Higher oil prices triggered by Russia’s invasion of Ukraine would offset “any hypothetical risk” to BP PLC (LSE:BP.)’s cash dividend from Rosneft (AIM:ROSN), that’s according to analysts at Royal Bank of Canada (TSX:RY).
BP owns 19.75% of Russia’s third-largest oil company and it is not yet clear the extent that sanctions against Russia’s economic interests will impact upon BP.
Nevertheless, the possible impact was evidently insufficient for RBC to resist upgrading its view on BP.
“BP is likely to be seen as one of the most geared to Russia,” RBC analysts said in a note.
“From a production standpoint, Russia accounts for around a third of BP’s volumes, however, importantly, from a cash flow perspective, we estimate BP could receive $1.8bn in dividends from Rosneft in 2022, accounting for 5% of CFFO.
“We believe any hypothetical risk to cash received would be offset by rising geopolitical tensions. To put this into context, we estimate that the US$1.8bn in dividends could be offset by a US$5 to US$6 per barrel change in oil prices on an annual basis.”
RBC, meanwhile, added: “While we’re comfortable with the CFFO impact, quantifying the governance issues that investors may have at a time of conflict is more difficult.”
Enhanced cash flow, and the fact that the company it's returning a significant portion of it back to shareholders, is the basis of RBC upgrade for BP, to ‘outperform’ from ‘sector perform’, which sees a new price target of 450p (versus the current price of 378.4p).
“Our bullish commodity price deck suggests the company is likely to generate significant free cash flow in the coming years, and we believe investors could receive more than 50% of the company’s market cap back over the next five years,” RBC added.