Home—Blog—Why buying BP now is incredibly risky
Jun 11, 2010, 11:00
Posted byMerryn Somerset Webb
Comments (16)
A huge percentage of the UK population probably think they don't own any shares. Mostly they are wrong. If they have a company or private pension of any kind they do – they own a percentage of the shares in the pension fund. And odds are that one of the biggest holdings in the fund is BP, particularly if you hold any sort of income fund.
Own any of the JP Morgan Income and Growth Funds? At the end of March, a full 9.2% of the fund's portfolio was in BP. Or perhaps you have the Schroder Income Growth Fund? 8.5%. Or the Standard Life Equity Income Fund? 8.3%. I've got a list in front of me as I type. It tells me that nine of the UK's best known income funds have – or had up until a few weeks ago – more than 5% of their total assets invested in a share that has fallen 40% in a matter of weeks. Yikes.
So what next for BP? There is much talk about whether the shares are a buy or not – John Stepek and I were bickering over it just this morning. He thinks that even the most unlikely of eventualities has got to be priced in at this stage and that the huge fall we saw overnight on Wednesday probably represents a mad panic that in itself marks a bottom.
I agree on lots of these points. BP is in fine financial shape. The cost of the clean up is going to be horrendous and the lawsuits and punitive fines never ending. But BP has good cashflow and low levels of debt: odds are it can cope. It also looks cheap if you just look at the financials.
However the problem is that you can't just do that. BP isn't a company any more; it is a political hot potato with a future made up of speculative litigation, desperate political pressure and unknowable costs. And that changes everything.
Barack Obama knows perfectly well that BP hasn't been called British Petroleum for years; he knows that it is nearly 40% American owned and was formed from the mega-merger of America's Amoco and BP back in the late 1990s; and he also knows that the accident happened on a Transocean rig in US waters with American permits, and that blaming BP for 100% of it isn't entirely fair (a lot of it yes, all of it, no).
But with his own popularity ratings deeply in dodgy territory, he clearly doesn't care: instead, as Fraser Nelson puts it in The Spectator, "to listen to Obama it is as if a few blokes from Stoke-on-Trent sailed over and drilled a wildcat well – then buggered off and left Uncle Sam to suffer all the damage." No different really to the silly way Gordon Brown kept referring to the banking crisis and global recession as having "started in America," as though no one except for a group of derivative-crazed New Yorkers had anything to do with the meltdown (least of all him).
The hope is that Obama will give the nutty rhetoric a rest soon, given how many Americans work for BP (and for other deep sea drillers) and how many Americans own BP shares and depend on BP dividends. But the fact that he may not means that buying BP is a dangerous thing to do. Anyone who buys it now is going to have to have an entirely different attitude to risk than the long-term income seekers who make up its current shareholder base.
Published in Blog More articles by Merryn Somerset Webb
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(11 June 2010, 12:12PM) Complain about this comment
The Daily Mail claims that 18 million Brits own BP shares either directly or indirectly through pension funds and unit trusts. Including spouses and dependents of these 18 million then we're talking about almost half the population.No idea whether BP is a buy at these levels but if the England football players' wealth managers have invested their millions in high dividend UK oil majors then Rooney and co have every incentive to counter Obama's nasty populism and humiliate the USA on Saturday.
(11 June 2010, 01:56PM) Complain about this comment
I would take Obamas rhetoric to be just that, crowd pleasing, but with little substance. And who can blame him. But the fact is that America and the world needs the oil, that BP is very good at finding it, and that as Obama and the rest of the industry know perfectly well they all use the same dozen or so major sub-contractors and so this could have happened, and indeed could happen to any of the oil majors at anytime. A baddy has to be found and blamed BP, a scalp has to be sacrificed Hayward. But the US Government isn't about to desstroy the entire USD oil industry which is pretty much what would happen if BP were to be ruined. After all if that was BPs fate who would ever invest or lend to oil companies in future. I still think a meger with Shell following some asset sales to pay for the $20-30bn cleanup bill is the most likely outcome.
(11 June 2010, 06:26PM) Complain about this comment
2. Alex said 'I still think a merger with Shell following some asset sales to pay for the $20-30bn cleanup bill is the most likely outcome.'1. What would that (likely) mean for BP share holders? A good thing? A bad thing? 2. How long do these mergers take, I'm guessing years?3. Why SHELL why not an American Oil Co.? Apologies in advance I'm a novice.
