What’s Stopped Me From Buying BP Plc Today

Royston Wild considers the investment case for BP plc (LON: BP).

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Today, I am looking at BP (LSE: BP) (NYSE: BP.US), and deciding whether to pump the stock into my investment portfolio.

Production slide continues as Deepwater weighs

BP announced in July’s interims that a combination of lower oil prices, a higher tax bill and reduced profitability from its assets in Russia caused underlying profit to slide to $6.9bn during January-June. This was down from $8.2bn in the corresponding 2012 period.

And exploration and production output slipped to 2.24 million barrels of oil equivalent per day (mboed) during quarter two, down from 2.33 mboed in the prior three-month period. Planned maintenance in the current quarter is set to keep investors guessing over BP’s production outlook until the end of the year at the earliest.

Group output declined in April-June as the effect of divestments — made in order to cover the cost of the Deepwater Horizon oil spill in 2010 — prompted volumes to decline. And the ongoing saga concerning the Gulf of Mexico disaster continues to weigh heavily on the firm, fanning the flames over what additional actions BP may have to take to mitigate the cost of the accident.

BP has now increased its estimates for the total charge to $42.4bn, a $200m rise from previous projections. But the firm cautioned that the overall cost could well exceed this figure, and increased provisions related to the spill by an additional $1.4bn to $9.6bn.

Further earnings pressure in the offing

Broker Investec expects earnings per share to fall 14% in 2013 before bouncing a modest 6% in the following 12-month period. But BP was recently changing hands on a low P/E rating of 8.7 for this year — comfortably below the value threshold of 10 times prospective earnings — and which is expected to fall to 8.2 in 2014.

As well, the oil giant is expected to increase the full-year dividend from 34 cents in 2012 to 37 cents and 39 cents in 2013 and 2014 respectively. Payouts for these years carry dividend yields of 5.4% and 5.6%, easily surpassing the FTSE 100 average of 3.1%.

“There’s gold in them there wells…”

The Gulf of Mexico saga and its possible effect on future production, and thus earnings, continues to hang heavily over the firm. On top of this, BP is facing accusations of oil-price rigging in Europe, as well as irregular natural gas trades in the US. It could be argued that these issues are already factored into the share price, but investors should still be aware of the risks which could exert fresh pressure on the bottom line.

So BP — like all natural resources plays — comes attached with a heightened risk profile. Drilling for oil and minerals mining is often a ‘hit and miss’ business where the timing, and indeed quantities, of potential payloads are extremely unpredictable.

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> Royston does not own shares in BP.

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.

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