What You Were Buying Last Week: BP PLC

One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful” – or, in other words, sell when others are buying and buy when they’re selling. 

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments. 

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been buying in the past week or so, and what might have made them decide to do so.

Persistent uncertainty

Oil supermajor BP (LSE: BP) (NYSE: BP.US) really hasn’t had a good time since the Deepwater Horizon oil-spill disaster in April 2010.  Its share price plummeted by over 50% in the immediate aftermath and, even though there was a sharp recovery soon afterwards (anyone buying at the share’s post-spill nadir has enjoyed a gain of over 40%), it’s still way below its pre-spill level, currently languishing some 30% off its high of mid-April 2010.

The main problem has been that the full extent of BP’s exposure to compensation claims has remained persistently uncertain, whilst persistently increasing. Only recently the company issued a statement warning that its overall compensation liability is set to exceed the £27.1bn ($42.2bn) charge already on its books.

Its original estimate of the settlement for individual and business claims was £5bn ($7.8bn), but that was subsequently raised to £6.2bn ($9.6bn). However, BP has now warned that the total cost of the settling such claims will be “significantly higher” even than that, because of claims not yet received or not yet processed.

BP is also still embroiled in a lawsuit under the Clean Water Act. If there’s a judgement of gross negligence against the company, the penalties imposed would far exceed anything the BP has so far provided for, and, in the company’s own words, would “have a material adverse impact on the group’s reputation“.  For “reputation”, read “share price”.

More generally, in its second quarter results BP warned that “the magnitude and timing of all possible obligations in relation to the Gulf of Mexico oil spill continue to be subject to a very high degree of uncertainty“.  That’s exactly the sort of thing that will make most investors very wary of BP for the foreseeable future.

So what could have induced some people to put BP in the number 7 spot in last week’s “Top 10 Buys” list*? 

Well, for one thing BP is not taking the onslaught of compensation claims lying down. It’s currently appealing the way in which the court-supervised settlement program has been implemented, which, BP says, has resulted in “absurd” oil spill compensation payouts. Only last last week BP said it had discovered new evidence of fraud and conflicts of interest in the program. It’s also suing the US government over the ban imposed on the company’s obtaining new federal contracts. As one of the largest suppliers of fuel to the US government, if the ban is maintained it could seriously harm BP’s revenue.

Focusing on the numbers rather than the news, BP’s price-to-earnings (P/E) ratio is a mere 7.4 – well below both the FTSE 100 and oil & gas sector averages – which suggests that the market has already priced-in the uncertainty about the company’s compensation liabilities. And then there’s the yield of 4.7%, making BP very attractive to income-seeking investors, and providing comfort for growth-seekers whilst they wait for the share price to climb.  If you ignore the news coverage (easier said than done, perhaps), the numbers seem to make BP eminently investable.

But of course, no matter what other people were doing last week, only you can decide if BP really is a ‘buy’ right now.

A high-quality growth share

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> Jon owns shares in BP.

 * based on aggregate data from The Motley Fool ShareDealing Service.