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British oil giant BP Plc (BP - Analyst Report), Russia’s state-operated oil company, OAO Rosneft, and the parent company Rosneftegaz have entered into an agreement that enables BP to sell off its half-interest in the joint venture TNK-BP to Rosneft.

This deal mirrors the one announced on October 22 that entailed BP and a consortium of Russian billionaires - Alfa-Access-Renova or AAR − to sell their 50% holdings in TNK-BP to Rosneft.

The terms of the present deal come in two parts. First, BP will get $17.1 billion in cash and shares giving it a 12.84% equity stake in Rosneft. Second, the UK giant plans to buy an additional 5.66% share in Rosneft from the Russian state with approval already granted. For this BP will have to siphon $4.8 billion from the cash proceeds.

On completion of the transaction, BP is expected to raise its ownership in the Russian company to 19.75% taking into consideration its existing minority stake of 1.25% in Rosneft. The deal is yet to be approved by the regulatory authorities and should be completed in the first half of 2013.

This deal will make Rosneft one of the world's biggest oil companies in terms of market capitalization. BP, for its part, stands to gain essential access to hydrocarbon reserves in the remote Arctic belt of Russia.

Since 1998, BP and Rosneft have worked together for the exploration in the offshore Sakhalin Island. The pair also shares 50:50 ownership in the joint venture entity − Ruhr Oel GMBH − that owns stakes in 530,000 barrels per day of refining capacity in Germany.

Completing the sale of TNK-BP will simplify BP's operations in Russia via a major strategic shift. We note that BP is also busy in reshaping its portfolio through the divestiture of smaller non-core properties to help pay spill-related costs while holding onto potential big resources.

The news of the BP-Rosneft settlement comes on the heels of the London-based oil major’s largest ever criminal settlement with the federal authorities regarding the catastrophic 2010 Macondo well oil spill. The agreement with the U.S. government calls for the payment of $4.5 billion by the British oil giant to resolve all criminal charges leveled by the Department of Justice and all claims by the Securities and Exchange Commission. The company can now focus on the remaining civil claims as well as on more upstream activities.

The Zacks Consensus Estimates for BP’s fourth quarter and full year 2012 currently stand at $1.35 per share and $5.62 per American Depositary Share (ADS), respectively.

BP, the second largest oil company in the UK by market value after Royal Dutch Shell Plc (RDS.A - Analyst Report), carries a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. We also maintain our long-term Neutral recommendation on the company.

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