There are various conflicting views on BP and for most of us looking for a quick bargain on our shares, BP could easily be a target.
Most of us already have high exposure to BP in any event. If you were to look at the top ten holdings in your pension fund or endowment policy, right at the top will be a holding of between 5-10% in BP. Many pension funds have a simple strategy with their investment where they buy a core holding of fifteen to twenty big stocks then surround those with some potentially sexy funds that may offer some outperformance. You may have been of the belief they all managed your money better than that, but you'll have been misled.
A typical holding might be as per the Prudential UK growth fund. This is a fund of over £2.1bn but its exposure to BP is striking at 6.66%. I wonder what it was before it plummeted. (1) The Prudential is reasonably typical of many companies in its exposure to BP and you might also consider the exposure for those who have purchased tracker funds in an attempt to keep costs down. The UK's wealth is exposed to BP to the tune of billions.
The views of the leading managers are conflicting when considering whether or not to buy back into BP. Neil Woodford, probably the UK's leading consistent manager and is in charge of two funds totalling £16.4bn hasn't been hit by BP's share fall. He sold out last year on the belief BP was paying out too much in dividends and not investing in exploration or production. Woodford believes it to be reckless to think that the $20bn rescue package is all BP needs to think about, believing it will be a much smaller company in the future.(2) BP's defence may well be that it has farmed its work out to trusted suppliers and that the responsibilities rest with them. Perhaps.
It may or may not be proven that Anadarko, as its partner, are responsible, but will they be able to pay up?
The negative view of BP's position is shared by many and most experts agree that better value still remains with some of its competitors even after the falls.
Some of M&G's managers see things slightly differently. The manager of the M&G recovery fund (one of the best in its UK all companies sector). He is adding more stock to his portfolio but is of the view that the risks associated with the current situation are being over discounted. However he believes its cashflows are quality and that it has a high quality and undervalued asset base. He believes there is long term value in the stock and that the primary drivers will be what the US government demands in addition to the clean up. Its a pretty open cheque book. (3) Other forums report views of potential bankruptcy which are overdone I believe. But if Exxon Valdez cost $40,000 per barrel to take care of clean up and litigation etc, we have a current bill of c$37.6 so far. However the containment cap is collecting 15,000 a day so that is probably a more accurate calculation of the amount of oil leaking and this would bring the liability to $27.6bn. BP said a worse case scenario was 60,000 barrels a day which takes the liability to $117.6bn but this is likely to have been overdone seeing as the cap is collecting 15,000. (4) Before the spill BP's net assets were $105bn and annual cashflow before capex and dividends of c$25-40bn.
An off the record conversation with a couple of other leading fund managers pointed to the belief it's possible it will bounce back but the potential for the reverse to happen is more than equal to that, so why take the risk.
Or as I might put it, if it falls from now, how would you be able to defend your decision to buy. It seems the logic behind it relates to the fact its share price is now almost half its price on April 15th. I learned a long time ago 'anything that can get cheap can get a whole lot cheaper'.
If you would like to see how much exposure you have to BP call on 0845 230 9876, e-mail info@wwfp.net
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