British Petroleum and Russia's Rosneft Swap Shares
Extending its already close ties with Russia, British Petroleum PLC announced an agreement to exchange shares with Russia's largest oil company, OAO Rosneft, on January 14, 2011. Rosneft is 75% owned by the Russian government. BP and Rosneft also announced the formation of a JV to develop three massive offshore exploration blocks that Rosneft owns in northern Russia. The two firms said they will jointly explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4 and $2 billion on seismic tests and drilling wells in the initial exploration phase. The JV will be two-thirds owned by Rosneft, with the remainder owned by BP.
Reflecting Europe's escalating dependence on Russia for an increasing share of its energy usage, particularly for clean-burning natural gas, the agreement is backed by Britain's prime minister, David Cameron, and Russia's prime minister, Vladimir Putin. Russia holds one-fifth of the world's proven reserves of natural gas, and, by some estimates, the South Kara Sea contains some of the largest reserves of oil and gas in the world.
The deal comes in the wake of BP's sale of assets to raise funds to cover the costs of the Gulf of Mexico oil spill in mid-2010. Such costs are expected to eventually total $40 billion. Rosneft, which had announced in late 2010 that it was seeking a partner for exploiting its Arctic leases, indicated that BP's experience in dealing with such problems gives it an edge over other potential partners. Rosneft also regards BP's deep-water drilling technology and experience as cutting edge. BP's expertise received another vote of confidence when Australia granted BP licenses to initiate extensive drilling activity off its coast several days after the Rosneft announcement.
The share exchange gives Rosneft a 5% interest in BP's voting shares, making it BP's single largest shareholder. In return, BP receives a 9.5% ownership stake in Rosneft. Each stake is valued at about $7.8 billion. Both firms agreed to hold each other's equity for at least two years before selling any stock. BP's shares currently pay a dividend about twice that of Rosneft's. BP and Rosneft have stated publicly that they believe investors have significantly undervalued their firms. The Russian government has a particularly strong interest in seeing the value of its holdings appreciate, since it announced plans to privatize a number of largely state-owned enterprises, including Rosneft, in 2014 in order to raise funds.
At the time of the announcement, BP's market capitalization was about $154 billion. With almost 90% of its shares owned by the Russian government and Sherbank, Russia's biggest retail savings bank, the firm's stock trading in public markets tends to be limited and not reflective of Rosneft's true value. However, the terms of the share exchange imply a market capitalization for Rosneft of about $81 billion.
The transaction represents the first time there has been a cross-shareholding between major international oil firms and a major government-owned national oil company. Unlike more conventional oil and gas JVs, the Rosneft JV will not own the oil leases but merely the right to develop them. This structure is similar to Russian oil company Gazrpom's agreement with France's Total SA and Norway's Statoil for the development of the Shtokman gas field in early 2008.
Rosneft became Russia's leading extraction and refining company after purchasing assets of former privately owned oil giant Yukos at state-sponsored auctions, in which the global community decried what appeared to be the Russian government expropriation of the privately owned assets. In 2006, Rosneft conducted one of the largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading System and the London Stock Exchange. With the shares priced at $7.55 each, the offering raised about $10.7 billion. Most of the proceeds went to the Russian government. BP began its relationship with Rosneft by buying $1 billion in shares in the firm's initial public offering, equivalent to 1.3%. Thus, the recent agreement brings BP's ownership interest in Rosneft to 10.8%.
Previous attempts to invest in Russia and to create partnerships between Russian state oil companies and Western oil firms have failed due to outright expropriation by the Russian government or heavy-handed tactics employed by certain Russian billionaires (so-called oligarchs) with close ties to the Russian government. For example, Russian officials forced Shell Oil to sell control of its Sakhalin II oil and gas development to state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which each was to contribute assets valued at $1.5 billion, but it was later dissolved due to disagreements between BP and large Russian investors. TNK-BP, BP's 50 percent-owned JV with a group of Russian billionaire business people, has also had a troubled history. The JV that contributes a quarter of BP's global production and nearly a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some of its control. BP chief executive Bob Dudley had served as chief executive of that JV for five years until he was expelled by BP's Russian partners during the disagreement.
On news of the agreement, BP's partners in the TNK-BP JV stated that BP had not notified them adequately and that the Rosneft deal violated their "right of first refusal" as stated in the JV agreement. The partners were successful in getting a court injunction in the United Kingdom to block the implementation of the JV in February 2011. TNK-BP at the time of this writing is considering a legal claim against BP for damages of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its main vehicle for investment in Russia. These developments raise serious questions about the longer-term viability of the BP-Rosneft JV.
:
-How would you estimate the market capitalization for Rosneft based on the terms of the share exchange? Show your work.

