Today I am looking at whether fossil fuel leviathan BP (LSE: BP) (NYSE: BP.US) could prove to be a terrific high-risk, high-reward stock selection
Deepwater case continues to shock
The business’ strategy of damage limitation following the 2010 Deepwater Horizon spill continues to hit the buffers, and BP received another setback this week when the US Supreme Court rejected its appeal over how much compensation it should have to pay following the disaster.
BP stated that many of those claiming under the compensation deal it signed in 2012 have either inflated or fabricated the effect of the spill on their businesses, unfairly exacerbating the cost of the crisis. So far the oil giant has paid out $2.3bn out of a total of $4.25bn to individuals and companies as part of the settlement, but advised that it can no longer provide an accurate estimate as to how much the final bill will clock in at.
… while overcapacity smashes oil prices
But of course the Gulf of Mexico saga is not the only potentially earnings-crushing problem facing the fossil fuel colossus, with the issue of a tanking crude price dominating the headlines in recent weeks. Indeed, the Brent benchmark punched another five-year trough this week below $65.30 per barrel, as broker Morgan Stanley slashed its 2015 average forecast under “base” conditions by $28 to $70.
This latest downgrade is one of many in recent days as analysts line up to take the hatchet to next year’s forecast. And with OPEC — supplier of 40% of the world’s oil — still failing to cut production, swathes of US shale hitting the market, and meagre global growth casting doubts over future demand, the black gold price could continue to crumble.
On top of this, BP’s aggressive asset-shedding programme also threatens to derail its earnings prospects in coming years, particularly should output at the firm’s smaller project portfolio disappoint.
At first glance it could be argued that the risks associated with BP are currently factored into the share price, with the firm trading on P/E multiples of just 10.1 times and 10.6 times prospective earnings for 2014 and 2015 respectively. Any value around or below 10 times is widely considered to be a bargain.
Still, I believe that BP’s share price could have much further to fall should an already-creaking oil market worsen in the coming year.
