Broker snap: Rosneft bid for TNK-BP stake not without its issues

25th Jul 2012 15:06

Credit Suisse has reiterated its 'outperform' rating and 500p target price for British oil major BP following the recent news that Rosneft is interest in its stake in TNK-BP, but the broker does highlight some concerns with the potential deal.Russia-focused oil titan Rosneft announced yesterday its intention to pursue an acquisition of BP's stake in TNK-BP, the 50/50 joint venture between BP and Russian group Alfa Access-Renova (AAR). This follows AAR's expression interest to buy up part/all of BP's 50% stake in TNK-BP on July 18th."In our view, Rosneft's bid increases BP's options, and we see Rosneft as a more likely buyer of BP's stake than AAR, however we still believe a return to the status quo is the most likely outcome," Credit Suisse said on Wednesday.While the broker admits that the BP-AAR alliance has not been a happy marriage, it says that dissolving the shareholder structure seems even more difficult than keeping it together.As for the Rosneft bid, Credit Suisse says that it would expect some form of opposition from AAR "as we think AAR would likely prefer running TNK-BP with BP than with Rosneft since the latter is more likely to increase capes and reduce dividends.""Secondly, Rosneft would have to top AAR's implied $20bn offer to buy BP's stake, but on our calculation does not have enough cash for a $20bn+ deal, potentially making it dependent on other financing options."Finally, the broker notes that is Rosneft is successful, then the joint entity would control 37% of Russian oil production, something which the Russian government may not be happy with."We think a TNK-BP sale would be positive for BP only if: (1) EPS dilution is offset by share buybacks, (2) BP makes a strategic upstream acquisition," Credit Suisse said.If BP were to sell-up, then its 2013 earnings per share would fall by around 19% and operating cash-flow would drop 10%, the broker said. However, this would leave just enough room to cover its current quarterly dividend.Despite the broker's comments about AAR preferring BP to Rosneft as a partner, news agency Interfax cited an AAR shareholder as saying on Wednesday that they would welcome its Russian peer buying out BP."We [at TNK-BP] have a lot of synergies with Rosneft. I think there is nothing bad in this. TNK-BP's market capitalisation would only grow," the person was quoted as saying.BC