BP (BP) has stolen the headlines over recent weeks, since the explosion and sinking of its Deepwater Horizon rig off the coast of Mexico on the 21st April. Thousands of barrels of oil are gushing into the sea everyday from what is said to be the worst oil spill since the Exxon Valdez disaster off the coast of Alaska in 1989.
As can be seen from the above chart of BP, the share price has plunged around 17% since the explosion, wiping over £20 billion off the company’s market value.
Efforts to contain the leak are costing BP more than $6 million a day and significant litigation and reputable damage is likely to follow. It is difficult to accurately estimate the final costs, but analysts are forecasting a final bill of around $5 to $7 billion, which is well below its reduction in market value.
Recent first quarter results on the 27th April came in comfortably ahead of consensus forecast. The clean replacement cost of supplies, a keenly watched figure that strips out gains or losses from inventories and other non-operating items, for the three months ended 31st March totalled $5.65 billion, which was ahead of estimates of $4.8 billion and well above the $2.58 billion in the first quarter of 2009.
The strength can be largely attributed to the continuing success of the restructuring programme launched by CEO Tony Hayward when he took over in July 2007. Furthermore, following the first quarter results and the initial impact from the oil spill, the chairman of BP, Carl-Henric Svanberg personally bought over £1 million worth of shares above £6 per share.
At the current reduced price, BP yields a generous 7% and due to the growing costs relating to the oil spill there is a fear that the high dividend may not be sustainable. However, the dividend is almost twice covered by earnings and although it is hard to predict the impact of the spill on cash flow, I do not believe the dividend is at risk. The shares trade on less than 8x earnings, with over 13% of growth expected next year, putting them on an attractive PEG of 0.53.
Technical analysis suggests that after the near 20% sharp falls experienced recently, the share price appears to be stabilizing. The moving average convergence divergence (MACD) histogram is stepping higher and the corresponding moving averages appear to be bottoming out, indicating that a new trend could be in the making. Similarly the RSI is levelling off deep within oversold territory, indicating that the selling momentum could be exhausted.
Despite the ongoing uncertainty surrounding the leak, I believe the weakness in the share price is out of proportion to the costs surrounding the incident. The environmental impact is likely to affect the group’s reputation, which will take a while to disperse, but BP is supported by strong fundamentals and I feel the weakness offers a good medium/long term buying opportunity.
At the time of writing the share price is 547.6p and near term targets are seen at 583.5p, 598.75p and 631p, with a stop loss marginally below secondary support at 496.5p.
I was thinking the very same thing on Friday as BP has now been kicked about for the last two weeks and appears to be un-loved by the market in general I too think the sell off is way over done and the current price is a good place to dip your toe back into this good yield paying stock
I will be dipping in with small amounts with this one!