The anatomy of an energy stock in trouble
Despite the Gulf oil spill, this British advisory remains bullish on BP in the long term and tells the story of a giant trying to save itself.
Is it British or American?
Is it about to disappear or is it due to get stronger?
Has BP finally put an end to the Gulf oil spill?
Yesterday, there were reports that the leak had been capped, a thin ray of hope in the disaster that struck the Gulf of Mexico when the Macondo well exploded back on April 20.
Now, almost three months into this unhappy saga, a leading British advisory, The Fleet Street Letter, discusses the plight and future of BP plc (NYSE-BP).
The advisory still likes this stock, which has been on its buy list for a long time. It makes the case for BP’s long-term survival and success.
In a sense, it is addressing a very important question. Is BP the victim of one tragic accident, or has the accident revealed a fundamental weakness in the way the company does business?
This question can never be far from an investor’s mind. No matter how invulnerable a company may seem, the worst can and does happen.
Who would have believed one of Canada’s favourite conservative stocks, Moore Corporation, would disappear from the scene? Or that General Motors could be brought its knees? Or that General Electric would wander in the wilderness for three years before returning to profitability?
Becoming American
Mr. Theo Casey, Investment Director at this advisory, makes the case for BP. We will begin with his concluding statement.
“Whatever happens in the short term, I remain resolutely a long-term fundamental bull in BP.”
But he begins by discussing where BP really hangs its shingle. Throughout its century-long history, it has clearly been British.
It began life in 1909 as the Anglo-Persian Oil Company, a pioneer of oil discoveries in the Middle East. When it became British Petroleum in 1954, it had lost its monopoly in Iran, but was expanding around the globe.
The stock is listed in London and New York. Until recently, for every 100£ traded in New York, 110£ has been traded in London.
But since the beginning of the oil disaster, Mr. Casey tells us, “BP has become primarily an American company.” Three times as many shares have been traded in New York as in London.
So while the U.S. administration dictates the terms of BP’s dividend, U.S. traders dictate the terms of its capital return — or lack of it.
A takeover bid
Then there is the takeover talk. Investment bank Morgan Stanley recently declared BP “the most attractive takeover opportunity in Europe.”
Many others agree. Some believe Exxon Mobil or Royal Dutch Shell could gobble it up. Others think PetroChina could do it.
“The reason no one has yet tabled an official bid,” points out Mr. Casey,” is because we are still a long way from knowing the full cost of the Gulf of Mexico oil spill.”
The bigger question, he asks, is whether investors should accept the bid. BP has paid “more income to more investors’ portfolios than any other UK stock.” Mr. Casey is prepared to resist such a bid.
But it’s not an easy call. “If we accept a bid, we lose out on lifelong income but recover from a capital loss. If we don’t accept a bid, the dividend is likely to be resumed, but the share price could take a hit.”
In fact, rumours abound that Goldman Sachs is helping BP prepare a “poison pill” to keep suitors away. This would further dilute the value of the shares, of course.
But Mr. Casey’s resistance comes down to the fact that he still believes in the fundamental strength of the company. Despite what others have claimed, the Gulf disaster does not reflect a vital weakness in the firm.
Three conditions
Let’s turn away from the bid, says this analyst, and see what BP must do to win back the confidence of investors. He sees three conditions.
The first is obvious — stop the leak. If the leak has finally been capped, it will still take time for the company to win support in or out of the markets.
Second, Washington must put more pressure on BP’s partners in the venture — minority stakeholder Anadarko Petroleum (NYSE-APC) and rig owner Transocean (NYSE-RIG). The administration has “gone to great lengths to claim that it is not vilifying the company because it is British,” says Mr. Casey. Its independent investigators can prove this is not BP’s problem alone and that costs must be shared.
Third, the company must unveil strong second quarter results on Tuesday, July 27. Among other things, this might restore its credit rating, lowered to BBB, a reaction that was “overdone,” the analyst complains.
Further along, it can benefit from an influx of money. The company plans to sell off $10 billion in assets over the next 12 months. BP is already used to cutting $3-4 billion a year. Maybe the next big chop, Mr. Casey states laconically, should be the PR department.
If these conditions are met, BP can recover, insists this investment director. It has never been so cheap, he points out.
Its dividend suspended, it trades at US$38.05, about $25 beneath the 52-week high achieved in January.
Anadarko is about $28 below its high, at $48.13 and yields 0.7 per cent on its $0.36 dividend. Transocean is over $40 off its January high at $53.37 and pays no dividend.
You may not find any of these stocks an attractive bargain at the moment.
But it would be wise to reflect that no stock is indestructible, and to keep an eye on how the companies you invest in behave under pressure.
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