Things have been looking up for BP recently.
They’ve got themselves a new, more media-friendly American chief executive, Robert Dudley. The hole in the Gulf of Mexico looks as though it’s well on the way to being plugged. The worst of the catastrophe has passed. Now it’s all about the clearing up process.
But what does it all mean for BP as an investment? Let’s have a look.
The company’s second quarter results revealed a pre-tax charge of $32.2bn for the Gulf of Mexico oil spill costs. Excluding this, replacement cost profit was $5bn, up on $2.9bn the year before. The group is also planning to sell off $30bn in assets to help fund the spill cost, and to cut net debt to $10-$15bn in the next 18 months, from $23bn.
The Gulf of Mexico spill will hang over it for a long time. There could be further nasties in store. And while $32.2bn is a lot of money, it’s still below the worst-case estimates, which are upwards of $50bn.
But it does seem far more likely now that the company will get back on track. Talk of bankruptcy has faded away. And the background chatter about the oil spill seems to be turning more positive, with reports of scientists arguing that it’s nowhere near as bad as it was originally portrayed.
Unless something else unexpected happens, the worst seems to be behind the stock. But does that make it a buy?
We pointed out a couple of months ago that BP was now more of a punt than a nice big safe blue chip. And to be honest, that advice still stands. The main difference now is that the risk/reward profile is that bit less extreme.
There are still a lot of potential hazards hovering around the stock. It might end up being a takeover target, sure, which could mean plenty of upside from here. But it might also be hit harder by legal costs and a US backlash than it is currently predicting.
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And as The Telegraph’s Questor page points out, even when the group returns to paying a dividend, it may take the opportunity to do so at a lower yield. “when Mr Dudley reinstates the payment, he may decide not to ‘let a good crisis go to waste.’ The dividend could be reinstated at a lower level so that it is not such a financial burden on the group in turbulent times.”
On top of that, 70% of analysts have stayed bullish about BP – never a good sign…
So hold them if you’ve still got them (unless you bought at £3, in which case you might be tempted to take at least some of your profits). But if you want to buy an oil major for income, you’d be better off looking at Royal Dutch Shell. As Fiona Maharg-Bravo points out on Breakingviews.com, by 2012, both oil majors aim to be producing around 3.5m barrels of oil a day. However, Shell will be growing (from its current 3.3m barrels) while BP will be shrinking (from around 4m barrels just now) as it sells off assets. “For Shell, unlike BP, the best is yet to come.”
Of course, Shell – or any other oil major – could be hit by a similar disaster tomorrow. But you’d hope that they’d learn from BP’s mistakes. The company is on a 6% prospective yield, and a p/e of nine.
Alternatively, if it’s a risky bet in the oil sector you’re looking for, you could go the whole hog and look at some of the exploration minnows. These are much riskier than BP of course, but the upside is also far greater. Tom Bulford, who writes the free Penny Sleuth email, did a recent cover story for MoneyWeek magazine in which he took a look at the most interesting explorers around the world.