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4.9 Million Reasons That May Make BP plc A Sell

Today I am highlighting why I believe shares in oil giant BP (LSE: BP) (NYSE: BP.US) are in jeopardy of heading lower, as the fallout of the Deepwater Horizon crisis looks set to ramp up in coming months.

Gulf of Mexico saga continues to weigh

Shares in BP are still struggling to gain traction, as the legal implications of the 2010 Deepwater Horizon oil spill on potential earnings continuing to sap investor appetite. The US government estimates that around 4.9m barrels of the black stuff were spilled into the Gulf of Mexico following the accident, and recent newsflow is hardly helping the firm’s damage limitation efforts.

The amount of waste material washed up in Louisiana has surged in recent months, according to recent studies. Data from the US Department of Natural Resources last week showed that 3.01m pounds of oily material were cleaned up in March-August, surging from 119,894 pounds in the corresponding period last year.

A final court ruling on how much BP must pay is not expected until well into next year at the earliest, and the likely prospect of further twists and turns is likely to maintain volatility in the share price.

Current risks affecting BP are not only coming from the courtroom, too. The oil leviathan is, of course, heavily exposed to waves of weakness in the oil price, which threatens to severely crimp earnings. Indeed, falling black gold prices caused underlying pre-tax profit to plummet to $2.7bn in quarter two from $4.2bn in the previous three-month period, and also slip heavily from profits of $3.6bn in April-June 2012.

The company is expected by City analysts to produce earnings per share of 48.7p and 56.9p in 2013 and 2014 respectively, figures which would represent annual growth of 30% and 17% if realised.

Still, broker Liberum Capital warned earlier this month that recent oil price weakness may make broker consensus appear top-heavy to the tune of between 5% and 10%. And with Brent crude oil prices having dipped to near-three-month lows below $108 per barrel since then, and fragile confidence in the global economy still reverberating, the prospect of fresh profits pressure may undermine BP’s forward P/E rating below the bargain threshold of 10 times prospective earnings.  

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> Royston does not own shares in BP.