BP Plc (BP/)’s decision to consider selling out of its Russian venture signals the end for John Browne’s vision of a British driller able to challenge Exxon Mobil Corp. (XOM) as the world’s largest publicly-traded oil producer.
At the helm from 1995 to 2007, the former chief executive officer forged a $100 billion series of deals that made BP Europe’s largest oil company. Today, it’s shrinking.
Already forced to shed more than $20 billion of assets to pay the costs of the Deepwater Horizon disaster in 2010, selling TNK-BP would see BP’s oil and gas production drop to less than 3 million barrels of a day for the first time since 1997, putting it behind Royal Dutch Shell Plc (RDSA) and Chevron Corp. (CVX)
Bob Dudley, the company’s first American CEO, is betting investors will back his move to create a leaner oil producer that concentrates on exploring for new reserves rather than overall production. Smaller producers have outperformed larger rivals. Shares in Exxon, France’s Total SA and ConocoPhillips as well as BP have all fallen over the past five years.
“This is hopefully the start of a new strategy that sees a smaller BP,” said Stuart Joyner, an analyst at Investec Plc in London. “The super-major model is broken. Who wouldn’t want to be a smaller, nimbler company that grows faster?”
BP rose 1.8 percent to 402 pence yesterday, making it the only gainer among 32 companies in Europe’s Stoxx 600 oil & gas index after BP said it had received approaches for its 50 percent share in TNK-BP, Russia’s third-largest oil company. The stake may be worth as much as $30 billion, according to Bank of America Corp. analysts.
“If they were able to extract something in the neighborhood of $20 billion, talk about how that would redeployed, it could be a positive catalyst for the stock,” Macquarie analyst Jason Gammel said in a telephone interview. The company may consider both acquisitions and a special dividend, he said.
“If the proceeds from the equity are redeployed effectively you do have a smaller company that could be better able to grow,” he said.
Browne transformed BP from a former state-run producer focused on the North Sea through the $56 billion acquisition of Amoco Corp. in 1998, followed by Atlantic Richfield Co. two years later for $32 billion.
In 2003, Browne struck an $8 billion deal with a group of billionaires to form TNK-BP, the biggest single investment in post-Soviet Russia.
TNK-BP was Browne’s most successful move, giving BP the biggest Russian presence among the world’s largest oil companies. The company has paid BP $19 billion in dividends so far and provides more than a quarter of its production.
Without TNK-BP’s contribution of about 900,000 barrels a day, BP’s output would drop to about 2.5 million barrels, putting the London-based company close to Total SA.
Dudley has already started to shrink the company after the Deepwater Horizon rig exploded in the Gulf of Mexico in April 2010, starting the worst U.S. oil spill. He’s sold fields from Venezuela to Alaska, raising $23 billion and cutting production to a 10-year low.
BP’s share price remains 39 percent below its level on the eve of the spill, a $40 billion loss in market value for investors.
While profitable, the investors in the TNK-BP venture have had a difficult relationship. In 2008, Dudley, who was then CEO of TNK-BP, was forced to step down and left Russia after a dispute over company strategy. Last year, the billionaires took BP to arbitration after they cut TNK-BP out of a deal to explore Russia’s Arctic with state-run OAO Rosneft.
One of the Russian shareholders, Mikhail Fridman, resigned as CEO this week, casting renewed doubt on the future of the business. The board hasn’t met this year because shareholders can’t agree on a third independent director.
“It seems rather that BP’s hand has been forced,” said Colin McLean, CEO at SVM Asset Management. “I don’t think this is happening at BP’s choosing. As long as they don’t get a bad price, it draws a line under what doesn’t appear to have been handled well before.”
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