BP's Situation in Russia Grows Dire if Sanctions Remain Long Term

NEW YORK (TheStreet) -- BP plc (BP) was down 10 cents Wednesday morning, after plummeting by 3.3% to $48.98 Tuesday. This fall came after the company voiced its concern over its stake in the Russian oil and gas producer Rosneft. The escalation of violence between Russia and Ukraine has led the European ministers to impose sanctions on Russia. President Vladimir V. Putin appears to be shrugging off the sanctions.

How important is Russia's Rosneft to BP? And is this recent market reaction justified?

BP's recent earnings report showed a 46% jump in its operating cash flow, year over year. Part of this gain came from Rosneft's staggering rise in its earnings in the second quarter. Specifically, $1 billion of BP's $3.6 billion underlying replacement cost profit came from Rosneft. Most of this gain in Rosneft's profit came from favorable exchange rates and higher realized energy prices. Moreover, by the end of July, BP recovered a $690 million divided payment from its 20% stake in Rosneft.

Based on the numbers above, if these sanctions were to jeopardize BP's relations with Rosneft, this could have a significant impact on BP's bottom line. But investors should also consider that Rosneft's earnings vary over time and do not reach these high profits regularly. It reported $300 million in first-quarter 2014 and $200 million in second-quarter 2013.

In any case, the recent market reaction may have been a bit too harsh. Even after the European Union starts to impose sanctions on Russia, it is not clear how long these restrictions will last. It's also unclear how these sanctions may impact Rosneft's relations with BP, or how will they affect Rosneft's earnings.

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