It feels like a lifetime since BP (LSE: BP) (NYSE: BP.US) was viewed as a solid FTSE 100 dividend stalwart, and it could be another lifetime before it regains that mantle.
Increasingly, it looks like a risk asset to me.
In Deep Water
It all went wrong in April 2010, after the Deepwater Horizon Gulf of Mexico tragedy. BP’s bill for that blow-up is now $43 billion and counting, of which a hefty chunk has gone to claimants barely affected by the disaster.
Now BP finds itself caught up in another multi-billion dollar controversy, thanks to its 20% stake in Kremlin-owned oil company Rosneft, which is in the firing line for sanctions over the Ukraine crisis.
BP may also get caught up in the $51.5 billion Yukos scandal, as lawyers are likely to pursue Rosneft for compensation.
Global company, global problems.
Risky Business
Investing in BP has been like wading through sludge ever since the Deepwater disaster. At today’s valuation of 480p, its share price remains 25% below its share price peak of around 650p over four years ago.
Investors were slowly coming round to BP, buoyed by the return of its dividend, until the Russian crisis blew up.
Putin has cast a dark shadow over BP’s recent otherwise positive Q2 results, which included an underlying quarterly profit of $3.6 billion, up 34% year-on-year.
BP admitted that “any future erosion of our relationship with Rosneft, or the impact of further economic sanctions, could adversely impact our business and strategic objectives in Russia”.
“Adversely impact” is one way of putting it. It could blow them away.
Russian Roulette
With hindsight, BP should have struck well clear of Putin, the Kremlin, Yukos, TNK-BP and the whole post-Soviet shebang. It is now more exposed to sanctions than any other British company.
Then again, if it had played safe, it would have sacrificed the $2.3 billion its stake in Rosneft has generated so far this year.
A global oil behemoth like BP believes it has to take risks these days, whether drilling deep below the sea or getting deeply embroiled with dodgy regimes, because that’s where the oil reserves are these days.
The question is how well it manages these risks. BP’s record is patchy at best.
Black Gold Isn’t A Safe Haven
Chief executive Bob Dudley says the benefits of being in Russia outweigh the potential dangers, but he now faces a precarious balancing act.
Putin seems highly unlikely to retreat from the current stand-off, while US financial regulatory teeth, and a belated attempt by the EU to hang tough, could intensify the fallout.
Every investor has to calculate the threat posed by these known unknowns.
Trading at 6.6 times earnings, BP’s problems are reflected in the price. Royal Dutch Shell Group, by contrast, trades at 16.1 times earnings, in what some believe is an overvalued sector.
Don’t expect to hit a gusher from this apparent undervaluation. I made that mistake by rushing into buy BP’s shares too soon after the Gulf oil spill, only for that crisis to run and run and run.
The Russian crisis also has legs.
Always Bet on Black
Oil is set to remain a controversial business. Demand is soaring (Dudley says it will rise 40% in the next 20 years) but deposits are dwindling, and exploration and political risks are spiralling.
Is this what the end of the oil age looks like?
At least you get a reward while you wait to see in the punt pays off. BP continues to pump out cash, and now yields a juicy 4.7%.
If you’re tempted by that, brace yourself.
