At heart I am a contrarian investor: I buy when others are selling, and sell when others are buying. This is the reason I bought into BP (LSE: BP) (NYSE: BP.US) a couple of years ago.
After the Deepwater Horizon explosion the BP share price crashed. Often when disaster comes, the share price falls dramatically, only then to recover gradually.
Take the example of Barclays after the LIBOR scandal, or Standard Chartered after the Iranian money-laundering scandal. Their share prices tumbled, only to recover over the course of subsequent weeks, months and years.
I was hoping for a similar recovery in the share price of BP, but so far it has disappointed. The share price has been trading within a range for what seems like ages.
Why BP is a sell
I think the lack of increase in the company’s share price is explained by the size and scale of the Gulf of Mexico disaster. Whereas Barclays and Standard Chartered lost several hundred million pounds, BP has suffered a loss so far of around £30 billion, and there is still more litigation to come.
The scale of the company’s losses are unprecedented. BP has had to sell a range of assets, dramatically reducing the profits of the company. What’s more, even excluding the Deepwater Horizon losses, the profitability of the exploration and production business is edging downwards as global oil reserves gradually decrease.
So I have decided to sell BP.
Why I’ve bought this company instead
So what have I bought instead? Well, you may be surprised to hear that I have bought another oil company, because I think that there actually is a bright future for the oil industry.
A decade ago, people thought that the gas industry was in its twilight years. Then shale gas was discovered, and suddenly a new energy boom was launched.
Now people are thinking laterally about oil, too. People have talked about a coming ‘oil crunch’, where demand shoots up, leading to rocketing oil prices, and perhaps bringing about the long-awaited transition to electric vehicles and fuel cells.
But people have not considered the potential of oil sands. This resource was once seen as pie in the sky, but high oil prices, rapidly advancing extraction technologies, plus an expanding pipeline network, mean that oil sands have suddenly become viable.
That’s why I have bought into Suncor (TSE: SU), the world’s leading oil-sands business, which is poised to boom as investment in oil sands takes off.
But I hear you say, BP is much cheaper than Suncor. Certainly BP has a lower P/E ratio. However, if you check the book value of each company you will find that BP’s price to book value is 1.1, while Suncor’s price to book value is 1.35.
On this fundamental valuation ratio, despite all BP’s troubles, it is only marginally cheaper than Suncor. Yet Suncor is a company that can look forward to rapid growth, whereas I’m afraid I think BP is a company in decline.
That’s why I have sold BP and bought Suncor.