It gives you a sense of the scale of BP’s current woes in the Gulf of Mexico when a business of this size is being tipped as a ‘gamble of the week’.
Before the awful events of the 20 April, when its Deep Horizon rig exploded, most investors classed BP as a widows and orphans stock. It offered decent dividend income along with gradual capital appreciation. However, the catastrophic events of the past six weeks have quite literally blown it apart.
And with vast oil slicks already spewing on the environmentally fragile Louisiana coastline, just how bad are things going to get? Well, given BP owns a 65% stake in the damaged field, my best guess is that the remediation costs will be somewhere around the $10bn mark. This is an awfully large number, but still small compared to the group’s other operations which are still thriving.
The City is predicting turnover of £195bn, and underlying earnings per share of 72p in 2010. That puts the stock on an attractive price/earnings multiple of six and it also offers a chunky 8.6% dividend yield.
But what is the group worth on a sum-of-the-parts basis? I would value its proven reserves at about $183bn (or $10 per barrel). Its downstream interests (covering activities such as refining, petrol stations and lubricants) another $20bn.
And finally its other reserves and exploration licenses could be worth an extra $10bn. Added together – and after deducting net debt of $25.2bn, a $7.9bn pension deficit and the $10bn in clean-up costs – you get a risk-adjusted fair value of $170bn. That’s equates to around £6 per share (assuming a sterling/US dollar exchange rate of about £1:$1.50).
BP is still not for the faint hearted, especially with President Obama breathing ire at the lack of progress in plugging the leaking well. More adverse publicity, or a failure to properly stem the flow of oil, could see the shares take another tumble.
The company is also exposed to the volatility of the crude oil and foreignexchange markets. It is also heavily geared towards geopolitically unstable territories, such as Russia, where it owns a large stake in TNK-BP.
Finally, the reputational fallout and future restrictions on off-shore drilling may be onerous too – particularly in light of BP’s extensive deepwater assets and poor track record in the US after the fatal Texas City refinery explosion in 2005 and the serious oil spill in Alaska in 2006.
But I’m not put off as these worries are more than factored into the depressed price.
So, how to play it? First off, I do not recommend paying a penny more than my fair value of £6 per share should the stock bounce on positive news that the oil leak has at least been plugged. And as BP’s share price continues to slide even after a temporary bounce, I would be looking to fill up on the shares anywhere under the 450p mark.
Recommendation: SPECULATIVE BUY at 430p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments