I am by nature a contrarian investor: when others are selling, I am buying, and when others are buying, I am selling.
So is BP (LSE: BP) (NYSE: BP.US), after the recent gross negligence ruling, now a contrarian buy?
The devastating effect of Deepwater Horizon
As much of the world’s oil reserves have been extracted, the remaining oil is more difficult, and more dangerous, to extract. The Deepwater Horizon rig was the deepest oil well that had ever been drilled, with a depth of 10km — that’s more than the height of Mount Everest. Think of the technical challenges of drilling below more than 1km of water, many miles from the coast.
The Deepwater Horizon oil spill of 2010 had a devastating effect on BP. So far the company has paid out $43 billion in fines and clean-up costs. And now it has been found to be grossly negligent about the Gulf of Mexico disaster, meaning it could face civil fines of an additional $18 billion. And I suspect BP could be wrangling in the US courts about these fines over many years. The Macondo spill looks likely to cloud the firm’s fortunes years into the future.
But amid all the negativity, there are also some positives. To raise the cash to pay the fines and clean-up costs, BP has been reassessing its oil assets. It has taken an approach of value over volume, keeping its best assets and selling off the rest.
As the world’s remaining oil reserves are more difficult, and more expensive, to extract, it is taking a disciplined approach to capital expenditure, so that it can increase cashflow. It is also now placing much more emphasis on safety — this is crucial as it has more deepwater oil reserves than any other oil company.
“Smaller, simpler, more focused”
Chief executive Bob Dudley has said that BP is looking ahead to a smaller, simpler, more focused future. This is because it has to raise cash after Macondo, and also perhaps because it realises that there is less oil to extract.
Much of the world’s oil is now produced by state oil companies, so it is not surprising that BP has bought 20% of Russia’s state-owned oil company Rosneft. BP has oil fields around the world, from Uruguay and India to Egypt and Alaska.
How will the company act after the gross negligence ruling? I think it will act the only way it can, by selling off more assets.
So overall, how would I rate this company? Well, if we check the fundamentals, we find that that BP is actually quite reasonably priced. The 2014 P/E ratio is 9.8, falling to 9.1 in 2015. The dividend yield is 5.0, rising to 5.2.
This is not a company that will show rapid growth, but it may be worth considering as a dividend play. However, what puts me off from investing is the unclear long-term future of the oil industry, and the likelihood that BP will be clouded by the Macondo spill for years to come.