TNK-BP: One of the Largest M&A Deals in Years on Deck

BP plc BP today said that is is considering selling its stake in its Russian joint venture, TNK-BP. BP owns half of the venture and the sale could fetch as much as $30 billion for the company. Ever since AAR, the consortium of Russian billionaires who own the other half of the joint venture, blocked BP's deal with another Russian oil company, Rosneft, tensions have risen between the two parties, and now BP wants out.

Analysts at Raymond James weighed in this morning, stating that BP does not have to sell its take in the venture, neither for political nor financial reasons. They claim that the venture is BP's single biggest asset, accounting for 27% of proved reserves and 29% of 2011 production, and so the decision to sell would largely be based upon portfolio optimization/risk management and/or how fed up with the Russians the BP board is.

BP has been at odds with its Russian partners for some time now, starting with the failed Rosneft deal. However, since then, there has been more turmoil. On Monday, the CEO of TNK-BP resigned due to tensions between the shareholders. Also, there is no quorum on the TNK-BP board, so the joint venture cannot pay dividends to its owners.

The analysts also think that the 50% stake can fetch a good deal of money. "We think $20-30 billion is a plausible range, with the high end corresponding to a fully competitive process," say the analysts at Raymond James. They do note that, if the stake were sold to another Russian company, the bidding process would probably be much less efficient and result in a lower price (Moscow will give approval to a Russian company over a foreign one).

This deal, even at the low end of the range, could be the largest upstream deal since Exxon-Mobil XOM bought XTO energy. The downside to such a big deal is that it limits the number of potential buyers; look for a large, state-owned Chinese company to make a bid.

BP shareholders look set to benefit from this deal, if done at the right price. The obvious choices for capital use are share buybacks or special dividends, however other measures could be taken such as debt reduction. BP could also invest in new geographies or look for acquisitions. Further, this sale would exceed management's target for future asset sales, so it would be interesting to see if they continue to sell assets afterwards.