Buy or sell: BP shares bounce from lows, risk remains

LONDON/SAN FRANCISCO (BestGrowthStock) – Shares in BP Plc have been pummeled since the blowout at its Macondo well in the Gulf of Mexico on April 20. The oil major’s London shares dropped as much as 54 percent, but have since rallied 20 percent from their June 29 low to trade at about 363 pence on Friday.

The company may be able to stop the flow at the well a mile below the water’s surface later this month, but it still faces billions of dollars in clean-up costs and liability for the disaster, the worst ever U.S. offshore oil spill.

Are the shares undervalued, or does BP still represent a risky investment?

BUY

George Luckraft, lead manager of the 200 million pound AXA Framlington Equity Income Fund, said investors were now betting BP’s relief well would stem the oil leak.

“Odds are that it will work and that’s why shares have rallied quite decently from the 3 pound level to where we are now,” he said.

Still, BP shares, which account for around 4 percent of the Framlington fund’s assets, remain a risky investment, he said.

“We’ve held the view that the current levels have been good value for awhile now – the stock has been very undervalued. We think they’ve got a lot further to rise.”

Another fund manager, who spoke on the condition of anonymity, said many of his peers would likely avoid the stock because of its risk, even though it was attractive at the current price.

“It’s one of those terribly emotional stocks that if someone were brave and bought some of it and it went wrong, the clients would be very unhappy,” the fund manager said.

“But taking a purely rational, detached standpoint and putting aside this asymmetry of risk, the stock looks cheap. I think 3 sterling would be a practical floor to have on the stock that people will be looking at.”

SELL

BP, which continues to face significant political pressure in the United States, agreed to suspend its dividend to preserve cash that may be needed to help pay for the cleanup. That has made it less attractive to investors looking for exposure to the energy sector.

And until the well is capped and BP’s total costs and liabilities become clear, the shares will be volatile. Some company watchers have put BP’s likely costs between $20 billion and $40 billion, although estimates have reached $100 billion.

“As that worst-case scenario continued to grow, we just gradually got more uncomfortable with telling people to hang on to it,” said Edward Jones energy analyst Brian Youngberg, who rates BP a “sell.”

Few analysts expect BP to sink into bankruptcy because of the costs, which will likely be spread over several years, but the cash drain will dim its growth opportunities.

“They’re having to dedicate so much cash to the spill and its aftermath, will that impact their capital spending down the road? And also will other companies and countries want to do as much business with them, from a reputational standpoint? Those things could have a negative impact on the growth outlook for the company over time,” he said.

“Most individuals bought BP because they paid a great dividend, and that’s gone, and you’re basically rolling the dice at this point in time as to whether it goes up or down,” he added.

That uncertainty is clearly dampening investors’ appetite.

“If the (relief) well fails the shares are going to go down and if the well succeeds, the shares are going to go up. Doesn’t matter if you are fund manager or say a restaurateur, your guess is as good as mine,” and one UK fund manager.

(Reporting by Raji Menon in London and Braden Reddall in San Francisco, writing by Matt Daily, editing by Dave Zimmerman)

Buy or sell: BP shares bounce from lows, risk remains