We all factor in risk when making our investment decisions, and from person to person our risk tolerance varies. It’s generally true that the greater the risk, the greater reward: I mean, that’s why we’re investing our money in the stock market, instead of letting it stagnate in a savings account, isn’t it?
While it often pays to take certain risks, the only perspective I can give you is my own, so here are three reasons why I wouldn’t put my money in BPÂ (LSE: BP) (NYSE: BP.US) today:
1) Costs on top of costs
Remember how the banks dominated the Footsie’s top 10 before the financial crisis? Now oil & gas stocks reign, but that doesn’t mean the going for BP is smooth. Where else can we start but with the Gulf of Mexico oil disaster.
BP has just set aside an extra $200m, bringing the total paid so far to $42.7bn, as profits fell to $13.4bn compared with $17.1bn in 2012. The worst of this mightn’t yet be over, with a New Orleans District Judge yet to decide whether BP was grossly negligent, opening the firm up to $18m in penalties.
Note how those penalties are $5bn more than what BP made in profit this year.
2) Squeezed all around
In an attempt to shore up its balance sheet BP has divested numerous assets. The impact of these divestments was felt in the firm’s fourth-quarter earnings, which fell 28% to $2.8bn. Exits from several countries has cost BP 150,000 barrels a day. With BP’s cash flow under pressure, you’re left to wonder how it’ll maintain its progressive dividend policy.
In addition to the production hit caused by divestments, you should remember — as you probably know — once that oil is gone, it’s gone. Prospecting is an uncertain business but, while BP is selling assets to keep shareholders happy, what do you do when the reserves run dry?
3) Image is a problem
If we’re to see an energy boom in the UK then young workers are necessary. But do you think any of them actually want to work in the energy industry? While a technology firm like Google has the kind of cultural cache that a Hollywood comedy was set in its real-life corporate offices, BP on the other hand has a legacy of — not to sound scathing or anything — killing dolphins due to toxic exposure.
Reputational damage has been significant to other areas of the business, too. The French oil giant Total is investing $21m in the UK shale gas industry. Yet BP can’t so much as dig with a spade here due to fears over its damaged safety record.
May BP be undervalued?
I’ve considered BP as a value investment before. It trades on a low earnings multiple, but we’re talking about one of the biggest blue-chips around, so it’s safe to say people are pretty clued up on its strengths and weaknesses.
The balance sheet is what it is.
