Many of us thought things couldn’t get any worse for BP (LSE: BP) (NYSE: BP.US), but then we heard last Thursday’s “gross negligence” judgment that pinned 67% of the blame for the Gulf of Mexico disaster on the UK oil giant.
BP disagrees and says it will appeal, but the share price took a 5.9% dive on the day — although it did recover a few percent on Friday to end the week just 3% down at 463p.
An $18bn fine?
There is also disagreement on the volume of the spillage, and if the US government wins on both counts, the total fine BP would face could be as high as $18bn, which is way more then the $3.5bn the company has set aside.
The big fear now is that BP’s dividends, after three years of solid recovery, will be hit a second time by the unexpected need for a lot of extra cash on top of the $43bn set aside in total to cover everything.
With decent earnings reported last year, BP paid a dividend of 37 cents per share, which equated to a yield of 4.6% on year-end prices. And with rises of 3.5% this year and 5% next being forecast before the latest setback, BP was looking like a solid income investment with its annual cash handouts growing nicely ahead of inflation.
Low valuation
Earnings forecasts put BP shares, currently priced at 463p, on a forward P/E of 9.8 for this year, dropping to 9.1 for December 2015. That’s quite a bit lower then the FTSE 100‘s long-term average of 14, and it’s also significantly lower than FTSE rival Royal Dutch Shell, which is showing forward ratios of 11.1 and 10.9.
That suggests that however shocking last week’s news, there was a lot of pessimism already built into BP’s share price — and that means there might not be much sentiment-driven downside left in it now.
So could we, finally, be at or near the point of maximum pessimism? I’ve though so several times in the past, notably back in August 2012 when I added BP to the Fool’s Beginners’ Portfolio. And things got worse several times beyond that — although the portfolio is still actually slightly ahead on BP.
Only a small fall
But I am cheered by one thing that happened last week. Though the share price initially shed 6%, there were enough investors waiting to buy on the dips and it quickly recovered almost half of the loss — and a fall of only 3% on the week suggests to me that the price is looking reasonably resilient now.
So, that’s my one big reason — if you’re convinced that BP really has hit maximum pessimism, it might be time to buy. But be cautious, and do your own careful research.