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The Answer of British Petroleum and Russia's Rosneft Swap Shares
Extending its already close ties with Russia, British Petroleum PLC announced an agreement to exchange shares with Russia's largest oil company, OAO Rosneft, on January 14, 2011. Rosneft is 75% owned by the Russian government. BP and Rosneft also announced the formation of a JV to develop three massive offshore exploration blocks that Rosneft owns in northern Russia. The two firms said they will jointly explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4 and $2 billion on seismic tests and drilling wells in the initial exploration phase. The JV will be two-thirds owned by Rosneft, with the remainder owned by BP.
Reflecting Europe's escalating dependence on Russia for an increasing share of its energy usage, particularly for clean-burning natural gas, the agreement is backed by Britain's prime minister, David Cameron, and Russia's prime minister, Vladimir Putin. Russia holds one-fifth of the world's proven reserves of natural gas, and, by some estimates, the South Kara Sea contains some of the largest reserves of oil and gas in the world.
The deal comes in the wake of BP's sale of assets to raise funds to cover the costs of the Gulf of Mexico oil spill in mid-2010. Such costs are expected to eventually total $40 billion. Rosneft, which had announced in late 2010 that it was seeking a partner for exploiting its Arctic leases, indicated that BP's experience in dealing with such problems gives it an edge over other potential partners. Rosneft also regards BP's deep-water drilling technology and experience as cutting edge. BP's expertise received another vote of confidence when Australia granted BP licenses to initiate extensive drilling activity off its coast several days after the Rosneft announcement.
The share exchange gives Rosneft a 5% interest in BP's voting shares, making it BP's single largest shareholder. In return, BP receives a 9.5% ownership stake in Rosneft. Each stake is valued at about $7.8 billion. Both firms agreed to hold each other's equity for at least two years before selling any stock. BP's shares currently pay a dividend about twice that of Rosneft's. BP and Rosneft have stated publicly that they believe investors have significantly undervalued their firms. The Russian government has a particularly strong interest in seeing the value of its holdings appreciate, since it announced plans to privatize a number of largely state-owned enterprises, including Rosneft, in 2014 in order to raise funds.
At the time of the announcement, BP's market capitalization was about $154 billion. With almost 90% of its shares owned by the Russian government and Sherbank, Russia's biggest retail savings bank, the firm's stock trading in public markets tends to be limited and not reflective of Rosneft's true value. However, the terms of the share exchange imply a market capitalization for Rosneft of about $81 billion.
The transaction represents the first time there has been a cross-shareholding between major international oil firms and a major government-owned national oil company. Unlike more conventional oil and gas JVs, the Rosneft JV will not own the oil leases but merely the right to develop them. This structure is similar to Russian oil company Gazrpom's agreement with France's Total SA and Norway's Statoil for the development of the Shtokman gas field in early 2008.
Rosneft became Russia's leading extraction and refining company after purchasing assets of former privately owned oil giant Yukos at state-sponsored auctions, in which the global community decried what appeared to be the Russian government expropriation of the privately owned assets. In 2006, Rosneft conducted one of the largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading System and the London Stock Exchange. With the shares priced at $7.55 each, the offering raised about $10.7 billion. Most of the proceeds went to the Russian government. BP began its relationship with Rosneft by buying $1 billion in shares in the firm's initial public offering, equivalent to 1.3%. Thus, the recent agreement brings BP's ownership interest in Rosneft to 10.8%.
Previous attempts to invest in Russia and to create partnerships between Russian state oil companies and Western oil firms have failed due to outright expropriation by the Russian government or heavy-handed tactics employed by certain Russian billionaires (so-called oligarchs) with close ties to the Russian government. For example, Russian officials forced Shell Oil to sell control of its Sakhalin II oil and gas development to state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which each was to contribute assets valued at $1.5 billion, but it was later dissolved due to disagreements between BP and large Russian investors. TNK-BP, BP's 50 percent-owned JV with a group of Russian billionaire business people, has also had a troubled history. The JV that contributes a quarter of BP's global production and nearly a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some of its control. BP chief executive Bob Dudley had served as chief executive of that JV for five years until he was expelled by BP's Russian partners during the disagreement.
On news of the agreement, BP's partners in the TNK-BP JV stated that BP had not notified them adequately and that the Rosneft deal violated their "right of first refusal" as stated in the JV agreement. The partners were successful in getting a court injunction in the United Kingdom to block the implementation of the JV in February 2011. TNK-BP at the time of this writing is considering a legal claim against BP for damages of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its main vehicle for investment in Russia. These developments raise serious questions about the longer-term viability of the BP-Rosneft JV.
:
-How would you estimate the market capitalization for Rosneft based on the terms of the share exchange? Show your work.