BP remains under pressure months after plugging Gulf of Mexico leak

Kathleen Brooks
THINGS can’t get much worse for Carl-Henric Svanberg, chairman of BP. After receiving a drubbing for his handling of the Gulf of Mexico oil spill, he is also nursing a £2m paper loss on shares he bought just before and just after the 20 April explosion.

The beleaguered oil giant’s share price staged a mini recovery at the start of this month after falling to below 300p at the peak of crisis. However, in recent weeks it has spluttered to a halt. After a few attempts it has been unable to break above the crucial 400p level.

But is now the time to buy the oil giant? Analysts at Credit Suisse certainly think so. They see two potential catalysts over the next few weeks that could propel the stock higher. Firstly, a BP internal investigation into the Gulf of Mexico spill, which was scheduled to have been released by the end of August, could increase the pressure on BP’s partners to take some responsibility for the event; secondly, by 6 September BP engineers hope to fill the well with the last injection of mud and cement that should plug the well for good. These factors, they say, should push the share price, currently at 382p, to 515p, a 36 per cent increase in the medium-term.

The final bill for the disaster has yet to be tallied. Credit Suisse however, believes that the final cost will be £46bn, which includes all clean-up costs, punitive damages and Clean Water Act fines. Combined with a strong balance sheet, BP is currently selling for an attractive price, it says.

But spread betters who are interested in going long on the oil giant will not want to suffer the same fate as Svanberg. The problem with BP’s share price is that it can’t seem to shrug off its unknown liabilities, says Jonathan Jackson, head of equities at Killik & Co, the stockbroker: “It’s moved into the courtrooms now and we just don’t know how much the final bill will be.” Even Credit Suisse acknowledges that the liabilities incurred because of the crisis won’t be known until the middle of next year.

There are other concerns too, namely what price BP will be able to get for the assets it has agreed to sell to cover the cost of the liabilities. It has already divested $8.9bn of assets, including oil fields in Colombia. However, it has a further $16bn-$21bn of asset sales still to make and, as Jackson points out, we don’t know how much cash these sales will actually generate. Then there is the reputation issue. Earlier this week, BP decided not to bid for a drilling licence near Greenland. It is not known if this is because of events in the Gulf of Mexico.

BP hasn’t been the only oil stock to fall in recent weeks. Royal Dutch Shell and Exxon Mobil have also experienced weakness as fears about the global economic recovery has mounted. This weighed on the price of oil, which has fallen from just over $80 per barrel at the start of this month to $72 per barrel on Friday.

There are good arguments to be made on both the bullish and bearish side for BP.
However, spread betters should be aware that BP is a very different company to what is was on 19 April. BP doesn’t only have to carry the burden common to the overall oil sector, but its own woes could leave any rallies short-lived.