Oil prices have managed to remain high all through the latest hiccup in world growth.
Between demand from emerging markets, disruption in the Middle East, and the ever-present spectre of peak oil, many now assume that the days of sub-$70 a barrel oil are behind us forever.
You’d think that with such a rosy outlook for their product, investors in oil producers would be laughing.
And that might be true for some oil investors. But not if you’re a shareholder in BP…
If you bought BP at the bottom, don’t read this bit
This might be an eye-opener for you.
Imagine you’d bought BP at its lowest closing price of just above 300p last June. You’d have been pretty chuffed with yourself. Not many people manage to catch a falling knife with that precision – plenty of us here in the MoneyWeek office had a go at calling the bottom, so I should know.
You’d now be sitting on a 56% total return (so including dividends), according to our Bloomberg terminal. Not bad at all. A bold contrarian move, made when all around you were losing their heads and worrying about BP going bankrupt.
But if you’re in this position, you should maybe stop reading now. Because what I’m going to say next is likely to knock the wind out of your sails.
Let’s imagine you’d bought Royal Dutch Shell on the same day. No disasters plaguing Shell. No vendetta declared by the US government. No obvious risks beyond the usual oil exploration ones hanging over it.
What gain would you be sitting on now? 49%, including dividends.
So even if you bought BP at the bottom, you on got a measly extra 700 basis points (7%) for all that added risk. And chances are you didn’t catch the bottom. If you got within 10% either way you’ll have been lucky.
What’s my point? Apart from demonstrating that it’s often better to focus on finding good companies, rather than gambling on your ability to spot turning points, it also explains why just about anyone currently holding onto BP shares might be feeling a bit frustrated with the company.
And that’s not going to change any time soon, it seems.
BP – the City is pinning its hopes on a break-up
BP’s second quarter results missed City expectations. Profits rose to $5.6bn. That’s a lot better than the $17bn loss recorded at this time last year, following the Gulf of Mexico disaster. But analysts had been hoping for nearer $6bn. Oil production was down 11% during the period because the company hasn’t resumed drilling in the Gulf. Nor has the dividend been increased.
Now, given that this time last year, many people were wondering whether BP would even remain solvent, you might not think this is a terrible result. But with the major panic over, shareholders are now looking for clear direction. They want to know where their future returns are coming from.
And it’s that apparent lack of definitive direction that seems to have disappointed the City the most. US rival ConocoPhillips has already announced that it will spin off its refining arm in 2012, leaving the main company to focus on exploration.
Many hoped that BP would follow suit. But while chief executive Bob Dudley hasn’t ruled out breaking up the company, he didn’t come out and back the idea either. “We are open to all kind of ideas, but they have to be ones that build long-term value for shareholders, not a short-term pop”, said Dudley.
I can’t disagree with this sentiment. But I can also see why shareholders might be starting to feel grumpy. The fact that the Gulf disaster happened at all painted the company in a bad light. This was compounded by its sloppy reactions when it came to dealing with the aftermath.
Then one of the first things Dudley did when he became CEO, was to embroil the company in a high profile and embarrassing spat with its Russian partners over a deal to explore the Arctic. Lots of fund managers I spoke to at the time shrugged this off, and said that’s just how business is done in Russia.
But to make a big fuss of the deal, and then have it taken away from you, just looks careless. Particularly when you’d think the company would have learned to be more aware of its public image.
If you want to buy an oil major, Total looks more promising than BP
The fact is, I just don’t see what there is to excite anyone about BP. There are a lot of risks still hanging over the company and there’s nothing thrilling on the horizon to offset those risks.
Yes, JP Morgan Cazenove reckons that the company could be worth 800p a share if it was split up and sold off. Maybe the management will come round to that way of thinking. But on the downside, you’ve got the ongoing Gulf disaster investigation, and BP’s entanglement with Russia to contend with.
And chances are you hold it anyway: if you own any British unit trusts, or tracker fund, you’ll almost certainly have some exposure to BP. If you’re looking to increase your exposure to an oil major, we’d be keener to look at French group Total (FR: PA). It trades on a current price/earnings ratio of 7.1 and yields almost 6%. It also has the added bonus of being the world’s fourth-largest natural gas producer – demand for natural gas in the future can only increase as easy-to-reach oil runs out.
And if you’re interested in the wider implications of high oil prices, we got a group of energy experts in to the MoneyWeek offices the other day to chat about this very topic. We’ll have their views on what the future holds for the energy sector – and their favourite stocks to play it – in the next issue of MoneyWeek magazine, out on Friday. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
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