Defence stocks surged at the end of last week and this week so far. But stocks with links to Russia have understandably taken a kicking. This includes FTSE 100 oil major BP (LSE: BP). The BP share price is down 8% in just the last five days and it could fall further. The recent fall doesn’t quite reverse the positive trend though as the shares are still up 20% over 12 months.
A tricky road ahead
It’s hard to think that the short term will be anything other than volatile for the BP share price and tricky for the company’s management. It’s not as yet clear how it will exit its near-20% holding in Russian state-owned oil giant Rosneft at an expected cost of around $25bn in response to Russia’s invasion of Ukraine.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “The decision to exit the Rosneft stake will be an eye-wateringly expensive one for BP”. She was unclear how the firm would manage it and thinks it will be a very tough call to “recover anywhere near what was considered to be the full value of the stake, estimated to be $14bn at the end of 2021”. And of course, she pointed out that the move will also “strip BP of lucrative dividends which were due to pour out of the Russian business”.
So in the short term the share price still has plenty of potential to fall further, and it’s a punt to buy the shares now before more information becomes clear on the sale. At least the company was quick to respond and has laid out the scale of the write-down it will take. Swift action is often better than dithering and I think investors will forgive management for the losses.
A good company at a slightly lower price?
While I’d hold off on buying the shares until the situation becomes a bit clearer – and when the shares might even have dropped further – there will come a time when the BP share price could be too cheap for me to ignore. The P/E is already near 13, so it’s cheap but not compellingly so. The yield is now around 4.4% so there’s also the potential for income with this share.
I feel higher oil prices should continue to offset the loss of value of the Russian Rosneft stake. The big problem for BP would come if for some reason, and unexpectedly, the oil price drops sharply. That would have a huge impact on its finances.
Potential investors like me will also have to watch costs associated with moving into renewables, which BP seems to have been slower to transition to than SSE, for example. It will be interesting to see if the change goes well and how much capital it takes to go green.
Overall I’m steering clear of BP for now. But if the shares fell another 10% over the coming weeks I’d be tempted to take another look, at least when the situation regarding its Russian stake becomes clearer.
