It’s out of the frying pan and into the fire for BP (LSE: BP) (NYSE: BP.US). With the end in sight to the long-running battle over legal liabilities arising from the Deepwater Horizon disaster, it is now uncomfortably close to US sanctions against Russia over the Ukrainian crisis.
The roof falls in
The US has put Igor Sechin, CEO of Russian state-owned oil company Rosneft and a close ally of President Putin, on its blacklist. BP owns just under 20% of Rosneft following an asset-swap in 2012 which, at the time, substantially de-risked the company’s Russian exposure. An alliance so close to the Kremlin gave BP what Russians call Krysha, literally roof, or protection.
Now the roof looks like it might fall in. BP could hardly have anticipated a new Cold War, but the latest sanctions could prove very uncomfortable. US companies and citizens are not allowed to have dealings with blacklisted individuals. That will be awkward for BP’s CEO Bob Dudley, who is a US citizen and sits on Rosneft’s board.
Double risk
I see a double-sided risk for BP. Firstly, sanctions against Mr Sechin put sanctions against Rosneft itself one step closer: that could place BP in an impossible position trying to protect its assets in Russia and in the US.
Secondly, BP’s accounting treatment of Rosneft as an associate rests on the — tenuous — contention that with a 19.75% shareholding and two board members, it has ‘significant influence’ over Rosneft. If the end result of today’s sanctions is that BP becomes unable to use its influence effectively, then its auditors could challenge that treatment. On paper, BP would lose its share of Rosneft’s reserves, and could only count dividends received from Rosneft towards its own income, rather than its 20% share of Rosneft’s earnings. It might only be accounting, but there would be a lot of red ink.
With the final liabilities for the Deepwater Horizon disaster still undetermined, and this new uncertainty over its Russian assets, there’s a lot of risk in BP’s shares.
Lumbering giant
That makes Shell (LSE: RDSB) (NYSE: RDS-B.US) a much safer bet if you want big oil in your portfolio. It’s testimony to the longevity of the lumbering giant that the ‘You can be sure of Shell’ slogan, which dates from the 1930s, is still resonant. The giant has been lumbering rather too slowly in recent years: the company was slow to catch on to the new zeitgeist for natural resources companies to prioritise profitability over scale.
But new CEO Ben van Beurden has acknowledged that changes need to be made. He previously turned around Shell’s chemicals division, so there’s reason to have confidence in his abilities to execute. The shares are up 11% so far this year, helped by a good first quarter, suggesting that the new startegy is starting to work. Though Q1 profits dropped by 3%, they were double BP’s first-quarter results and well ahead of market expectations, with one analyst saying they had “blown the competition out of the water”. On a yield of 4.8% and PE of 12, there’s still time to get on board.
