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To BP, or not to BP? - BP (BP.)
24/5/2010
(119264)
To BP, Or not to BP?
A lot of people are asking the question – whether this is the time to buy BP (BP.) after
the slump from around 650p on the disastrous Gulf of Mexico oil spill.
My call to sell at 625p looks to have been extremely fortunate – but then I was relatively close at hand, tucked up in bed on Florida’s Gulf Coast watching the late night news when an interview with some official made it clear that the spill was much worse than had been suggested. It is not often I write an investment idea at midnight (5am UK time), knowing that it would be mid-morning in England before the news was likely to break.
It took a fall of maybe 40p or 50p to set the idiot analysts to work suggesting that there would be a bounce-back, and that it was time to buy BP. My stance since has been consistently sceptical. Indeed, on our bulletin board I advised selling again at 575p.
It is tempting to think at 489p that we have seen enough of a fall – tempting, but unwise. The tens of billions wiped off market capitalisation far outweigh the direct cost of clearing up the mess, even after the immediate legal liabilities.
Buying still makes little sense, however. That is not to swear that the price will not rally. It could bounce usefully later this week if the next big effort to plug the leak should succeed. If that fails, there will be one attempt after another to plug it. Should one succeed, the share price will bounce.
Step back, though, and think about it. At worst, the leak could continue spewing oil out into the Gulf of Mexico for months. Drilling another well to cut this one off may take three months (four weeks into the problem, that rescue well remains a rolling three months away). Obviously the longer it takes, the worse the problem.
Whatever happens, BP has been badly damaged. The US Government is threatening to take over the operation to contain the spill. Why anyone should think that more likely to succeed than BP’s efforts is not clear, but it illustrates the damage done already to BP’s reputation. And the wildly – and obviously – inaccurate figures for the spillage coming from BP do not make it any better.
BP has massive assets around the world, but is fatally damaged in the US, with this calamity simply piling on the problems following the Texas explosion and other troubles. Wherever the assets, the USA is a crucial market for any international oil company. And given the US affection for litigation, the damage will drag on for decades.
Why buy BP when the duration of this disaster is unknown, and the eventual cost unknown? It must already be threatening the position of chief executive Tony Hayward, and that gives rise to more serious questions for shareholders.
Over the week-end (sorry can’t remember where) there was some sort of indication that the BP dividend was not under threat. That did not come from a named source, so it is not to be taken too seriously.
Indeed, no comments about dividends should be taken seriously. At the very least, the dividend decision could depend upon Hayward. If he should go, what then?
There must be a chance that his successor would don the hair shirt, chuck all of the nasties possible into the next results, and cut the dividend.
Without that dividend, the yield prop for the share price goes. In theory, BP yields about 8.8% at 489p. There have long been questions about the pay-out.
Any bounce in the BP price should the well be capped could prove temporary. At best, it might only reach 40p or 50p. Is that enough upside to risk buying BP should doubts about the dividend become canvassed more actively? Already one newspaper has raised them.
And why buy BP anyway? There is deep general market unease. AS IR35 has pointed out on our bulletin board, maybe 60p of the recent price fall could be due to the wider spread of market unease.
If we are going into a double dip, should you buy a market leader? Never mind falling through the 500p barrier. It is not so long ago that smarter subscribers like kenmitch were buying BP at under 400p (hope you had a trailing stop loss Ken).
If it is yield you want, you can get it in other highly liquid top quality stocks which don’t have the BP worries. While I have not researched them carefully, there seem to be fewer problems lurking at the likes of United Utilities (UU.) – a 6.3% yield at 530p – or even National Grid (NG.), which has just announced the rights issue which would hit the price, and is now at 563p for a prospective 6.8% yield.
Or, if you want to stick with oil (not a bad idea), there is even Royal Dutch/Shell B RDSB) at 1718p to yield 6.1%.
There will be a time to buy BP, but who knows when? Only gamblers would go in now. Ignore stuff about comparing the loss in market value to the cost of the spill. That comes from analysts paid to generate share trading. This collapse is about so much more, about the intangibles which are so hard to count but which matter so much.
As mentioned a while back, this could be so bad that BP will disappear altogether, merged with another giant (maybe Royal Dutch/ Shell) to try to kill the ugly image altogether. Believe me, there are several generations of Americans who don’t want to hear about BP ever again.
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