Business World

Saturday 24 February 2018

Oil disaster coating BP offers a great opportunity to snap up shares

Thomas Molloy

IT looks like a very good time to buy shares in BP. The collapse in the oil company's share price following BP's repeated failure to stop an oil leak from spewing millions of gallons of crude into the Gulf of Mexico means that investors have a chance to hoover up shares in the blue chip at 10-year lows.

Yesterday, BP shares had plunged 36pc since the drilling rig leased by the company exploded on April 20, wiping more than £40bn from the company's value.

The fall is irrational as the cost of clearing up the oil will only amount to a proportion of this decline. In other words, the bad news is already in the price.

The rig explosion is many things; an environmental disaster, a great tragedy for the families of the 11 men killed and a PR problem but it will blow over just as all the other oil disasters have blown over for one simple reason; the West remains addicted to oil.

Just as a crack addict will forgive his dealer almost any betrayal, consumers will forgive oil companies almost anything from pollution to war.

Some analysts are speculating that the company is now a takeover target which could makes the shares an attractive short-term punt but demand for oil and the depletion of many of the world's major oil reserves makes BP a good long-term hold as well.

While takeover speculation swirls around BP, it seems to Sharescope that there are very few companies in the world which could afford BP and even fewer who would get regulatory approval.

It will be well worth watching what the company says about its dividend policy this week. Rumours say the company is set to say it will maintain its dividend at 56 cents a share this week.

That would put dividend yield at a mouth-watering 9.6pc, the highest yield among 18 of BP's peers, according to Bloomberg data. There are risks of course. Here in Ireland we are all too familiar with companies promising to maintain their dividends as part of some sort of pathetic machismo only to change policy months later.

The bigger worry, about the eventual clean-up costs, is what really matters. We don't know too much here but it would seem that irrational fear has crept into this information gap.

We do know for a fact that BP has spent $990m on trying to stop the gusher. We also know payments to landowners, hoteliers and fisherman claiming losses from the spill will cause the bill to rise but claims that the bill will reach $40bn to $50bn seem far fetched.

The cost for the Exxon Valdez tanker disaster in 1989, previously the worst US oil spill has reached at least $4.3bn so far; less than a tenth of BP's share price collapse.

We also know existing US law means BP's economic liabilities are capped at $75m although three US Senators are trying to raise that ceiling to $10bn, a move that is backed by President Obama.

One could argue that there are moral hazard problems with either law but while it may be wrong, its certainly looks like a good deal for shareholders.

Irish Independent

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