Why buying BP now is incredibly risky
BP looks cheap. But for now it's a high-risk stock for speculators, not long-term income-seeking investors. Here's why.
A huge percentage of the UK population probably think they don't own any shares. Mostly they are wrong. If they have a company or private pension of any kind they do they own a percentage of the shares in the pension fund. And odds are that one of the biggest holdings in the fund is BP, particularly if you hold any sort of income fund.
Own any of the JP Morgan Income and Growth Funds? At the end of March, a full 9.2% of the fund's portfolio was in BP. Or perhaps you have the Schroder Income Growth Fund? 8.5%. Or the Standard Life Equity Income Fund? 8.3%. I've got a list in front of me as I type. It tells me that nine of the UK's best known income funds have or had up until a few weeks ago more than 5% of their total assets invested in a share that has fallen 40% in a matter of weeks. Yikes.
So what next for BP? There is much talk about whether the shares are a buy or not John Stepek and I were bickering over it just this morning. He thinks that even the most unlikely of eventualities has got to be priced in at this stage and that the huge fall we saw overnight on Wednesday probably represents a mad panic that in itself marks a bottom.
I agree on lots of these points. BP is in fine financial shape. The cost of the clean up is going to be horrendous and the lawsuits and punitive fines never ending. But BP has good cashflow and low levels of debt: odds are it can cope. It also looks cheap if you just look at the financials.
However the problem is that you can't just do that. BP isn't a company any more; it is a political hot potato with a future made up of speculative litigation, desperate political pressure and unknowable costs. And that changes everything.
Barack Obama knows perfectly well that BP hasn't been called British Petroleum for years; he knows that it is nearly 40% American owned and was formed from the mega-merger of America's Amoco and BP back in the late 1990s; and he also knows that the accident happened on a Transocean rig in US waters with American permits, and that blaming BP for 100% of it isn't entirely fair (a lot of it yes, all of it, no).
But with his own popularity ratings deeply in dodgy territory, he clearly doesn't care: instead, as Fraser Nelson puts it in The Spectator, "to listen to Obama it is as if a few blokes from Stoke-on-Trent sailed over and drilled a wildcat well then buggered off and left Uncle Sam to suffer all the damage." No different really to the silly way Gordon Brown kept referring to the banking crisis and global recession as having "started in America," as though no one except for a group of derivative-crazed New Yorkers had anything to do with the meltdown (least of all him).
The hope is that Obama will give the nutty rhetoric a rest soon, given how many Americans work for BP (and for other deep sea drillers) and how many Americans own BP shares and depend on BP dividends. But the fact that he may not means that buying BP is a dangerous thing to do. Anyone who buys it now is going to have to have an entirely different attitude to risk than the long-term income seekers who make up its current shareholder base.