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BP: ditching Rosneft makes BP a smaller but slicker play for income investors

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For some years BP avoided dealing with the large bear in the room: its 19.75 per cent holding in Russia’s state oil company Rosneft. On Tuesday BP confirmed, via a pre-tax impairment, $24bn reasons why it had not sold off the stake sooner.

Still, BP could ride the wave of high oil prices in the first quarter, punching through analysts’ earning forecasts. The UK-listed oil major reported underlying profit on a replacement cost basis of $6.2bn, more than double the year-ago figure and 39 per cent above consensus. Its share price jumped 3 per cent.

BP did at least act quickly once the bear grew unruly. Its plans to ditch its stake in Rosneft came three days after the Russian invasion of Ukraine.

Of the $24bn cost of that exit, more than half was the carrying value at February 27 plus hefty foreign exchange losses ($11bn) accumulated since the 2013 purchase. That wiped out Rosneft’s purchase price. Some solace came from higher dividends recently. Rosneft has generated annual income of about $600mn for BP over the past five years.

Assets have teetered on a diminishing amount of equity every year since 2017. Jettisoning Rosneft slims BP down, scything $14.7bn of equity. Coming on top of other divestments, including those related to the energy transition, BP’s total equity has contracted 22 per cent since the end of 2017, to $78.5bn in March. Meanwhile, assets went up.

BP under boss Bernard Looney sees itself less as a shrunken beast and more focused on returns. Capital spending, at a run rate of $14bn to $16bn per year, is about two-fifths below the bloated levels of the previous decade. Ironically, governments — worried about energy security suddenly — want more investment from oil companies.

Theoretically, Looney targets tighter discipline rather than tamed production growth. BP is shooting for enhanced returns: ideally, a return to the 18 per cent average return on capital employed of the century’s first decade — back when oil surpassed $100 a barrel. The current price puts that in reach, but on BP’s normalised $60 outlook that remains some way off. Last year’s returns were 13.3 per cent.

Interesting that the standout star was its trading arm, a beneficiary of record levels of volatility and thus less sustainable than other income streams. The oil and gas business always requires some risk-taking. But as BP’s misadventure in Russia proved, historically its record is decidedly mixed.

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