Why BP is one slick investment

Despite fears the Gulf spill would sink the firm, its shares are soaring

It’s been nine months since the blowout at BP’s Macondo well sunk a US$350-million drill rig in the Gulf of Mexico, killing 11 workers and creating an unprecedented U.S. environmental catastrophe. At the height of the crisis, oil gushed uncontrollably from the sea floor and fears mounted that BP would ultimately become a casualty of the spill’s spiralling costs, so far pegged at US$40 billion.

But as a new year dawns, it looks unlikely that any of the corporate doomsday scenarios will come to pass. With coastlines returning to normal and underwater oil apparently dissolving away, BP’s U.S.-traded shares have climbed by 60 per cent over the past six months, from a low of US$26.75 last June to around US$43 as investors grow more confident the company’s darkest days are behind it. “It’s a recovery story,” says Pavel Molchanov, an analyst at Raymond James Financial. For investors, that means the possibility of more big returns down the road—some are speculating BP’s shares could reach US$60 later this year, about where they were before the blowout—but there are also still risks.

The biggest question mark is a recent lawsuit filed by the Obama administration against BP and its partners that accuses them of failing to adhere to U.S. environmental laws and safety regulations in the Gulf, where BP is the biggest operator. BP could also face criminal charges under the country’s Clean Water Act, with some estimates of damages as high as US$20 billion if BP is found to be “grossly negligent” in the run-up to the disaster.

Even so, Molchanov says he estimates a final price tag of about US$55 billion, which also includes the US$20-billion claims fund that BP was required to set up to assist victims. “For BP, that’s not the end of the world,” Molchanov says. “That’s about $5 a share.” In fact, Molchanov believes BP probably could have withstood a crisis that was, financially speaking, double in size. After all, this is a company that generated US$239 billion in sales last year—and that was a bad year.

To raise cash, BP has halted quarterly dividends and is selling US$30 billion worth of properties and other assets (the book value of BP’s assets is about US$257 billion), including oil fields in the U.S., Canada and Egypt. It’s not exactly a fire sale. For the most part, BP has walked away with decent prices for the properties—many of which analysts say BP was likely to have sold anyway. “The success which BP has had in conducting these sales has further eased investors’ concerns that the eventual cost of the disaster can be met,” says Keith Bowman, an equity analyst at Hargreaves Lansdown in the U.K.

Of course, that doesn’t mean BP is in the clear just yet. Investors crave certainty, and the threat of ongoing lawsuits, from everyone from fishermen to Gulf Coast tourism operators, means BP could run the risk of further spill-related expenses for years, even decades. Case in point: it took the lawsuits related to the 1989 Exxon Valdez disaster nearly 20 years to be fully resolved. And juries can be notoriously unpredictable when it comes to awarding damages. “The challenge,” says Molchanov, “is that no one really knows for sure what the ultimate price tag of the oil spill will be.”

There is also the painstaking task of re-building BP’s battered brand (the company’s green-sounding “Beyond Petroleum” moniker now rings hollow after some 4.9 million barrels of the stuff were deposited in the Gulf), which began with a July decision to turf former CEO Tony Hayward, who memorably told a reporter at the height of the crisis: “I want my life back.”

Yet there’s reason to believe BP will not only survive, but prosper in an oil-thirsty world. BP sits on an estimated 18 billion barrels of oil worth some US$1.35 trillion, and is expected to continue its focus on finding and exploiting deepwater oil sources off the coast of Africa and in the Gulf. BP has also been increasing its presence in Alberta’s oil sands. “While the degree of risk in holding BP shares has undoubtedly increased, as of today BP still provides investors with two highly fashionable attributes,” Bowman says. “Exposure to commodities in the form of oil, and the ability to generate cash.” In other words, it rarely makes sense to bet against Big Oil.

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