BP`s board approves sale of TNK-BP stake to Rosneft

If FT is correct, BP will receive a 19% stake in Rosneft, which is at the upper edge of an earlier reported range of 10-20%. We see this as the best outcome for Rosneft's minorities, as leverage will be minimized and, more importantly, BP will have greater influence over Rosneft's management and corporate governance. BP could receive two seats on Rosneft's board, according to FT. The deal on buying out AAR is also near completion, but the payment will likely occur over several years.

We see the news as positive for Rosneft with BP's entrance as a major shareholder. We believe BP could play a role in operating and financial management and apply TNK-BP's expertise to Rosneft. That would reduce downside risks related to government ownership of Rosneft, especially in relation to investment decisions and the decline in crude production at mature fields. However, the ultimate role of BP in management is still unclear. At TNK-BP Holding, we expect high dividends for the coming years until TNK-BP becomes fully controlled by Rosneft. From that point on, Rosneft could buyout TNK-BP Holding minorities at a premium to the market thanks to its relatively small free float. Otherwise, if Rosneft opts to sustain it as a traded subsidiary (like Gazprom Neft by Gazprom), we do not see material risks to value. We reiterate our Buy recommendations for both Rosneft and TNK-BP Holding.