Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at BP (LSE: BP) (NYSE: BP.US)
What is the sustainable competitive advantage?
Even after its troubles during the last few years, BP is still the sixth largest oil and gas producer in the world.
That said, even as one of the world’s largest oil and gas companies, BP lacks a serious competitive advantage. In particular, the company has to accept the market rate for the oil and gas that it produces, which means the company has no pricing power.
Moreover, in an industry such as oil and gas production, where bigger is better, BP lacks the size advantage that peers such as Royal Dutch Shell and Exxon Mobil have.
Indeed, excluding extraordinary items, BP’s operating profit margin for the last financial year was around 10%, while larger peer Shell reported an operating margin of nearly 20%.
Still, many investors are concerned about BP’s growing liabilities relating to the Gulf of Mexico disaster. However, it would appear that the company is in fact well placed to meet these obligations.
In particular, the recent sale of around $45 billion in assets just about covers the company’s projected liabilities and with a net-debt-to-asset ratio of only 6%, the company has plenty of room to borrow if additional funds are required.
Nonethless, a company in the midst of a lawsuit, such as BP, does not make a good share to buy and forget.
Company’s long-term outlook?
Over the longer term, I am unsure about BP’s outlook. The liabilities and resulting claims from the Macondo incident have somewhat altered the company’s future outlook.
Specifically, management have scrapped the company’s long-term plan to become one of the world’s leading renewable energy providers by 2020. The plan previously titled ‘Beyond Petroleum’ has been dismantled and many renewable energy projects are now being sold off to fund Macondo claims.
Foolish summary
All in all, despite BP’s position as one of the largest oil and gas companies in the world, the firm is not what I would call a buy-and-forget share.
In comparison to its larger peers, BP relatively small size means that it lacks the economies of scale that many of its larger peers have. Additionally, the company’s recent move away from renewable energy leads me to worry about BP’s future.
So overall, I rate BP as a poor share to buy and forget.Â