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. Last Updated: 07/27/2016

Russian Risk Is Most For BP, Analysts Say

BP is most at risk among Western oil companies of losing assets in Russia, meaning a recovery in its stock price is premature, Sanford C. Bernstein analysts said Friday.

BP's new CEO, Tony Hayward, should also centralize and simplify BP's organizational structure, Bernstein analysts Neil McMahon and Oswald Clint said in a note Thursday.

"We believe it is too early to announce a BP recovery story," the London-based Bernstein analysts said Friday. "Pseudo-expropriation, leading to a dilution of some of TNK-BP's strategic assets, represents a key risk," with BP the "most exposed" among Western oil companies, they said.

Gazprom last month completed buying a controlling stake in Shell's Sakhalin-2 oil and gas project, and is considering taking a stake in TNK-BP or some of its projects.

BP's stock price has fallen 18 percent over the past year as it dealt with criticism over Alaskan pipeline leaks, a Texas refinery explosion and project delays. Shares in rival ExxonMobil have risen 25 percent over the same period.

BP relies on Russia for one-quarter of its production and 18 percent of its proven oil and gas reserves. Last year, three-quarters of BP's new reserve additions were made in the country.

Gazprom has said it will consider buying part of TNK-BP when private Russian shareholders are allowed to sell their holdings at the end of 2007.

TNK-BP currently has majority or full ownership of four undeveloped Russian fields: Kovykta, Uvat, Rospan and Verkhnechonskoye, which are estimated to hold 4 billion barrels of oil equivalent, or 3.47 billion barrels for TNK-BP's share, the Bernstein analysts said.

"Whilst some in the market may be aware of the potential for dilution of TNK-BP's share in Kovykta and Rospan, we see no guarantees that ongoing discussions will be solely limited to these fields, and may extend to other undeveloped assets, or even the significant assets that are currently producing," the report said.

TNK-BP has previously offered Gazprom half of the Kovykta project to gain the gas company's cooperation in building an export route to Asian markets. The two companies are in "permanent contact" over how to develop the field, Gazprom deputy CEO Alexander Medvedev said last month. BP last year bought $1 billion worth of shares in state-run Rosneft to curry favor with the Kremlin.

Hayward took over May 1 after John Browne resigned following newspaper revelations about his personal life and his admission that he lied in court about how he had met a former boyfriend.

McMahon and Clint said BP's decentralized management structure was the correct choice for cost-cutting and merger activities during the 1990s though it is "no longer fit for the purpose of growth implementation, and the delivery of current strategy today."

On April 24, BP reported a seventh consecutive quarter of year-on-year production declines.

BP is organized in three segments: Exploration & Production; Gas, Power and Renewables; and Refining & Marketing. Within each of these are individual strategic groups known as Strategic Performance Units, "which are largely autonomous from the head office," the Bernstein said.

The analysts said BP should reorganize itself closer to the model adopted by ExxonMobil, where more power rests with heads of exploration, development and production, overseeing multiple projects, rather than leaders of individual projects or geographical regions.

Bernstein rates BP and Exxon shares as "market perform."