It’s been a rough start to the week for the BP (LSE:BP) share price. The stock has taken a near-double-digit hit after management informed shareholders of its plans to cease its activities in Russia after 30 years, following the escalating geopolitical situation in Ukraine.
But what does this move mean for shareholders? And is this an opportunity for me to snatch up some shares at a discount? Let’s explore.
What’s going on with the BP share price?
Getting into the specifics, the company plans to exit its 19.75% stake in Rosneft, a state-owned Russian oil enterprise. Meanwhile, both current CEO Bernard Looney and former CEO Bob Dudley are resigning from the board of Rosneft with immediate effect.
With its role in Rosneft leadership now ended, BP’s accounting policies are about to change. As it can no longer report its interest in Rosneft as an equity account, the assets will now be reported at fair value until they are disposed of.
This move is expected to result in two primary non-cash charges in its upcoming 2022 first-quarter results. The first is an $11bn accumulation of foreign exchange losses built up since 2013. And the second is a $14bn cut in the carrying value of BP’s stake in Rosneft.
In other words, BP books are going to take a $25bn hit. So I’m not surprised to see the BP share price fall on this news.
How will this move affect BP shareholders?
Management believes this decision is “the right thing to do” and “also in the long-term interests of BP”. But in the short-term, it could be about to cause some problems. Rosneft represented half of the group’s oil and gas reserves and a third of its production in 2021.
Consequently, the elimination of this asset is expected to have a material effect on future performance. The firm’s underlying profit target for 2025 just got slashed by $2bn. Meanwhile, the income generated by Rosneft will no longer be contributing towards shareholder dividends.
That could spell problems ahead for the BP share price. But having said that, management believes the flexibility of its current financial position will enable the group to maintain the current level of payouts. As a result, it reiterated its guidance for dividends and share buybacks announced earlier this month, keeping its 4% dividend yield forecast until 2025. Whether this promise can be delivered, only time will tell.
What now?
The road ahead might be a bit bumpy for the BP share price. Due to the ongoing conflict, analysts at Hargreaves Lansdown expect the firm will struggle “to recover anywhere near what was considered to be the full value” of its investment into Rosneft.
Personally, I think this move will further accelerate the group’s plans to transition to renewables as it seeks to replace the lost income. As encouraging as that may be this is currently speculation, and there remain a lot of unknowns. So, for now, I’m going to stay on the sidelines and keep an eye on how this decision impacts the business moving forward.