BP to fight hard on TNK as profits soar

Tony Hayward said BP would use “all legal means” to “vigorously” fight the four billionaires, who own 50% of TNK-BP, Russia’s third-largest oil producer. “We will not be intimidated by strong arm tactics,” he told a news conference to announce BP’s Q2 results.

TNK-BP’s CEO Bob Dudley fled Russia last week, blaming a campaign of harassment launched by the billionaires, which operate as the Alfa Access Renova (AAR) consortium. Since early March, TNK-BP’s offices have been raided by security forces, Dudley has been questioned in relation to a tax probe and labor law violations and foreign employees of TNK-BP and BP secondees have had difficulties securing visas.

Analysts said Dudley’s departure was a sign AAR was gaining the upper hand, but Hayward said the battle was only starting. “We’ve only been at it six months ... We will see who is the weaker party in due course,” Hayward added. Hayward said Dudley, whom AAR accuses of favoring BP and of poor performance, was in a central European location, which Dudley would likely reveal “in the next day or so”. When asked if BP was prepared to stop TNK-BP from paying out dividends to put pressure on AAR, which has opposed a cut in dividends to pay for higher investment, Hayward replied all options were on the table.

Analysts at Credit Suisse said BP shares traded at a 12.5% discount, as measured by their price-earnings ratio, to rivals, due to the uncertainty over TNK-BP. Jason Kenney at ING said it might now be in BP’s interest to sell out. Other analysts have suggested the partners break up TNK-BP and split its assets between them. Hayward declined to answer questions about a possible split while AAR CEO Stan Polovets said there was no point in carving up the assets.

 
FOREIGN INVESTORS BEWARE

The dispute is viewed by analysts as a test of the investment climate in RussiaHayward said his partners had employed arms of the state against BP and warned other foreign investors in Russia to take heed of events. “My advice would be ‘tread with caution’,” he said. BP said earlier on Tuesday its replacement cost (RC) net income was $6.85 billion in the Q2, up 6% on the same period of 2007. under new President Dmitry Medvedev and of whether the country is safe for other foreign investors to do business.

However, this result was depressed by non-cash charges of around $2 billion related to long-term gas contracts, which European accounting rules force BP to value as derivatives. Excluding these charges and one-off items such as the sale of oil fields, the RC net profit was up 61% at a record $8.63 billion, beating an average forecast of $7.70 billion in a Reuters poll of nine analysts. “It’s a good result,” said ING’s Kenney, while Citigroup upgraded the shares to ‘buy’ from ‘hold’. Colin Smith at Dresdner Kleinwort noted a low tax rate had flattered profits.

BP shares initially rose on the results but closed down 2.5% at 506-3/4 pence, compared to a 1.1% drop in the DJ Stoxx European oil and gas sector index as investors focused on TNK-BP and the lower-than-expected tax rate. BP said its share of Q2 net income at TNK-BP almost doubled to $1.35 billion in the quarter. RC profit strips out unrealized gains from changes in the value of fuel inventories and is comparable to US net income. BP’s core oil production unit was the main profit driver.

Oil prices averaged over $120 a barrel in the second quarter -- almost double the level in the same period of 2007 -- before rising to a record high above $147 per barrel on July 11. The world’s third-largest non-government controlled oil company by market value said production was broadly flat compared to the same period in 2007, at 3.83 million barrels of oil equivalent per day (boepd). This was in line with analysts’ forecasts. Profit at BP’s refining division collapsed to $539 million from $2.7 billion in the Q2 of last year, due to weak crude processing margins, which have also hit rivals. BP said it would pay a dividend of 14 cents per share, slightly ahead of what analysts had expected. (Reuters)