Over the last weeks I have given a lot of thoughts to the idea of buying shares in the distressed oil company BP plc, after the stock price has fallen over 40 % since the end of April.
As you all know, the market’s reaction came after the worst oil spill in the history of the USA.
What is obvious is that BP is a strong and vital company that can weather almost any storm.
Really, I believe the bankruptcy rumours around the oil giant are not well founded and the result of the stress US politicians are under.
Indeed, BP is cash-rich and generated GBP 16.5 billion in profits in 2009.
However, the proportions of the Gulf of Mexico spill have raised concerns about litigation and the resulting damages BP faces.
It’s tough to distinguish facts from emotion when watching the media coverage of the spill.
In my immediate investment community I came across people who actively speculate on a BP recovery as well as who hold BP in their retirement or income accounts.
It seems easy to argue in favour of a speculative bet on BP.
The market’s reaction might be to short-sighted and BP stock could very well recover soon.But you must be able to bear the risk of further share price declines and highly volatile price moves.
The really difficult question to answer though is, whether or not you should keep your BP shares in your retirement or income account.
If you (as many others) to some extent rely on BP dividends for your income, you should definitely consider the following two points:
a) Would it really devastate my portfolio if BP declined a further 50%?
b) Would I be in financial trouble if BP stopped its dividend payments?
If you have answered “yes” to any of the above two questions you may want to consider trimming your BP position to a bearable level.
But should you sell all your shares? You would definitely not be the first seller as the current volume being traded is at a record high.
If you ask me, I would not bet the house on continued long-term dividend payments by the oil giant, but as there is a huge vested interest in continued dividends payments see Barack Obama’s attacks on BP hurting British pensioners
At the end of the day a court of law and lot a bunch of hysterical politicians will decide what BP will have to pay. Until then shareholders will have to live with the volatility caused by wild outbursts.
In the meantime Whitney Tilson a hedge fund manager I greatly respect has bought some BP stock. The video clip where he puts the matter into perspective can be found here
Tim du Toit is the editor of Eurosharelab. Kindly note that this blog is published for information purposes and is not investment advice. Please refer to our disclaimer. To subscribe to our weekly newsletter, click here.
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