(11 June 2010, 08:49PM) Complain about this comment
In a couple of weeks something else will happen and the media circus will move off.Obama is just trying to move responsibility for the whole disaster as far away from himself as he can. Preferably all the way to another continent.Exxon is still Big Oil, despite the Exxon Valdez twenty odd years ago, and BP will still be here years from now, too.
(12 June 2010, 11:04AM) Complain about this comment
I'm getting. When the FTSE hit 3500 the fundementals looked XXXX. This is absolutely not the case for BP. 40% down, come on for gods sake!I missed out on some of the FTSE rise, I won't miss out on BP.
(12 June 2010, 11:21AM) Complain about this comment
Any possibility BP might seperate off its North American interests and put them up for sale? That, or at least the threat, might put it all into the US court?
(12 June 2010, 01:15PM) Complain about this comment
I agree with Merryn's comments. BP is a hot potato. This may not play out like the Exxon Valdez. One way to approach this might be to buy puts and calls, leaps that is. A year from now it seems likely that BP will either be considerably back up from where it is now OR it could really crash with massive litigation.
(12 June 2010, 02:20PM) Complain about this comment
While talking about compensation and court case against BP,Amercans should also compensate Bhopal's victim of Union Carbide disaster of 1984.I think they have suffered enough from last 24 years without any sort of help from USA .Peter
(12 June 2010, 05:59PM) Complain about this comment
personally I've taken a punt on the shares, ok so no divi for the next 2 quarters and maybe it'll be taken over and have to pay a record fine, maybe all its assets will have to be sold off to the vultures that are hovering - so what? at current share price it is below the value of its proven reserves, never mind all it's other assets. difficult to see how one can lose at this price level, the rebound will be swift and sudden.
(14 June 2010, 08:54AM) Complain about this comment
Hi Ken, Several reasons, strategic fit, in terms of the jigsaw that would fit togther in a combined business, obviously the less dulpication of resources the better, cultural fit and ease of intergration, regulatory issues/willingness of Government to agree to such a large merger. And of course price! The price BP shareholders would get for their shares in combined group shares would be a matter of negotiation. As for why I think it's likely to happen, simply that BP and Shell were openly discussing a merger several years back under the old CEO Lord Browne. The current events almost certainly unseat the present CEO and add a very pressing strategic rationale to a merger.
(14 June 2010, 01:15PM) Complain about this comment
Too bad that the BP USA missed the opportunity to fill for Chapter 11 last week and now they have to foot for the unlimited bills asked by politicians.BTW, it will be the biggest mystery of the century on why BP managers failed to follow safety protocol, under such risk adverse culture.For the Shell and BP talks... don't forget behind the scene, both companies are owned by the same family, Rothschild.
(14 June 2010, 01:47PM) Complain about this comment
Because like all oil majors they rely heavily on subcontractors, in this case American subcontractors operating in American waters with American drilling permits. But lets not let that get in the way of Obamas presidential trans atlantic willy waving. Maybe he's been watching 'The Patriot' and got carried away with it all?You are however correct to an extent re: some of BPs larger shareholders.
(15 June 2010, 09:04PM) Complain about this comment
1. As more information filters out, it is pretty clear BP was mostly to blame, forcing American contractors to do things against what they knew was safe. All in the name of bigger profits. BOY THAT DID NOT WORK AS PLANNED!2. Were not demanding England to pay, we're demanding that BP pays.3. BOYCOTT BP baby BOYCOTT BP, as opposed to drill baby drill.4. I'm sure that eventually BP will come through this a lot better off than many of the people who's livelyhood depended on an unpolluted Gulf.
(16 June 2010, 12:44PM) Complain about this comment
John...1. I don't think anyone is disputing that BP has a lot to answer for, but doubtless the American contractors were quite happy to take their share of the profit. They could have reported the safety breaches at any time.2. Then why is Obama and the American press constantly referring to the company as 'British Petrolium'?3. Not exactly going to help them compensate all those people whose livelihood has been affected is it?4. Depends if they're able to get through the political storm. Lets hope they can for all the people who they need to compensate and for all the ordinary shareholders on both sides of the Atlantic.
(16 June 2010, 11:05PM) Complain about this comment
So BP is risky because their oil well is leaking all over the Gulf of Mexico and one way or another that is going to cost a lot of money to sort out, especially in the home of litigation.Are house prices going to fall too?Do you not like public sector pensions?Do you like gold?Would you like a smaller government?Please come up with something new, or just go and write good news stories for your local council, I hear they pay very well to write pap.
(28 June 2010, 02:49PM) Complain about this comment
Remind me again... who was the p-nut who said "Buy what the rest of the market hates!"?Come on BP, stop the leak... you can do it mate!Til death us do part...
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