Oil giant BP plc (BP) is likely to face a major loss of hundreds of millions of dollars in earnings and dividend income from Rosneft (MCX:ROSN), Russia’s state-owned oil company.
The loss is mainly due to the decline in crude prices and financial turmoil that has resulted in the fall of the ruble. The ruble has slid about 47% over the last three months and that is predicted to cause substantial loss for BP in the fourth quarter on its Rosneft stake. The loss is estimated to be about $750 million, the first of its kind for BP in Russia. According to BMO, the erosion of export revenues and currency effects is likely to take BP’s full-year earnings to as little as 5 cents.
BP acquired 19.75% of Rosneft’s shares in 2013, when the UK major sold half of its TNK-BP joint venture to the Russian company. This remains one of BP’s most esteemed investments and is valued for its long-term commercial value.
For the first nine months of 2014, Rosneft accounted for approximately a third of BP’s total oil and gas output and over 8% of underlying replacement cost profits. But concerns regarding the conflict in Ukraine, sanctions imposed by the west on Moscow along with a nearly 50% drop in crude prices since June have troubled these prospects.
The fall of ruble to about RUB 80 to the dollar at one point in December, prior to recovering to RUB 58 by the end of the month, is expected to cause significant loss on earnings and nearly wipe out a dividend payout that BP is due to receive by mid-2015.
The effect of the currency depreciation is likely to be overwhelming as Rosneft’s debt was largely denominated in dollars and euros, and accounting rules required the Russian company to restate this in rubles at the end of each quarter.
According to BMO, BP’s dividend is likely to fall by about 75% from $693 million received in July. This forms a fraction of BP’s targeted overall $30 billion cashflow for 2014.
BP’s equity stake in Rosneft was valued at $13.6 billion in the group’s 2013 annual report. Under international accounting rules, this is adjusted in each quarter and the company may even write off its value for this quarter. An updated figure will be incorporated in the next annual report. Neither party has revealed any details in this respect.
Currently, BP carries a Zacks Rank #5 (Strong Sell). Investors could consider better-ranked stocks like Spectra Energy Partners, LP (NYSE:SEP), Seadrill Partners LLC (NYSE:SDRL) and QEP Midstream Partners, LP (NYSE:QEPM), all of which sport a Zacks Rank #1 (Strong Buy).