Have BP shares hit rock bottom yet?
By
Associate Editor
David Stevenson Jun 28, 2010
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BP. What a complete nightmare.
The Deepwater Horizon accident has been a terrible catastrophe for everyone in the Gulf of Mexico.
But now that shares in BP (LSE: BP/) are crashing and the company has cancelled its dividend, a great many other people are also feeling at least some impact from the disaster. There's even talk of BP filing for bankruptcy.
So what does it all mean for investors? And should you still be thinking about buying BP shares?
Things are getting no easier for BP
If only I'd listened to the boss. Just over two weeks ago, MoneyWeek's editor-in-chief Merryn Somerset Webb warned that: Buying BP now is incredibly risky.
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That was when the investment world was full of the 'it's fallen so far it must be time to buy BP' brigade. I should know: I was one of them. After all, BP's shares had plunged from £6.50 since the Gulf leak was announced in April, to just £4. Almost £50bn had been wiped off the company's market cap. Surely all the bad news had to be baked in, we thought.
But as we now know, it wasn't. BP has since fallen another 20% or so. It hit a 14-year low at one point on Friday. And the chances are that this has hurt your portfolio. Even if you don't own BP shares directly, you almost certainly do so as part of a pension fund. Since late April, the fall in the oil giant's shares has accounted for well over a third of the near-12% dip in the FTSE 100 index.
On top of that, the company has cancelled its first-quarter dividend (which was due to be paid last week), and suspended the next two payouts. So now there'll be no income for shareholders for the rest of 2010. That's not healthy for the nation's retirement pot – BP used to provide £1 in every £7 of UK equity dividend income.
The US government is the key factor
President Barack Obama got onto BP's case almost immediately after the disastrous chain of events began. We won't get too tied up in all the politics here. But dare I say it, had this been a bank in trouble, I reckon the attitude would have been very different. Politicians would have plied it with taxpayers' cash and talked about "cleaning up the mess first before worrying about what caused it". But because it's an oil company – well, enough said.
Meanwhile, oil is still spewing into the Gulf, although BP is now talking about plugging the leak by mid-July. Already, the clean up costs will be huge. BP has set aside $20bn for starters, and the bill has now risen to $2.65bn. To make matters worse, the hurricane season is about to start. That can only make a desperately difficult job even harder.
But the key factor is how big a penalty the US government stings BP with. Again, that's anyone's guess. But it's likely to be a much bigger figure than the clean-up costs alone. And it's likely to get larger the longer the hole takes to plug.
What does it mean for shareholders?
Add it all up, and what's the bottom line for shareholders now? By the end of last week, the panic was really setting in – and not just in the stock market. The value of bonds issued by BP fell to their lowest level ever, while the cost of protecting against a default hit new highs.
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Suggestions were rife that BP wouldn't have enough cash to pay all its costs without selling off some assets or selling more shares. The latter – more supply of stock – would damage the share price. Indeed, some pundits are saying there's even a chance of BP going bankrupt, or at least, that it could file for bankruptcy to get 'protection from creditors'. Under this scenario, BP would be able to keep going in some form, but would also be able to sidestep many of the claims being made against it.
This would be fraught with complications – and I won't try to take them on here. But remember that BP wasn't at all troubled financially before this all began. It was a healthy business that churned out almost £18bn in cash flow from its operations last year.
Michael Block, chief equities strategist at Phoenix partners, told the FT on Friday that BP had "ample resources and assets." But even so, "the spectre of voluntary bankruptcy or some other restructuring for one or some of BP's entities in North America cannot be overlooked... nothing is impossible."
The real issue is that, if pushed too hard by the US government, BP may find that some form of bankruptcy filing ends up being the least worst option. We're not there yet, and it would be a legal minefield – it's hardly a 'get out of jail free' card. But suffice to say, it would be yet more bad news for shareholders.
Bankruptcy would be a nightmare for the US government too – it would kill the golden goose. Though whatever the politicians were saying over the weekend, we can never trust them not to opt for short-term populism over long-term gain. Clearly the political situation won't really get any clearer until the well is plugged.
So is it time to take a gamble yet?
Scary stuff. So do all these risks mean you should avoid taking a punt on BP, even at these levels?
Well, let's make one thing clear first. As my colleague John Stepek has said if you do buy BP now, you need to be well aware of exactly what you're getting into.
It's now a very high-risk play rather than a 'safe' dividend provider. So you should only punt money that you can afford to lose. Don't touch it with your long-term investment cash.
But if you are prepared to gamble, when should you buy in?
The time to get into a troubled stock is often just when everyone else is throwing in the towel. And despite the dreadful run of headlines (not to mention the share price crash), that's not happened with BP yet. Two-thirds of City analysts are still bullish, according to Bloomberg data.
It's worth watching how the analysts respond to more bad news. If they lose faith, and switch to sell en masse, that could be the moment to buy. But for now, there are still too many people who view BP as a huge buying opportunity for me to feel happy about taking a second shot at calling the bottom on this share.
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