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3 Worrying Reasons Why BP plc Is Ready To Plummet

Today I am looking at why I believe oil giant BP (LSE: BP) (NYSE: BP.US) is a risky pick for investors seeking secure investment returns.

Firm remains in deep water over Gulf spill

The financial overhang attributed to the Deepwater Horizon catastrophe in the Gulf of Mexico continues to hang heavily over BP. And a resolution to the 2010 crisis appears to be no closer as legal action rumbles on. In August the oil giant raised its projections for the final charge to $42.4bn, up $200m from previous estimates, although it warned that the total expense could exceed this number. It also raised provisions for the spill to $9.6bn, a $1.4bn increase.

And the war of words between BP and the US States worst affected by the spill is becoming increasingly acrimonious, a situation that could make the saga even more prolonged. Just last month Geoff Morrell, the company’s vice president of US communications, accused Louisiana governor Bobby Jindal of “political grandstanding” and engaging in “patently false assertions”, comments that drew an equally frosty response.

BP, which has spent huge amounts of time and effort to repair its battered reputation, needs to get back on the charm offensive to try and limit the damage surrounding these comments. The timing could hardly have been worse as the firm continues to appeal to the US courts to throw out an earlier settlement that it claims is riddled with fraudulent claims.

Other legal action also casts pall

On top of this, BP is also facing accusations on both sides of the Atlantic over mispractice at its trading desks.

In the US the Federal Energy Regulatory Commission — which is stepping up the fight against companies it suspects of wrongdoing — last month asked the oil specialist to respond to allegations of manipulation in the gas market dating back to 2008. This follows accusations earlier this year that it was engaged in oil price manipulation in Europe alongside Royal Dutch Shell.

Muddy outlook for production volumes

BP announced in August that group production fell to 2.24 million barrels of oil equivalent per day (mboed) during April-June, down from 2.33 mboed in the previous three months, as the effect of heavy divestments — implemented to cover the cost of the Deepwater catastrophe — crimped output.

And planned maintenance in coming months creates huge uncertainty over BP’s production picture looking ahead. While the aforementioned legal action continues to drag on, investors should not rule out the possibility of further asset stripping and consequently further worries over future output.

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> Royston does not own shares in any of the companies mentioned in this article.