Should you Invest with BP?

oil spill

The last fortnight has seen a BP continue the attempt to prevent oil pouring into the sea after their Deepwater Horizon oil rig exploded on 20th April. Since the rig exploded and subsequently sank, an estimated 5,000 barrels of oil have been finding their way into the seas of the Gulf of Mexico every single day.

The oil is now drifting towards the US coast and threatens not only wildlife but also thousands of peoples’ livelihoods dependent on fishing and tourism.

BP’s latest move, the ‘top kill’ operation, saw them attempt to plug the spill by pumping 30,000 barrels of mud into the well over a period of three days. The operation failed as oil continued to leak into the Gulf of Mexico, forcing BP to start the process of digging a relief well and pumping concrete into the well shaft. Although this is likely to stop the leak, it will take around 8 weeks to complete, meaning the workers will be out there well into the areas’ hurricane season.

So as you would imagine, BP’s market value has taken a monumental pounding; dropping 36% since the disaster in April. This translates to a hefty £45bn drop for the petrol giant, and BP’s share price now sits at just 417p per share.

Things got even worse for the company this week as US authorities announced they are launching a criminal investigation into the disaster, adding even more pressure on the company and making life more difficult for Tony Hayward (BP’s Chief Executive).

So is there any sense in investing with BP? Some experts believe that actually, the answer may be yes. Several analysts are suggesting that BP’s stock should now be a ‘buy’, thinking that the stock has dropped so low it may be worth a punt as they attempt to move forward from the disaster.

So let’s have a look at the pros and cons of buying BP.

Firstly, BP is a major supplier to the US Military; not that this will get them off any hooks, but it certainly will carry weight in America and should provide some leverage when it comes to keeping the company out of trouble with the US government. A lot of people are speculating that given BP’s past form, they might start to get banned from US government contracts – this might be more believable if the US wasn’t currently engaged in a major international war. I can’t see BP receiving a ban like this, which should help them achieve their annual dividend target.

BP’s dividend is another major point, accounting for a massive £1 in every £6 in FTSE 100 dividends paid; making it integral to the health of Britain’s pension fund. Tony Hayward has assured investors (and will do again this week) that the BP annual dividend won’t be cut.

Having said that, the cost of the disaster for BP may well rise considerably and it’s been suggested that their statistics released since the disaster are vastly under-estimated. For example, BP suggested that the cleanup cost had reached £930 million, but this doesn’t include claims from fisherman and tourism industries affected by the oil spill.

BP’s insurance costs could also be another prohibitively expensive cost in the aftermath of the catastrophe. Insurers will be well aware of the potential risks of getting themselves involved with BP, and premium costs will reflect this (if they manage to find substantial cover at all).

On the one hand, I genuinely can’t see BP losing their major US contracts, nor can I see their dividend being substantially cut, which should result in their share price beginning to climb again within a few months.

At the same time, confidence in BP is at an all time low and there’s no guarantee that the petroleum giant will come out of this with their Chief Executive or their dividend intact.

I would suggest that their will be a relief rally and that the stock will eventually climb again, but I’d only really advise sticking the BP stock if you’re already a shareholder. For those wanting to get in to the oil market I’d recommend Chevron, a major US oil stock. Chevron have around a 4% prospective yield and practically no debt to the company, making them a far safer option than the troubled BP; and should BP get a band from US contract, the share price for Chevron will rise considerably.

This is a guest post by John, John is a financial advisor working with a UK based company specialising in share dealing, spread betting and forex trading. He’s a keen blogger and contributes regularly to the financial blogosphere.

photo: (NOAA via uscgd8)

{ 5 comments… read them below or add one }

1 Money Beagle June 10, 2010 at 8:04 am

Until they get the oil leak contained, and even then, nobody really knows how much this is going to cost them. There’s fixing it, there’s clean up, there’s all the claims for people that can’t work. There’s the hit on their goodwill, there will be an impact on sales.

I know the falling price makes this look attractive, but I wouldn’t go long on this stock at all. A day trade here and there perhaps, but even then, most day traders are probably shorting this turd.

Reply

2 The Weakonomist June 10, 2010 at 9:47 am

A discussion about whether or not to invest in a company without discussing revenue, profit, or growth potential with a target price based on a valuation model is not a discussion. This post makes the case for a good speculative move (which I agree with) but you can’t say you’re making an investment.

Reply

3 Austin @ Foreigner's Finances June 16, 2010 at 9:05 am

My grandpa is a long-time Exxon stock holder and all of his grandkids have some stock in their name through him and a college fund. I’ve been thinking a lot about this topic lately and it’s not something I want to be morally involved with. I’m in no rush to sell, but in a couple of years I don’t plan on having any of my portion in Exxon. It’s too risky and I don’t want to support these kind of actions.

Reply

4 Roger June 21, 2010 at 6:27 pm

Since this post was made BP has canceled the dividend. The legal liability they face is virtually unlimited as the amount of oil coming into the Gulf is many times higher than previously estimated, up to 60,000 barrels a day if I recall correctly, and the fine is up to $4300 a barrel. US public opinion is swinging hard against offshore drilling and there is movement in Congress to remove the cap on liabilities entirely (currently at $75 million). Rig insurance is going to rise dramatically (though BP self-insures). The US government may be willing to bankrupt BP to pay for this disaster. I don’t think it’s a normal “bounce” situation. And then there’s the moral side. I’d rather invest in clean energy, myself.

Reply

5 Chris January 17, 2013 at 5:17 pm

If you had gone long on BP just after the disaster you would have seen a 20% return now. Not too bad if you ask me!

Reply

Leave a Comment

Previous post:

Next post: