What do Russian sanctions mean for BP earnings?

In the last six months, the energy sector has been the best performer of the S&P 500; up 15%. Along with trouble in the Middle East, the rising tension with Russia had helped oil prices move steadily higher, with Brent crude oil going from $106 per barrel at the start of the year, to as high as $116 in June. As integrated oil major, higher oil prices tend to be positive for the upstream part of BP’s business. In late June however, the supply-shock in Iraq that resulted with a drop in crude oil prices, saw shares for diversified and upstream oil companies; BP included, suffer a setback. BP had actually been the outperformer amongst the oil majors but when Russian troops moved in to occupy Crimea in February the stock’s relative outperformance peaked and never recovered. Since the US government’s sectoral sanctions against Russia including the energy sector in late June; BP’s underperformance has accelerated, rising only 2% and hugely underperforming major oil rivals Royal Dutch Shell, Exxon Mobil and Chevron, all up over 9% in the same period. Since then BP’s shares have lagged behind its peers due to its strong ties to Russia, the world’s second largest oil-exporter which has been sanctioned by both the US and Europe since it annexed Crimea from Ukraine. While a lot of its peers do have minority interests in Russia through oil prices and strategic partnerships with Russian oil companies, BP’s exposure makes it much more susceptible to political headwinds by way of its associations with Rosneft. The latest US sanctions target specific Russian companies including Russian national oil company Rosneft but they do not, as yet, bar US companies from transacting with them nor do they freeze assets. The point is to starve the Russian companies of US dollar funding in order to exert political pressure on the Russian leader to rein back his political ambitions in Eastern Ukraine. The likely result would be a higher cost of funding for the likes of Rosneft, which will eat into earnings from any future investment without directly preventing any kind of strategic partnership. Exxon has a substantial number of joint ventures with Rosneft while Chevron has a stake in a Russian pipeline. What sets BP apart from the pack however, is its 20% stake directly in Rosneft, thereby tying BP’s performance directly to the earnings of Rosneft. In the first quarter Rosneft contributed 10% of BP’s profits, while this is significant; a reduction in that contribution would likely not be enough to impact BP maintaining its dividend of 9.75c per share that it announced last quarter. Widely considered a blue chip stock, BP attracts a lot of income investors who would be unlikely to sell due to short term price fluctuations and could act as buffer to any future declines. A rise in oil prices or at least a stabilisation of recent declines should benefit BP’s share price but while Russia is being sanctioned by the US and Europe and BP maintains its 20% stake in Rosneft, the current trend in prices suggest BP risks continuing to underperform. Last month saw its shares trade at its highest price since the environmental disaster of the Deepwater Horizon oil spill in the Gulf of Mexico in 2010, which cost the company billions of dollars in settlements. BP, the world’s third largest oil company by revenue, will be releasing its quarterly earnings report today, July 29th and is expected to earn 19c per share, down from estimates of 22c at the start of the year but still an improvement on the 14c earned in the same quarter last year. Revenue is expected to rise slightly to $95bn from the $94.7bn earned in Q2 a year ago. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.