Investing

BP Shares May Double

The problems in the Gulf have caused BP’s shares to drop from a 52-week high of $62 to the current price of $32. Two years ago, they were almost $70.

BP’s stock is likely to surge again, and may get back to its previous high.

Some of the reasons the shares could go up have nothing to do with BP, but most are within its control.The stocks of all the major oil companies rose sharply when oil was above $100. That price level nearly doubled their profits in the middle of 2008. Crude may not go back to its peak of $140, but a number of investment banks and oil analysts see it moving above $100 at the end of this year. That will cause another windfall of profits in the sector.

BP has eliminated its dividend, and oddly enough, that moved its shares up. Most holders of BP shares are institutions, They do not care as much about yield as individual investors. Many are looking for price appreciation. They look at the BP move as one to preserve capital and build a war chest for future drilling and liability costs.

BP may be shut out of the Gulf for some time, but the richest deposits of oil now sit off Brazil and Africa, deep beneath the ocean’s surface. BP is still the most skilled deepwater driller. It may be abhorrent, but Brazil and some nations in Africa may be more interested in profit than the environment.

BP has said that it will sell off $5 billion in assets to cover part of its escrow costs. There are not likely to be its most profitable businesses. As a matter of fact, they may be those that give it the lowest yield on equity and capital investment. Those assets may still be valuable to refiners like Valero and drillers in places like the Middle East. BP may actually improve its profitability.

BP has decided to pay money into escrow at a rate of $5 billion for the next four years. That will not be much of a strain on its balance sheet. Its cash flow is good enough to offset what is only a modest cost to the company.

The real test of BP’s share price will be the disposition of early suits against the company. If federal and state courts find that BP’s actions in the Gulf where not negligent, the company’s prospects will improve. If suits seem that they will be dragged out for years, the markets will react favorably. BP has an army of lawyers which is almost certainly not true of many it will face in court

It is nearly unimaginable that BP shares could recover. But it is instructive to look at Merck shares as it put much of the Vioxx litigation behind it. The stock traded at $27 in 2005 and moved to $58 two years later. The chart for Altria, the former Philip Morris, does not look much different as it went through tobacco litigation, from$21 in 2000 to $88 in 2007.

Litigation can nearly ruin a stock price but the end of litigation can drive it much higher.

Douglas A. McIntyre