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Should I Buy BP? 3 Pros, 3 Cons

It's certainly a better-run company now, but that may not be enough

   

There wasn’t much to like about BP’s (NYSE:BP) second-quarter report. Earnings plunged by 96% to a loss of $1.39 billion and revenues fell from $104 billion to $95 billion. On the news, the shares of BP are off by 4% to $40 in midday Tuesday trading.

Now it’s true that since the Deepwater Horizon disaster in the Gulf of Mexico in 2010, BP has certainly made lots of improvements. Consider that the stock is up close to 40% since the lows.

So might the recent fall-off be an opportunity to buy BP? Let’s take a look at the pros and cons:

Pros

Leadership. BP’s CEO Robert Dudley has taken tough actions, making significant investments in safety by upgrading offshore rigs. It also helps that Dudley grew up in Mississippi and is sensitive to the ties between the company and the local region. This has been key in helping to resolve the complex issues in the Gulf of Mexico.

TNK-BP. This Russian oil venture has been contentious. Yet it has been a big money-maker. BP will probably unload the asset, perhaps to a major Russian operator. A transaction could fetch as much as $30 billion, which would be important in dealing with the legal liabilities still pending from the Gulf of Mexico.

Dividend. In 2011, BP restored distributions. In fact, the current yield is a hefty 4.6%.

Cons

Gulf of Mexico Spill. BP has made lots of progress in dealing with the liabilities and regaining some trust. But the impact of the disaster will remain a problem for some time. The main reason is that it will be tougher to compete for bids on new projects against rivals like Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A, RDS.B).

Production. With its aggressive asset sales, BP is a now much smaller company. But to start growing again, it will need to eventually find new reserves. However, this is becoming much more difficult and expensive. Often it means dealing with hostile environments and/or tough foreign governments, which may renege on their agreements.

Oil Prices. Over the past few weeks, crude has rallied from its recent lows. But the price is still down by 14% for the year. If the global economy continues to weaken, downward pressure could increase.

Verdict

So far, it looks like Dudley has been making the right moves. He has put safety at the forefront, which has involved an extensive corporate reorganization. It also helps that BP has been cooperative in the cleanup efforts in the communities in the Gulf of Mexico.

Yet this means BP will continue to languish in the near-term as the company repairs fields, which means less production. Lower crude and natural gas prices are another drag.

Given these factors, the cons outweigh the pros on the stock for now.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/07/should-i-buy-bp-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

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