Is BP's share price undervalued?

Posted on: 09 July 2010 by Mark O'haire

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, according to Peter McGahan.

BP share undervalued?Most of us already have high exposure to BP in any event. If you were to look at the top 10 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 15 to 20 big stocks then surround those with some potentially sexy funds that may offer some out-performance. 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.

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.

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.

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.

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 15 April. I learned a long time ago 'anything that can get cheap can get a whole lot cheaper'.

By Peter McGahan

Need Expert Advice?

Peter McGahanPeter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.

Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.

Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'

Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.

If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email info@wwfp.net.

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