BP plc (ADR) (BP), Exxon Mobil Corporation (XOM) and The Russian Bet

The first risk is related to governance. A company where a government has decision power is always a great risk. Cash flows can always be used politically. The example of Petrobras Brazil is key when thinking of this problems. Not even great managers can resist political pressures and they may end up running the company without their minority shareholders in mind. There is not much the UK company can do against this risk. British Petroleum expects to get two board seats (out of nine) but nothing assures this will guarantee fair governance going forward.

The second risk is related to leverage. Rosneft is paying $28 billion in cash to the oligarchs for their 50% stake in TNK-BP and $12.5 billion in cash to BP. In part this will be funded by its own resources and by closing deals for about $10 billion for long-term supply contracts from oil traders. Rosneft will also issue $10 billion of bonds and will use its bank loan lines. Rosneft’s net debt will be about 2 times EBITDA and it will be the highest geared oil super-major. Even if I believe debt is fully payable we must keep an eye on how things develop going forward.

I am sure Rosneft will end up representing a great investment for British Petroleum. That said, the two risks mentioned above need to be taken into account. Only time shall say. My bets are already placed. I am long British Petroleum.

The article The Russian Bet originally appeared on Fool.com and is written by Federico Zaldua.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.