Falling oil prices have weighed on oil producers’ shares since the second half of 2014. Some oil companies have felt the weight more than others. For the most part, the big integrated oil giants have held their own.
Shares of ExxonMobil (NSYE: XOM), Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS.a) are flat to slightly down for the year. Factor in the dividend, and investors have little to complain about when one considers falling oil prices have demolished the market caps and distributions of many “mom-and-pop” exploration partnerships.
That said, there is an exception in the land of the giants: BP PLC (NYSE: BP). Year over year, BP’s shares are down 18%.
Lighter oil prices means more weight on BP’s shares. Then again, that’s the case for all oil producers. BP has had more weight to bear than most.
This past September, BP was found culpable in causing 5 million barrels of crude to spill into the Gulf of Mexico in 2010. Specifically, a federal judge ruled that BP was guilty of gross negligence and willful misconduct. This ruling opened the door to huge fines under the Clean Water Act. The initial fine was indeed huge – posted at $18 billion.
When the extent of the spill and the magnitude of the fine were revealed, BP was bombarded with the usual outcry: “Immoral,” “criminal,” “reprehensible” and similar words were used to express indignation over BP’s handling of the spill.
I took a different tack. In my write-up on BP in the December issue of High Yield Wealth, I reasoned that company was hardly the ogre it was portrayed to be. The fine was too severe and would be reduced by cooler heads. That has occurred. Last month, the fine was reduced to $13.7 billion. BP shares popped nearly 6% on the news.
Outside of the nation’s capital, $13.7 billion is still a lot of money, but within the grand scheme of company that generates $380 billion in annual revenue, it’s manageable. What’s more, I expect $13.7 billion to be further reduced. The amount is still excessive. Whether the fine will be pared is great unknown (along with the direction of oil prices) weighing on BP shares, but the great unknown can lead to great entry points.
I know from experience.
In May 2012, I recommended the French integrated company Total SA (NYSE: TOT) to High Yield Wealth readers. Total’s shares were trading near a five-year low. A whirlwind of uncertainty – produced by an offshore disaster, of all things – weighed on Total’s share price. I saw opportunity, because the estimated cost to Total to rectify the disaster was absurdly high.
In short enough time, Total shares began to rise. A few months after my recommendation, Total management announced the costs related to the offshore disaster would be far less than the pundits’ estimated. Intrepid investors who bought into Total’s “disaster” booked a 66% total return when Total was sold out of the High Yield Wealth portfolio last year.
BP offers the highest yield – at 6% – among the integrated energy giants. It also offers the greatest potential for price appreciation, because it has the most bad news weighing on its shares. When the weight begins to lessen – and it will – BP’s share price will rise. It will also likely rise more dramatically than most investors expect.
BP is priced for the worst, but the worst rarely occurs.
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