Despite its progress, BP is now a high-risk bet
WITH BP’s temporary capping of the leaking Macondo well last week, investors piled back into the stock. Fidelity’s star fund manager Anthony Bolton declared that investors have “a classic once in-alifetime opportunity to buy BP” and even after the announcement on Sunday that gas is now leaking from the ocean floor, most investment notes yesterday retained “buy” recommendations.
But if contracts for difference traders wondered if they should be getting some of the action on Friday, BP’s 4.74 per cent drop yesterday should reaffirm a cautious outlook. Although there are likely to be gains, the oil giant’s share price will stay extremely volatile.
On the upside, analysts highlight that BP has been severely oversold. Its share price hit a low of 296p at the end of May, which was for many a strong “buy” signal. Those who snapped up shares or bet long at the stock’s bottom could by now have made more than a 30 per cent profit.
Moreover, with a temporary cap cutting off the leak last week, BP has made significant progress. Many analysts target prices of over 500p, with UBS targeting 525p, AlphaValue suggesting 543p and Evolution Securities more bullish still at 580p. They argue that BP has a strong balance sheet, plenty of assets to sell and that models suggest it is severely undervalued at its current price.
But not everyone agrees with this optimistic outlook. Despite its 12-month 455p price target, the Royal Bank of Scotland urges caution: “From a short-term point of view, we suspect that 400p will manifest as resistance and short-term traders should prepare to take profits.” Killik & Co’s Jonathan Jackson took a similar line on Friday even before reports of new gas leaks emerged on the weekend, pointing out that “it is still too early to tell whether the well will remain shut off”.
Meanwhile, the cost of the clean-up and litigation remains unclear. Dealing with the leak has already cost £3.95bn and lawsuits are likely to hang over the company for years to come. BNP Paribas Wealth Management’s Chris Alexander highlights this uncertainty as the reason for his firm’s negative outlook on the stock in both the short and long-term. Alexander says: “It is impossible to get a handle on the costs. For low-risk investors who’d like to sleep easy and own something once removed from a gilt, this is a leopard that has changed its spots. It has become a higher-risk, higher-volatility share.”
Moreover, he does not think this has yet been priced in. Comparing BP to Shell’s valuation, he says: “If you look at the analysts’ consensus view of 2012 prospective yields, BP offers a riskier 7.2 per cent compared with Shell’s 6.9 per cent. So, at best, you’re only being paid 0.3 per cent more for the extra risk.”
So even if everything goes perfectly, low-risk traders should not assume that BP’s stock price will enjoy a smooth recovery. Until the well is permanently plugged and until the full legal costs are known, the oil major remains a high-risk bet.