Should I Buy BP?


It's time to go shopping for shares again, but where to start? Banking behemoth Barclays? Good old Marks & Spencer (ISE: MKS.L) ? Or drinks giant Diageo (ISE: DGE.L) ?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy BP (ISE: BP.L) (NYS: BP) ?

In deepwater
I like to buy big companies on bad news, and that's why I topped up my stake in oil giant BP at the peak of the Gulf of Mexico oil spill crisis, and again shortly after the leak was plugged.

But the subsequent share price recovery has been sporadic, as BP struggles to shake off the toxic legacy of Deepwater Horizon. It currently trades at £4.37, a whopping 33% below its pre-spill peak of £6.46 (but slightly above the price I paid). Is now the time to fill up on BP?

This mortal oil
BP or not BP? That is the question. The U.K.-listed oil major's last half-yearly results were disappointing, which it blamed on the falling gas and oil price as the global economy weakened, and planned maintenance, which reduced output. Production dipped more than 7% to 2.28 million barrels of oil equivalent per day, that from 2.46 million in the same period last year.

The results were also hit by BP's devalued U.S. shale gas assets and the suspension of its $1.5 billion offshore Liberty project in Alaska, after costs overran.

BP has yet to escape its sea of troubles.

Lean machine
But many investors do like BP's plans to become a leaner, meaner operation. It has offloaded $24 billion of assets since 2010, and is targeting another $14 billion or so by the end of 2013. This should help it release funds to invest in high-margin upstream projects.

Many will also breathe a sigh of relief when BP finally ditches the troublesome TNK-BP venture, in which it has a 50% stake. That could take some time yet.

BP is likely to plough the proceeds back into Russia, possibly by buying a stake in Rosneft, which should open up the prospect of Arctic exploration.

Tank up!
If you buy BP, you are buying a tank load of uncertainty. It still finds itself up to its neck in Deepwater Horizon, as the U.S. authorities look to drill every last dollar in compensation out of the company. Until that is settled, the share price is likely to be stuck in second gear. There is also the danger that another major oil spill could sink the company for good, given its tarnished safety reputation.

As a reward for investing, you get a current yield of 4.1%, covered 4.7 times. The share price valuation also looks modest, with BP on a forecast price-to-earnings ratio of just 7.5 for December 2012.

The road to recovery could be a lengthy one. But if you plan to hold for the long term, now could be a good time to roll out the barrel for BP.

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Harvey Jones owns shares in BP and Diageo. He doesn't own shares in any other company mentioned in this article.The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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