NEW YORK ( TheStreet) -- BP ( BP) and Apache ( APA) were in the news a year ago when Apache inked a deal to buy a block of assets from BP, and both were back in the news on Tuesday for M&A reasons, although moving in different directions. BP finally came out and said what the market has already expected, that its deal with Russia's Rosneft to develop Arctic assets is going nowhere fast. Apache, meanwhile, said on Tuesday that it was increasing its capital spending budget in 2011 from $7.5 billion to $8.1 billion, at least partially to exploit opportunities in the U.S. Permian Basin and in Canada, areas where it acquired assets from BP in July 2010. BP CEO Robert Dudley stopped short of saying "never" in the Tuesday announcement that the Russian Arctic deal had failed -- in fact, it was just the legal deadline to reach a deal that had passed -- though BP's last-ditch effort to save the deal was shot down by Rosneft and rumors are rampant that Rosneft is looking elsewhere. Dudley said in the release, "BP remains committed to Russia, to working constructively with AAR in TNK-BP and to our existing good relationship with Rosneft. All parties have worked hard to reach an acceptable resolution, as we believe it could offer significant benefits to BP shareholders, to Rosneft, AAR and Russia." Phil Weiss, analyst at Argus Research, said on Tuesday that the offer BP and TNK-BP -- its Russian natural gas partner -- made to Rosneft for TNK-BP to take over the Arctic deal never made much sense, since BP is the company with the drilling expertise, and TNK-BP, on the other hand, has no experience in oil drilling. "It didn't seem to me they would come to terms unless they could buy out AAR
the TNK-BP partners ," Weiss said. BP shares were flat in trading on Tuesday as many integrated oil majors declined. "It's a black mark for BP shares that it didn't happen, but I think it's already been priced into the shares,' Argus Research's Weiss said. In fact, as many of BP's oil major peers had rally this year on the higher crude oil prices, BP shares remain down 4% year-to-date.
Pavel Molchanov, Raymond James analyst, noted on Tuesday, "Over the past four months, amid an acrimonious dispute between BP and its Russian partners (AAR) over the Rosneft alliance, all this has turned into a deeply unpleasant distraction, with recriminations flying in both directions. With this in mind, we believe the market will breathe a sigh of relief now that the deadline for signing the share-swap agreement has lapsed, and BP is essentially turning the page on this episode." Analysts have noted as the turmoil from the Rosneft deal increased that all oil majors face the primary hurdle of increasing production of a dwindling resource over the next five, ten and fifteen years. The BP deal with Rosneft was being viewed as a victory for BP in this long-term battle versus peers, in addition to being a perceived as a coup for new CEO Dudley after the oil spill dominated the past year for BP. Yet analysts also say that BP's operations today are not impacted by the loss of the Rosneft deal and the longer-term game of replacing reserves remains an issue for all of the global oil companies. Oppenheimer & Co. analyst Fadel Gheit recently told TheStreet that the Arctic deal had shifted attention away from the Gulf of Mexico, which for BP remains mired in the uncertainty related to the oil spill and claims of gross negligence against the company. However, the Oppenheimer analyst maintains that the Gulf of Mesico also remains the best opportunity for BP long-term. BP has the best position of any company in the Gulf of Mexico, and barring the most severe government judgment against BP, which Gheit does not expect, the British oil company will eventually be able to resume its Gulf of Mexico deepwater drilling program. Additionally, while the Rosneft deal has carried the headlines, long-term production growth doesn't need to be about a single deal replacing the 300,000 to 400,000 barrels of oil that BP has sold off as part of its recent asset divestitures. BP tried to steer attention to other deals that it has with Rosneft, including a Germany refinery agreement. Raymond James's Molchanov thought that the failure of the Arctic deal left room for Rosneft and BP to find less-problematic ways to continue to work together. "Rosneft recently partnered with BP in European refining, and similar types of deals -- smaller, more tactical transactions as opposed to an overarching strategic alliance -- are certainly an option for the future," the analyst noted on Tuesday. The Raymond James analyst also expressed some relief that BP did not bow to pressure from its TNK-BP partners to get the deal done at any price. "Quite frankly, we are relieved that BP opted not to aggressively push this option, because such a strategy under the circumstances would have almost certainly led to shareholder dilution," the analyst wrote on Tuesday. Speculation over the Rosneft deal now centers on big oil companies with existing relationships in Russia, including ExxonMobil ( XOM) and Royal Dutch Shell ( RDS.A). Argus Research's Weiss said that the speculation was logical given the efforts that these oil majors already have in Russia, and ExxonMobil and Shell had the biggest presence. However, a key stumbling block could be the financial structuring of any deal with Rosneft to drill in the Arctic. BP was willing to swap shares with Rosneft to get the deal done, while the Argus Research analyst doubted that other oil majors would agree to a stock swap with Rosneft. "Other oil major might want a more straightforward JV," Weiss said. On the flip side of the M&A coin, BP announced on Tuesday that it has sold North Sea assets to Perenco in a $610 million deal, bringing the cumulative asset sale announcements since the Gulf of Mexico oil spill to roughly $26 billion -- within striking distance of BP's $30 billion target in asset sales by year-end.
A year after acquiring a slew of assets in the U.S., Canada and Egypt from BP, Apache announced at its investor day on Tuesday that the U.S. and Canada are regions where it is planning to spend more in 2011. The two largest spending increases within the Apache guide up in capital spending from $7.5 billion to $8 billion were the U.S. Permian Basin, from $950 million to $1.1 billion, and Canada, from $800 million to just under $1.2 billion. Argus Research's Weiss noted that a capital spending increase without a production guidance raise is often met with concern by energy investors. Apache shares were 2% on Tuesday, though the loss was in line with the decline in the shares of U.S. independent energy exploration and production companies. The Argus analyst said the increased spending will likely show up production guidance for 2012, explaining, "That money is not going to be spent until the second half of the year so you won't see a production pick up until next year." He added that Apache may up spending levels again if its oil price target proves conservative. At its Tuesday investor day Apache guided to oil prices of $85 a barrel over the next few years and $75 longer term. "That seems low and if it is low, I would expect Apache spending to rise again," Weiss said. -- Written by Eric Rosenbaum from New York.
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