BP plc (NYSE: BP) will report earnings tomorrow, but that’s hardly the biggest news surrounding the company.
A potential settlement with the U.S. Justice Department and the sale of the company’s interest in Russian joint venture TNK-BP (PINK: TNKBF) are what investors should really be focused on.
The Justice Department is seeking up to $25 billion from BP. However, BP is reportedly looking to settle for about $15 billion. That would cover all civil and criminal liabilities relating to the Deepwater Horizon spill.
It’s entirely possible that the two parties will meet somewhere in the middle – at around $20 billion. This would still be a positive development for BP because it would finally clarify the total monetary cost of the disaster.
BP, which took a $37.2 billion charge for what it believes will be its maximum spill-related cost, has already spent about $22 billion on cleanup and payouts to individuals and businesses affected by the spill. And it recently reached a $7.8 billion settlement with third-party litigants.
That means a $15 billion settlement with the Justice Department would put it just over the anticipated costs. It would also spare the company a trial.
So as bad as the Gulf oil spill was, there’s finally light at the end of the tunnel for BP.
And there’s even better news coming out of Russia.
Out From the Cold
Russian oil giant, Rosneft (PINK: RNFTF), announced last week that it’s looking to acquire BP’s stake in TNK-BP – a company that BP co-owns with a group of Russian billionaires.
TNK-BP is a big part of BP’s operations. The venture accounts for 40% of the company’s global oil output and 27% of its total oil and gas production. Additionally, it’s paid BP $19 billion in dividends since 2003.
Still, the project has been fraught with complications and will fetch as much as $30 billion in a sale.
BP put its stake in TNK-BP up for sale on June 1, shortly after its Russian partners blocked a $7.8 billion share swap between Rosneft and BP, as well as a deal to jointly explore the Arctic.
The oligarchs then rejected an offer from Rosneft and BP to buy out their half of TNK-BP for $32 billion. And on Friday, minority shareholder, Andrey Prokhorov, won a $3.1 billion lawsuit against BP, arguing the proposed deal would have lowered profits for TNK-BP – a claim BP and Rosneft dispute.
Now, Rosneft is looking to buy BP out of the venture.
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That’s a welcome development, since it would give BP more freedom and capital to invest in other projects. In fact, the two parties may reach a deal that gives BP an equity stake in Rosneft, which claims the largest proven oil reserves of any listed company.
Hypothetically, a deal that was 50% cash and 50% stock would give BP about a 20% stake in Rosneft. That would take some of the sting out of the lost production and pave the way for future partnerships in the Arctic.
What’s more, the president of BP’s Canadian operations has said the company is looking to develop more oil sands projects. Specifically, BP is interested in the Fort McMurray region, which is Canada’s oil sands epicenter.
BP has been a fixture in Canada’s oil sands since 2007, having partnered with Husky Energy Inc. (PINK: HUSKF) and Devon Energy Corp. (NYSE: DVN). Though some of its projects are in their early stages, BP forecasts production of 200,000 to 400,000 barrels of oil per day by 2025.
Obviously, new acquisitions would boost that figure.
All told, the clouds are really beginning to break for BP. Raking in a handsome return – while escaping its litigious Russian partners – would be a big step forward. And settling with the Justice Department and putting the Gulf spill behind it would be another.
For the first time in a long time, there’s a real possibility of the company moving forward. More than that, it’s finally become an enticing value play for more adventurous investors.
Still, don’t expect much from its earnings tomorrow.
The company reported a 19% drop in first-quarter earnings, which fell to $5.9 billion from $7.3 billion last year. And that’s despite the fact that oil prices in the first three months of this year were higher than they were in 2011.
To top it off, TNK-BP International said on Friday that its second-quarter net profit slumped to $808 million from $2.2 billion a year ago on the back of lower crude prices and higher taxes. TNK-BP’s revenue for the period declined to $14.26 billion from $15.38 billion a year ago, while its capital expenditure increased by 8% to $2.4 billion.
On the bright side, though, the company could boost its dividend payout by 14% to $0.07 a share, according to Bloomberg Dividend Forecasts. That’d be pretty good for a stock that’s already yielding 4.62%.