#BP may initiate leadership change in Russian oil mogul Rosneft

| May 18, 2016 | 0 Comments

Home-Page-Carousel-1A source among shareholders of BP plc reported that shareholders are dissatisfied with the ownership of this suspicious Russian asset of 19.75% stake in Rosneft. According to the source, the discontent is caused by a statement of the company’s CEO Robert Dudley, who says that it is senseless to increase the ownership beyond 20%. The value of Rosneft shares owned by BP has fallen by $5.5 billion since its acquisition in March 2013 due to ruble depreciation, writes Steve McKay.

This year, the Russian government is planning to sell 19.5% of its 69.5% stake in order to cover a huge federal budget deficit. On 11 April the Russian Business Service, an independent medium, reported that the head of Rosneft Igor Sechin has urged the government to prevent BP from obtaining the blocking stake in the company which would allow it to change the Rosneft management.

The company’s press service refuted that information almost immediately and called it a fantasy. In a hastily prepared press release, it praised “a partnership between Rosneft and BP, the largest minority shareholder, as strategic, long-term and based on mutual trust”.  Nevertheless, BP stockholders have serious reasons to be dissatisfied with the management of the largest Russian oil-producing company. The company’s 2015 Financial Statements recently made available on the company’s website demonstrate that the management consciously manipulates financial results with a view to embellish significantly a real situation.

The company uses International Accounting Standards, also known as IAS, in its own special way. Auditors specify that on 1st October 2014 the company, in accordance with IAS 39 ‘Financial instruments: recognition and measurement’, designated as part of its dollar-denominated liabilities on loans and borrowings as a hedging instrument of export earnings, which were also dollar-denominated.

The information about such an innovative approach to accounting was disclosed only in February 2015, which means that a change in accounting was done secretly and contrary to the IAS requirements. The reporting standards require that a company must prepare and approve detailed documentation of accounting mechanism before using hedging instruments. Nevertheless, no earlier corporate documents mention any changes in the method of accounting connected with hedging (including interim IAS report, published on 29 October 2014 which showed significant drop in the profit).

Thereafter company’s accounting policy was “corrected” to get a desired result.  According to analysts, the use of such accounting method of debt liabilities allowed Rosneft to avoid losses of 498bn rubles (except for the tax effect of 100 bn rubles) as a component of “other funds and reserves”, but not in the P&L statement. Thus, instead of a loss of 48bn rubles (500 million GBP) Rosneft showed a net profit of 350bn rubles (3.5bn GBP) for 2014.

In 2015 Rosneft continues to employ such manipulations of designating and re-designating hedging instruments (probably, also retroactively) and recorded a positive Forex profit of 86bn rubles (860m GBP) on its books. In turn, ForEx losses of 215bn rubles (2.5bn GBP) were attributed to “other funds and reserves”, thus showing a positive effect of hedging on P&L.  The goal of these re-classifications is clearly to present a better picture to Rosneft stockholders.

However, this strategy will reflect poorly on the company’s in the future. Analysts estimate that the company will have to record annual losses of at least 118 bn rubles (1.1bn GBP) up until 2019.  But that is not all the tricks. The company also reports currency losses of 194bn rubles (2bn GBP) attributable to its “foreign operations”.

To generate such a loss these undisclosed “foreign transactions and operations” have to have average net assets of 690bn rubles or almost 7bn GBP if one proceeds from the ruble devaluation rate of 28%. Rosneft failed to disclose what these “transactions and operations”.

Apparently, 7bn GBP of shareholders value is no concern to the Rosneft management.  Valuation of derivatives has become yet another tool of manipulations with financial results. In accordance with IAS accounting policy, fair value of derivatives should be determined using available market data.

However, the company disregards its own accounting policy and IAS requirements stating in Note 31 that it estimates the value of derivatives on the basis of “current discounted value of future cashflows with the use of information about consensus forecast of exchange rates”, but not based on exchange forward quotes.  This method of accounting misrepresents the real value of derivatives. According to analysts, the sum of losses declared in 2015 was about 40bn rubles (400m GBP) with the greater part of losses carried forwarded to future periods as the maturity approaches.

As the source reported, BP shareholders have sent a letter to Bob Dudley, who also sits on Rosneft Board, outlining the problems and asking BP to take steps to rectify the situation. The letter expresses a consolidated position about the stake in Rosneft. One of possible solution would be to sell it at a loss, which may become the most significant failure of BP CEO since the Macondj disaster the accident in the Gulf of Mexico.

However, such an action would be welcomed by Rosneft management as it will give Igor Sechin an opportunity to save his seat. Another one would be to buy additional stock from the Russian government at a bargain price and implement a long needed management reshuffle.

Dudley, a former CEO of Russian TNK-BP which was acquired by Rosneft in 2013, knows how to operate a Russian company and make it a success. The ball is in his court, but it will not be an easy decision.

 

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Category: A Frontpage, Energy, Energy market, Energy security, EU, Featured Article, Russia

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