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Why BP PLC Should Lag The FTSE 100 This Year

bpAt one stage, it looked like BP (LSE: BP) (NYSE: BP.US) might be on to beat the FTSE 100 this year. In fact, by late June the price was up 7% to 524p while the index couldn’t even make 0.5%.

The price then started to slide, but was heading back to breakeven when the latest legal setback in the United States hit the headlines. In early September, BP was declared to have been “grossly negligent” in its part in the Gulf of Mexico oil spill, raising the bar for possible total penalties.

Steeper penalties

BP had already set aside $43bn to cover the potential total costs, but the interim ruling means BP could be fined $4,300 per barrel of oil spilled rather than the $1,100 applicable to a mere “negligent” ruling.

The final amount won’t be known for some time as, not surprisingly, the two sides are some way apart in their opinions of the size of the spill, but it looks set to be a lot more than the $3.5bn BP had been expecting.

The share price slumped by 6% on the day to 455p, and though it subsequently rallied a little, it’s since fallen back to 450p — that’s a fall of 7% since the start of 2014, against a 2% fall for the FTSE itself.

Not going to win

It’s still possible for BP shares to recover again and end the year ahead, but with sentiment the way it is and no further resolution to the latest court decision (which BP is appealing) due in the immediate future, my bet would be on an overall losing year.

So how about investing in BP now? Well, despite the cutback in the immediate aftermath of the disaster, BP is already back to paying strong dividends — we have 5.3% and 5.6% forecast for the next two years.

A cut is possible should the ruling continue to go against the company, but I think it’s unlikely — it’ll be dragging on for years yet, and there’ll be plenty more income to cover it.

Ten-year profit

And it’s surprising how well BP has done over the past ten years. Despite the largest accidental marine oil spill in the history of the petroleum industry, and despite the hardest recession for decades, a £10,000 investment in BP ten years ago would be worth £13,000 today — not a great return, but a lot better than the loss that I’d wager many people would have guessed at.

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Alan Oscroft 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.