BP May Buy Back $6 Billion of Shares After TNK-BP Deal, UBS Says

BP Plc (BP/) may use about $6 billion of the cash it obtains for its stake in Russia’s TNK-BP to buy back stock, repaying shareholders for lower earnings they’ll get from an investment in OAO Rosneft (ROSN), Deutsche Bank AG and UBS AG said.

BP said yesterday it will try to compensate stockowners for reduced profit after Europe’s second-biggest crude-oil producer agreed to exchange its 50 percent in TNK-BP for an increase in its Rosneft holding to almost 20 percent and $12.3 billion in cash. The deal suggests a dilution of BP’s earnings-per-share of as much as 5 percent, according to Macquarie Capital Europe.

“It’s too premature to say what we’re going to do with the cash,” BP’s Chief Financial Officer Brian Gilvary said in a telephone interview yesterday. “But we are making sure we minimize the dilution to earnings-per-share as well as continue with our progressive dividend policy. We’re not looking to go out and make an acquisition with it.”

Chief Executive Officer Bob Dudley has spent the past two years trying to strengthen BP’s balance sheet through asset sales following the Gulf of Mexico oil spill that erased a third of the company’s market value. A trial over liability for the accident is set to begin on Jan. 14, with BP facing pollution fines of as much as $17.6 billion under the Clean Water Act.

Countering lower earnings-per-share “would mean you’d either have to boost earnings by 3 percent to 5 percent, or more likely buy back $5 billion to $7 billion of shares,” said Jason Gammel, a Macquarie analyst. “But I wouldn’t expect any detail on that until after a settlement with the U.S. government.”

Diluted Earnings

Yesterday’s deal will probably cause earnings per share to slip 3 percent to 4 percent and free cash flow by 10 percent, Deutsche Bank analyst Lucas Herrmann said in an e-mailed note. BP can compensate for that with a $6 billion buyback, he said.

Ivor Pether, who oversees about 360 million pounds ($576 million) of BP shares at Royal London Asset Management, said it may buy back about $7.5 billion. Jon Rigby, an analyst at UBS, said the dilution implies a buyback of about $6 billion.

BP expects to book earnings, reserves and output from its stake in Rosneft, which plans to buy all of TNK-BP. BP will initially lose about 100,000 barrels of oil a day in production and gain about 700 million barrels of oil reserves as a result.

The company will take 19.75 percent of Rosneft and get two board seats. The sale of the TNK-BP stake is BP’s biggest deal since its $56 billion purchase of Amoco Corp. 13 years ago.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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