Last week Igor Sechin, CEO of Russia’s state-owned oil company Rosneft, spent a cool $5.5m on shares in the company, the equivalent of his 2012 bonus. Other board members joined in the share-buying in a concerted move to align management with investors.
It’s a very clear sign of confidence in Rosneft, the world’s largest producer of oil. With BP (LSE: BP) (NYSE: BP.US) owning nearly 20% of Rosneft, it’s also a boost for shareholders in BP.
It’s easy to get bogged down concentrating on BP’s messy legal problems in the US. Indeed the long-drawn out saga and seemingly bottomless pit of claims has kept BP on my watch-list but off my shopping list longer than I anticipated it would.
Coup
So it’s good to be reminded of the coup that BP pulled off in Russia. Last year it sold its troublesome 50% stake in TNK-BP to Rosneft, increasing its stake in the Russian state company to 19.75% and getting $12bn cash. Rosneft then bought the other half of TNK-BP.
BP got two seats on Rosneft’s board, not enough to exert any control but putting it in pole position for anything related to Russia’s oil. Joint exploration in the Russia Arctic is likely to be one prize. BP should also boost Rosneft’s technical expertise.
Ally
Rosneft is no ordinary company, and Mr Sechin no ordinary CEO. He is a close ally of President Vladimir Putin, and according to Reuters is “considered by some Kremlin watchers to be the second-most powerful man in the country”. During the 10 years he has run Rosneft, he crafted the 70% state-owned company to become the national champion in the oil sector. This is his first purchase of stock, sending a powerful message about where he thinks the share price will go.
10% of Rosneft’s shares are listed and can be bought on the London stock exchange (ticker LSE: ROSN), but most investors will prefer an indirect stake through BP. Under equity accounting BP will take its share of Rosneft’s production, earnings and reserves into its own figures, so what’s good for Rosneft is good for BP.
Risk
Of course, the deal isn’t without risk, especially Sovereign risk. BP has had more than its fair share of Russian trials and tribulations, and the new structure is vulnerable to the Russian state throwing its weight around.
But that goes with the territory when investing in the oil and gas sector. BG Group‘s investment in once-stable Egypt and the looming threat of a Syrian war disrupting oil supplies are testimony to that. It’s a sector with high risks and high rewards.
If you’d like to discover more about investing in oil and gas companies, I suggest you read ‘How to Unearth Great Oil and Gas Shares‘. It’s a report from the Motley Fool packed full of tips. You can download it by clicking here — it’s free.
> Tony owns shares in BG Group but no other shares mentioned in this article.
