Investment in BP Appeals to Sovereign Wealth Funds

The logic behind recent investment of sovereign wealth funds (SWFs) into BP may seem a bit unclear on the surface, but a deeper look reveals that the SWFs stand to gain through this diversification into gas and renewable energy.  While handling the oil spill cleanup in the Gulf, BP has found need for increased cash investments to ward off the threat of takeover.  Executives and financial officers at BP have turned to several SWFs including the largest in the world, Abu Dhabi Investment Authority.

Sovereign funds already have about $3 trillion invested in oil futures and exports, and while a stake in BP may not result in a significant jump in their oil-driven capital, the technology and experience they are tapping into could help diversify the SWFs’ oil-based economies.  The technology transfer abilities at BP are what make its stock so appealing.  Gas is also projected to increase in popularity over the next decade, which will ensure a steady flow of cash into the SWFs for years to come.

While Abu Dhabi and SWFs in countries like Qatar, Kuwait, and Saudi Arabia are already working with BP, China is now looking to increase its investments as well.  BP growth has been strongly correlated with energy use in the fastest growing markets over the last several years, which explains why the Government of Singapore Investment Corp wants to build upon its current 0.7% stake in the company.  The interest of SWFs has helped BP to raise some of the estimated $20 billion that they will need in order to recover from the drilling rig explosion back in April.

Sovereign wealth funds tend to be cash-heavy investment funds that invest globally in not only stocks, but also real estate, precious metals, and any other available assets.  They have been providing the capital that has been much needed by banks during the current financial crisis, in hopes that their investments will pay off in the long run.  The SWFs are large enough and incredibly diversified, so they count on the long-term projections rather than turning short-term profits.

Some professionals worry about the political risks associated with allowing foreign SWFs to acquire stock in our national ports.  It is uncertain how the regulation of oil, a depleting natural resource, will be handled in the future, so BP is considered a high security risk.  As government deficits grow, many countries will be forced to sell off their assets, meaning that shares in U.S. companies like BP would be changing hands globally.

For now we have to trust that the SWFs know what they’re getting into.  BP represents a niche in an emerging market that could potentially earn these funds and their investors a lot of money.