BP and Russia Discussions Increase Demand for TNK-BP Bonds

August 5, 2010

Discussions between Russia’s government and BP Plc’s newly-appointed Chief Executive Officer Robert Dudley appear to be the impetus for the largest rally in 17 months for TNK-BP bonds, based upon market expectations that asset sales will help BP’s affiliate in Moscow.

TNK-BP’s $1 billion of 7.5% bonds due 2016 rose for the 13th day in a row, providing the longest rally since March of last year.  The yield fell to as low as 5.5% yesterday, dropping for the first time below the level attained prior to the April 20th Gulf of Mexico oil spill.

CEO Dudley makes the journey back to Moscow just two years after he fled Russia as the Chief of TNK-BP, citing “sustained harassment”, including Visa difficulties, from Russian officials.  Dudley met yesterday with Russia’s Deputy for Energy Igor Sechin.

TNK-BP, Russia’s third-largest oil producer, accounts for about 25% of BP’s output and a fifth of the company’s reserves.  That percentage may increase as BP sells several projects in order to assist in paying off the $32.2 billion in damages associated with the Gulf oil spill.

Dudley, who succeeds Tony Hayward on October 1st of this year, will oversee as much as $30 billion of sales of BP assets.

BP recently announced an income of $1.9 billion from the sale of Columbian oil fields to Ecopetrol SA and Talisman Energy Inc.

BP also reportedly told Venezuela’s state oil company that BP is interested in selling its stakes in three projects in the country to TNK-BP.  The company, Petroleos de Venezuela, has the first option to purchase BP’s local assets.

The ruble recently weakened 0.3% to 29.84 per dollar.  Non-deliverable forwards (NDFs) show the ruble at 30.0594 per dollar in three months.  NDFs often provide a guide to expected movements of currency by allowing foreign investors & companies to fix the exchange rate at a specific level in the future.

In 2003, BP paid $7.7 billion in cash to Siberian oil producer TNK’s shareholders, including billionaires Viktor Vekselberg and Mikhail Fridman, in order to create TNK-BP with 50/50 ownership between BP and the remaining shareholders.  Since then, TNK-BP has received more than $25 billion in net income and has distributed over $20 billion in dividends.

TNK-BP bonds have increased in part due to oil prices rising 7% since July 19th. The yield on OAO Lukoil’s 6.375% dollar bonds due November 2014 has decreased 13 basis points since July 19th to 4.864%, marking the lowest level since April 20th.