accounts for about 25 percent of BP’s output and a fifth of the company’s reserves, and may boost that share as BP sells projects to cover the $32.2 billion charge linked to the leak.

“Hayward’s dismissal and Dudley’s appointment” has “significantly supported TNK’s spreads,” said Sergey Dergachev, who helps oversee about $6 billion of emerging-market debt, including TNK-BP dollar bonds, at Union Investment in Frankfurt. “TNK-BP underperformed in the past, mostly due to the corporate governance disputes between Russian and BP sides.”

New Ideas

Dudley, who succeeds Tony Hayward on Oct. 1, will oversee as much as $30 billion of asset sales.

“Maybe in the longer term there will be some new ideas that surface that unite us further,” Sechin said during the meeting with BP’s Dudley and Hayward last night in Moscow.

BP raised $1.9 billion from Ecopetrol SA and Talisman Energy Inc. for fields in Colombia, the company said Aug. 3.

London-based BP told Venezuela’s state oil company it’s interested in selling its stakes in three projects in the country to TNK-BP, Petroleos de Venezuela SA Vice President Eulogio del Pino said last week. Petroleos de Venezuela, the state-owned Venezuelan oil producer, has the first option to purchase BP’s local assets, the company’s president Rafael Ramirez said yesterday.

“TNK works with us” on some local projects, Ramirez said. “We have excellent relations with them and would evaluate any request that comes from them.”

‘Cash Cow’

Any sale of TNK-BP shares to state-owned OAO Gazprom, Russia’s gas monopoly, or OAO Rosneft, the country’s biggest oil producer, could boost bond prices, according to Marina Vlasenko, the lead emerging market credit analyst at Commerzbank AG in London.

“For a cash-cow like TNK-BP the presence of the state in its capital would not impose a major change in credit risk,” Vlasenko said. “The shareholder change from BP to Gazprom or Rosneft would be moderately positive for the credit as it will reduce the political risk and eliminate shareholder conflict.”

Nikolai Gorelov, a Moscow-based spokesman for TNK-BP, said he couldn’t comment on securities, citing company policy.

TNK BP bonds are rated Baa2 by Moody’s Investors Service, one level below the government at Baa1, and BBB- by Standard & Poor’s, a step lower than the BBB sovereign ranking.

The yield on Russia’s dollar bonds due in 2020 was little changed at 4.692 percent today, the lowest level since they were sold in April.

Default Swaps

The cost of protecting Russian debt against non-payment for five years using credit-default swaps rose 1 basis point to 158.635 on Aug. 4, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Russia credit-default swaps cost 2 basis points less than contracts for Turkey, which is rated four levels lower at Ba2 by Moody’s Investors Service. That difference has narrowed from 40 basis points on April 20.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 4 basis points to 217, according to JPMorgan EMBI+ Indexes. That compares with 132 for debt of similarly rated Mexico and 198 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

The so-called yield spread on Russian bonds is 47 basis points below the average for emerging markets, down from a 15- month high of 105 in February, according to JPMorgan Indexes.

The ruble weakened 0.3 percent to 29.8402 per dollar today. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements as they allow foreign investors and companies to fix the exchange rate at a specific level in the future, show the ruble at 30.0594 per dollar in three months.

Vekselberg, Fridman

BP, under its former Chief Executive Officer John Browne, paid $7.7 billion in cash to Siberian oil producer TNK’s billionaire shareholders, including Viktor Vekselberg and Mikhail Fridman, to pool their assets and create TNK-BP under 50-50 ownership. TNK-BP has generated more than $25 billion of net income and distributed over $20 billion in dividends since the tie-up began in 2003, Hayward said last year.

TNK-BP bonds have rallied as oil has gained 7 percent since July 19. The yield on OAO Lukoil’s 6.375 percent dollar bonds due November 2014 has declined 13 basis points since July 19 to 4.864 percent, the lowest since Apr. 20. The 5.67 percent dollar notes of OAO Transneft are yielding 3.716 percent today, the lowest since they were sold in February 2007.

“The assets in Venezuela are a tidying-up opportunity,” for TNK-BP, Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow, said in a phone interview. “The dialogue now taking place between BP and the Russian government is about BP’s future involvement in Russia and how the Kremlin can take advantage of BP’s problem.”

To contact the reporter on this story: Jason Corcoran at Jcorcoran13@bloomberg.net

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