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.
