Is It Time To Buy Or Sell BP plc?

The long-term prospects for BP plc (LON:BP).

| 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.

bpI am by nature a contrarian investor: when others are selling, I am buying, and when others are buying, I am selling.

So is BP (LSE: BP) (NYSE: BP.US), after the recent gross negligence ruling, now a contrarian buy?

The devastating effect of Deepwater Horizon

As much of the world’s oil reserves have been extracted, the remaining oil is more difficult, and more dangerous, to extract. The Deepwater Horizon rig was the deepest oil well that had ever been drilled, with a depth of 10km — that’s more than the height of Mount Everest. Think of the technical challenges of drilling below more than 1km of water, many miles from the coast.

The Deepwater Horizon oil spill of 2010 had a devastating effect on BP. So far the company has paid out $43 billion in fines and clean-up costs. And now it has been found to be grossly negligent about the Gulf of Mexico disaster, meaning it could face civil fines of an additional $18 billion. And I suspect BP could be wrangling in the US courts about these fines over many years. The Macondo spill looks likely to cloud the firm’s fortunes years into the future.

But amid all the negativity, there are also some positives. To raise the cash to pay the fines and clean-up costs, BP has been reassessing its oil assets. It has taken an approach of value over volume, keeping its best assets and selling off the rest.

As the world’s remaining oil reserves are more difficult, and more expensive, to extract, it is taking a disciplined approach to capital expenditure, so that it can increase cashflow. It is also now placing much more emphasis on safety — this is crucial as it has more deepwater oil reserves than any other oil company.

“Smaller, simpler, more focused”

Chief executive Bob Dudley has said that BP is looking ahead to a smaller, simpler, more focused future. This is because it has to raise cash after Macondo, and also perhaps because it realises that there is less oil to extract.

Much of the world’s oil is now produced by state oil companies, so it is not surprising that BP has bought 20% of Russia’s state-owned oil company Rosneft. BP has oil fields around the world, from Uruguay and India to Egypt and Alaska.

How will the company act after the gross negligence ruling? I think it will act the only way it can, by selling off more assets.

So overall, how would I rate this company? Well, if we check the fundamentals, we find that that BP is actually quite reasonably priced. The 2014 P/E ratio is 9.8, falling to 9.1 in 2015. The dividend yield is 5.0, rising to 5.2.

This is not a company that will show rapid growth, but it may be worth considering as a dividend play. However, what puts me off from investing is the unclear long-term future of the oil industry, and the likelihood that BP will be clouded by the Macondo spill for years to come.

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.

Prabhat Sakya 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

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »