Honeymooners

BP's Russian honeymoon isn't the end of the story

BP is enjoying a sort of Russian honeymoon. The UK energy major's first quarterly results as owner of 20 per cent of Russian state oil giant Rosneft show a turnaround strategy that is gaining momentum. BP's shares rose more than three per cent on Tuesday morning, as underlying profit surpassed most analysts' estimates. But the honeymoon isn't the end of the story. BP chief executive Bob Dudley's management of the new Russian relationship may determine whether BP can shrink to greatness, or just mediocrity.

Rosneft's purchase of BP's stake in number-three Russian producer TNK-BP for cash and shares was last quarter's big news. But the bumper results came mainly from more profitable production in Angola, the Gulf of Mexico and the North Sea. Overall underlying replacement cost profit, the industry's preferred performance measure, was $4.2 billion, down from the year before, but well ahead of analysts' average forecast of around $3.3 billion. It looks like BP's strategy of shrinking its portfolio to concentrate on higher-margin projects is starting to pay off.

Rosneft itself only made a token contribution - $85 million of underlying profit during the 11 days it was included, according to BP estimates. That will swell in future quarters, but investors shouldn't get complacent. As springtime maintenance takes away some of BP's higher-margin barrels, the fundamental question - whether BP has shown it can manage its new Russian partnership - will become more prominent.

BP's shares trade on about 8.5 times forward earnings, a 13 per cent discount to its closest peers, according to Reuters data. That undoubtedly reflects uncertainty about the final cost of the 2010 Gulf of Mexico disaster. But it also may reflect unease about the company's new Russian commitments.

Rosneft's boss, Igor Sechin, wants to transform the Moscow-based giant into a world-class global oil producer. That could drag BP investors into a shareholder-unfriendly campaign of empire-building. In theory, BP should have some sway over its new partner. Sechin has promised BP two seats on the Rosneft board and access to Russian projects. Dudley's challenge - and the key to a happy Russian marriage - is to turn those promises into real influence.