BP's Bad Karma Returns in Rosneft on Russian Sanctions

BP seems to be experiencing what the hippies used to call "bad karma".

The slow-motion car crash of the Ukrainian uprising, punctuated by the bewildering incursion of Russian troops into Crimea, must have left BP's top brass shaking their heads in disbelief.

The inevitable writing on the wall divined to them the words "Rosneft" and "sanctions".

Just a week or two earlier BP had begun to see a line finally being drawn under the Deepwater Horizon disaster.

An agreement was reached with the vindictive Environment Protection Agency to lift the ban on BP entering into new contracts with the US government. Such contracts are worth more that £1bn (€1.2bn, $1.6bn) a year to BP.

Analysts described the agreement as the first moral victory for BP and a chance for the company to "get back to the hunt".

Since the Gulf of Mexico spill in April 2010, BP has sold close to $40bn in assets and taken more than $42bn in write-downs related to legal settlements and clean-up costs. It has also pleaded guilty to a dozen felony counts in the US related to the accident, in which 11 workers died.

The Unloved Stock

Before the Deepwater disaster BP was trading at about 640p. However, over the last two years, the share price has hovered around the 450p mark.

At its current valuation BP has become a classic contrarian investor's stock pick: an undervalued large cap looking for strong management to lead it out of crisis.

Champion of unloved stocks, the UK's M&G Recovery Fund has stood by BP through this crisis.

BP comprises the largest holding in M&G Recovery, making up 5.7% of the fund's £7bn portfolio.

Tom Dobell who runs the recovery fund said: "The tragic 2010 Deepwater Horizon oil spill in the Gulf of Mexico and the highly punitive US trial has kept BP down, trading well below its share price before the disaster.

"The underlying business is performing well and I am convinced the value of the group is way above where it is trading today."

The logic of contrarian investing holds that provided a security is not going out of business, it becomes a matter of what point it will turn. Many market watchers must have thought BP had hit the bottom of its U-shaped price curve.

That was before the Russian offensive into Crimea.

Doing Business in Russia

Last week, the former chief financial officer of Yukos, Bruce Misamore, made headlines when he called for Russian energy giant Rosneft to be delisted from the London Stock Exchange.

After the Russian state, BP is the single largest shareholder in Rosneft with a 20% holding.

BP became a major shareholder in the Rosneft last year after selling its 50% ownership in TNK-BP to the Russian company for cash and stock.

Indeed, revenues from BP's Rosneft stake were about the only highlight of the otherwise grim fourth quarter results the UK firm posted last month; analysts called BP's Rosneft assets its saving grace.

However, BP's stake in Rosneft dropped by $850m in value overnight as the crisis deepened.

BP's share price has fallen 7% since the start of the month. This is not an explosive disaster but rather a gradual menace that is fraught with tension and uncertainty - just what markets don't want.

BP for its part said: "We are committed to our businesses in Russia. We are, of course, monitoring the situation. If sanctions were to involve us, we would comply with them."

BP has plenty of experience of working around geopolitical risks. It also has extensive form negotiating in Russia where it has been conducting large-scale projects since the early1990s.

Meanwhile, Rosneft boss Igor Sechin remains defiant. "Sanctions against individuals and especially corporates are not justifiable in any way," he said.

Sechin added that the punitive measures would simply suck more people in and "bring harm to all parties. That's why we are calmly looking at this situation. It cannot last long."

Cold comfort for BP, which can only stand by and watch the drama unfold.

Who would have predicted that the light at the end of the tunnel could turn out to be an oncoming train?