BP plc Plunges After £18bn Fine. Yet NOW Could Be The Time To Buy!

One day, far-sighted investors will be glad they bought BP plc (LON: BP), says Harvey Jones

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

bp

Remember the final scene in Godfather III, when heartbroken Al Pacino wails: “Just when I thought I was out, they pull me back in!” That’s how BP (LSE: BP) (NYSE: BP.US) feels right now.

It is now well over four years since the fatal Deepwater Horizon disaster, and there is still no way out for BP. Last week, US District Judge Carl Barbier found it guilty of “gross negligence”, opening the way for another $18bn or so in compensation claims. Management had only set aside another $3.5bn.

This new threat comes on top of the $43bn BP has already paid, making this one of the largest class action lawsuits in US history.

The two US companies that worked on the Deepwater rig, Transocean and Halliburton, suffered only minor scratches, but British Petroleum keeps on getting plugged.

Despite that, it is still possible to build a case for buying the London-listed oil major.

Invest Like Brian

In June, BP hit a 52-week high of 526p. Today, you could snap it up for 463p. That’s a discount of 12%. There’s a good reason for that discount, as we all know, but if you like buying good companies on bad news, BP could be for you.

You won’t be the only buyer out there. BP’s chief financial officer Brian Gilvary has just spent more than £233,000 on the company’s stock, picking up 50,000 shares at around 467p each.

He clearly thinks he has spotted an opportunity. Why?

Wilful Behaviour

First, there is the prospect of an appeal. BP “strongly disagrees” with district decision, and has promised to take its case to the US Court of Appeals. Claims that it was also guilty of “wilful misconduct” weren’t supported by evidence at the trial, it said.

BP investors’ confidence in the US legal system won’t be high right now, but at least there is some hope.

Especially since today’s price largely reflects that $18bn potential fine. And remember, that massive figure is the worst-case scenario. If the fine is trimmed, there is scope for some share price upside.

Penalty Kick

The actual financial impact of the ruling could also be delayed, because BP’s appeal could take some years.

Even if BP does have to shell up, any penalties may be dragged out over several years, easing the damage to cash flow, and that dividend.

Gilvary insists it is financially strong enough to fund the extra penalties, but if you’re buying now, you have to accept that today’s dividend and share buyback programme are on the line.

That’s a shame, given that it has steadily recovered lately, and currently yields 4.9%, covered 3.3 times. 

Settle Down

There is also the chance that BP will settle up, one option Al Pacino didn’t have. In that case, the share price could spike. There is always something attractive about cutting your losses and moving on.

It will also make the future a lot clearer for investors.

Russian Roulette

At 9.7 times earnings, BP will still tempt many. Especially since fellow oil major Royal Dutch Shell, relatively untainted by scandal, trades at nearly 16 times earnings.

If you are tempted, remember that BP faces another superpower problem, due to its 20% stake in Kremlin-controlled Rosneft. This problem could also run and run. As Hollywood mobsters and Ukrainian politicians have learned, ceasefires are there to be broken.

If you want more certainty to your income stream, BP isn’t for you.

Clearly, there are a lot of uncertainties to investing in BP. But for far-sighted investors, many of those uncertainties are in today’s price. If you want BP in your portfolio, now could be the time to buy it.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »