Two weeks ago, as I put BP's shares into the Bearbull Income Portfolio, my focus was on BP's greatest failing - the Deepwater Horizon oil spill off the Louisiana coast in April 2010. That did not happen on Lord Browne's watch. Nevertheless, some of the flak ricocheted his way because, the allegations went, he had been responsible for a stream of acquisitions that BP had made in the US. The notion is that the acquired companies injected a gung-ho approach to exploration into BP's corporate culture and their expense led to a cost-cutting imperative - just the sort of combination out of which a disaster, such as Deepwater Horizon (or, before it, the Texas City refinery explosion in 2005), could develop.
This week I need to respond to another concern about BP's dividend-paying ability that has its origins in Lord Browne's hyperactivity - its interests in Russia.
Praise for the front that Lord Browne opened up in Russia was as gushing as that which greeted some of his US moves. When BP signed a deal with three oligarchs in 2003 to form TNK-BP, a joint venture in which BP had a 50 per cent stake, Lord Browne was singled out as a rare breed that could do business with this curious new form of state-influenced capitalism that was developing in Russia. This turned out to be as illusory as it was effusive. True, TNK's reserves of oil and (mostly) gas made the deal important for BP, but, within a few years, the UK company and the oligarchs were at each other's throats and the boss of TNK-BP, Bob Dudley - now BP's chief executive - could not actually work in Russia for fear of arrest.
The relationship between BP and the oligarchs finally severed for good in 2011 when BP made a deal with Rosneft - one half of Russia's two state-controlled energy giants - to develop Arctic oilfields. An international court decided that BP's move breached its agreement with the oligarchs. Then worse followed - ExxonMobil replaced BP as Rosneft's partner in the Arctic and Rosneft gobbled up TNK-BP.
Clearly, BP has made a complete Horlicks of its Russian ventures. However, it is doubtful that there were ever going to be happy outcomes. After all, whenever foreign companies do business in Russia - and despite what their bosses may say and even believe - they operate according to Russian rules. Appropriately enough for a country whose national symbol is a doll that hides more dolls, the rules can hide other rules. Whether hidden rules are ever revealed ultimately depends on who wants what and how powerful they are.
So now BP has swapped its half share of TNK-BP for an 18 per cent stake in Rosneft (bringing its holding to 19.8 per cent) plus $12.3bn (£7.9bn) in cash. That may not be such a bad deal even if the first glance indicates otherwise. Rosneft is a bit fuzzy about its dividend policy, but distributed 25 per cent of its net income in 2012 to its shareholders (the major one of which, with a 75 per cent stake, is the Russian state). That produced an 8.05 rouble-per-share payout (about 15.7p), which would have generated $513m for BP. By contrast, BP received $1.4bn in dividends from TNK-BP in 2012 and $3.7bn in 2011.
However, the 2011 payout was exceptional and even 2012's distribution was more than TNK-BP would have been likely to pay regularly, especially if the oil price drifts downwards. After all, in 2012 its net profit was $3.1bn compared with the bumper haul of $4.1bn in 2011 but 'just' $2.6bn in 2010. In other words, regular dividends that BP could have expected to receive from TNK-BP would have been $1bn or so a year. Obviously, that's twice what BP will receive from Rosneft, but then there is the little matter of the use of $12bn cash realised from the TNK-BP disposal. Invest that at BP's group-wide return on capital and the shortfall would be made good.
The trouble is, that's unlikely to happen. More likely, the cash will end up in the account marked 'Deepwater Horizon'. Still, that's how it is with BP - its chief priority is to manage the costs of that disaster. However, the fact that BP can do so and still pay a dividend that will satisfy shareholders says much about its resilience. The net loss of $500m a year in dividends from TNK-BP is a drag, but it's not the difference between a maintained or a cut dividend. Just as BP was not nearly as good as it was cracked up to be when Lord Browne's sycophantic supporters were at their loudest, so it is probably not as bad as it's supposed to be in this era of post-Deepwater Horizon decline.
