BP (LSE: BP) (NYSE: BP.US) gave a slight wobble this morning, on news of new US sanctions targeting Rosneft, Russian largest oil producer, in which BP has a 19.75% stake.
Should BP shareholders be worried, or is this just a storm in a teacup?
Carefully targeted
The new sanctions are targeted at a handful of large Russian firms that habitually maintain high levels of US dollar debt, including Rosneft.
Companies subject to the sanctions will not be able to borrow money in US dollars for more than 90 days. In other words, if they need new medium or long-term funding, they will have to borrow in currencies other than the dollar.
However, the sanctions do not place any restrictions on oil sales or joint ventures with US companies, meaning that Rosneft’s oil sales shouldn’t be affected.
Discomfort, not disable
Unlike the ban on oil sales imposed on Iran, the new US sanctions against Russia are not designed to cause widespread economic damage.
Rosneft will feel some pain: oil sales are always denominated in dollars, meaning that borrowing in any other currency introduces an additional exchange rate risk to profits.
A second complication is that Rosneft does a lot of business through pre-financing deals — effectively borrowing money (in dollars) against contracted future deliveries.
In my view, these sanctions will increase Rosneft’s financing costs and put pressure on its profits and cash flow. However, these effects won’t be disabling, and should not prevent Rosneft from maintaining normal levels of oil sales.
How will BP be affected?
Rosneft’s policy is to pay out 25% of its reported earnings as dividends. A dividend cut thus seems likely, but given that BP’s share of Rosneft’s dividend payout was only $456m in 2013, it’s clear that this will not have a material effect on BP’s profits.
BP’s partnership with Rosneft also provides it with improved access to joint venture opportunities in Russia. As the new US sanctions have been designed to allow such deals, BP shouldn’t be affected, although financing difficulties could mean that Rosneft is forced to delay its participation in major new projects.
BP should be safe
Overall, I believe that the impact of the US sanctions on BP will be negligible, for the foreseeable future. BP shares currently trade on a 2014 forecast P/E of 10.2 and offer prospective yield of 4.8%, and I continue to rate them a strong buy.
