Even at the height of the Gulf of Mexico disaster, I was convinced BP (LSE: BP) (NYSE: BP.US) had the staying power to survive the crisis. So convinced, I dived into the stock too early, before the full severity of the blow-out was known, and took an immediate 20% hit. It has taken me a long time to recover, although judicious purchases in the months that followed certainly helped. But all along, I kept the faith.
Which is why I’m not overly concerned by the latest disappointment from New Orleans, where BP failed in its attempt to overturn a 2012 ruling that has forced it to shell out vast sums to companies with no provable link to the Deepwater Horizon spill. BP has rightly describes the ruling as “absurd”, and is now taking its case to the US Supreme Court, where failure is likely to send its costs spiralling above the $9.2 billion it has already paid out. The disaster has already cost an almight $42.7 billion in total.
Survival Instincts
BP’s share price took the disappointment in its stride. Partly, that’s because corporate legal battles tend to run and run. Partly, investors will have been cheered by a claim by one of the judges that the catch-all compensation ruling was “fraud” that directed money to the undeserving. And partly, because BP is a survivor.
The BP share price has also kept a stiff upper lip in the face of troubles in the Ukraine. The US recently placed sanctions on Igor Sechin, president of Russian energy giant Rosneft, in which BP has a 20% stake. As a US citizen, chief executive Bob Dudley, who has a seat on the Rosneft board, could be banned from dealing with Sechin. Nevertheless, BP says it remains “committed” to the link-up. Cynics may wonder how many times BP is willing to get its fingers burned in Russia before giving up, but again, I admire its staying power.
Investors in a major global player like BP must brace themselves for this kind of trouble. Natural disasters and industrial accidents will happen. So will political shenanigans. But BP has survived it all, to post acceptable Q1 results, including underlying quarterly profit of $3.2 billion, up from $2.8 billion for the previous quarter.
Drill, Baby, Drill
2013 was a successful year for explorations, with seven discoveries in 17 drilling attempts. BP is working on another 15 exploration wells in 2014. After completing $38 billion divestments programme last October, it plans to divest another $10 billion by the end of next year. Most of the profits will go to shareholders, largely in the form of buy backs. Better still, it hiked its dividend payout to 9.75 cents, 8.3% higher than the same quarter last year.
Legal battles in the States will drag into next year and possibly beyond. The Ukraine is a bearpit, and BP could get clawed. Its earnings per share are forecast to fall 34% this year, another blow. But trading at 10.6 times earnings for December, it isn’t overpriced.Â
Better still, it is forecast to yield 4.6% by December, as the dividend is slowly restored. It is proving a long haul back to respectability, but BP will get there in the end, whatever the world throws at it.