February 5, 2019 / 12:50 PM / 3 months ago

Breakingviews - BP beats Rosneft in valuation, not operations

Logos of BP are on display at a petrol station in Moscow, Russia, July 4, 2016. REUTERS/Sergei Karpukhin - RTX2JXZN

By George Hay and Dasha Afanasieva

LONDON (Reuters Breakingviews) - Bob Dudley and Igor Sechin both have something the other lacks. The BP chief executive, whose $138 billion oil producer owns 20 percent of Sechin’s $67 billion Rosneft, may look covetously at the Russian group’s fat margins. Sechin, meanwhile, will look ruefully at Dudley’s much perkier valuation.

Both groups’ annual results released on February 5 show solid performances. BP’s net profit almost trebled to $9.6 billion, while Rosneft’s more than doubled to $8.9 billion. BP beat expectations in the fourth quarter in both exploration and refining. Yet in a number of important areas Rosneft’s operations are superior. Aside from producing 5.8 million barrels per day compared to BP’s overall 3.7 million bpd, its margins are bigger. In 2019 it is anticipated to make a 25 percent EBITDA margin on $133 billion of revenue, against BP’s 13 percent.

That’s not surprising. Rosneft exports much of its oil in dollars, but its costs are in a rouble that depreciated by over 20 percent against the dollar in 2018. That gives Sechin a tangible head start over Dudley.

Yet that isn’t reflected in the two companies’ valuations. BP trades on over 12 times its expected earnings for 2019, while Rosneft languishes at less than six times. Rosneft’s dividend yield for the same year is almost 9 percent, compared to BP’s 6 percent.

The market isn’t missing something. The difference between Rosneft and most western oil majors is that the former is largely owned by the Russian state. That means it can be used for geopolitical purposes that go beyond conventional shareholder value. Even though repayments have whittled the $6.5 billion lent to Venezuela’s state oil firm down to under half that level, the risk is that a change of government in Caracas leaves Rosneft with big losses.

A more obvious problem is sanctions. The U.S. is already restricting Rosneft’s ability to raise long-term finance. While it’s unlikely that Washington extends that to actually preventing the Russian group from exporting its products to western markets – as aluminium group Rusal was confronted with last year – that probability is not zero. Until Russia’s relations with the West thaw, Sechin will be the more envious oil tsar.

Breakingviews

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