Should I Buy BP?
LONDON -- I'm shopping for shares right now, should I pop BP into my basket?
When I looked at buying BP six months ago, I concluded that it offered investors a tank load of uncertainty. The Deepwater oil spill was still lining lawyers' pockets with black gold, gas and oil prices were down, production was falling, and its shale gas assets looked overvalued. Given all its problems, I naturally concluded that investors should roll out the barrel for BP, and buy it. Was I right to recommend buying BP at £4.37 last October, and would I buy it today?
Following the big share price drop of recent weeks, BP now trades at just £4.44. It's been whipped by the oil price and commodity backlash, as emerging market growth falters and the Federal Reserve fumbles for the QE exit. As a massive, vertically integrated energy company, BP has plenty of cushioning against falling energy prices, but it can't escape the impact altogether.
BP is also taking longer than I hoped to recover from its Gulf of Mexico misery. U.S. lawyers are determined to squeeze every last drop out of BP, but it is fighting back, contesting artificial claims and lawyer misconduct. The total bill will run into billions of dollars, but the share price won't settle until we know exactly how many billions. BP has also faced European Commission allegations of price rigging, along with Royal Dutch Shell. As if that wasn't enough risk, it is throwing its forces into Russia, with its 20% stake in Russian state-controlled Rosneft. As history shows, Russia is deadly territory.
Thanks to recent share price falls, BP now yields a slick 5%, comfortably above the FTSE 100 average of 3.6%. That dividend is covered 1.8 times, but remains exposed to further legal shenanigans. Dividends are paid in dollars, which could be a bonus if the Fed's threat to taper QE continues to boost the greenback. Better still, you tap into the yield at today's lowly valuation of just 5.9 times earnings, half the FTSE 100 average of 12 times.
Thrills and spills
You don't buy a company on those numbers unless there is a nasty back story, which of course there is. BP is still floundering in Deepwater. There is still a chance it could be found guilty of gross negligence, which would sink its share price, and unleash the legal sharks. Would I buy BP today? On a 5% yield and six times earnings, it is too tempting to resist. But investors must accept more risk than is usual for a company of this size.
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The article Should I Buy BP? originally appeared on Fool.com.
Harvey Jones owns shares in BP and Royal Dutch Shell. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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