Thursday, 22 February 2007

BP - and what to do about it?

As previously mentioned, I bought into BP last year. What a huge mistake! As the price has collapsed due to the drop in the oil price, texas refinery blowing up issues, prudhoe bay alaska pipe rusting problems, and the huge delays in the thunder horse project in the Gulf of Mexico have combined to drag the price down from a high of £7.12 to today's price of £5.21.

Currently I'm sitting on quite large losses. This week as BP plunged further after going ex-dividend on Wednesday, I started to wonder what I should do about it. I'm no genius stock picker and to be honest my picks have done plenty worse than the funds I'm in so maybe I should cut my losses and put all the money into some unit trusts or ETFs.

My options are :
Sell now - take the money and run
Short the stock - although I really am not confident of this method of trading
Buy more now - average down further and try to sell some of the stock later if it lifts
Hold - and just wait it out, collecting dividends along the way

Pros of BP
-Value - massively undervalued now compared to assets and future oil prices
-Demand for oil is high - and unlikely to drop in a hurry. Try telling the newly rich chinese that they can't put petrol in their motorbike or car.
-Dividends - 4% yield and paid quarterly allowing for more compounding
-Price low - surely it can only go up from £5.00
-Oil running out - as less oil exists in the world the price of it is bound to go up.
-Share buybacks - although I hate them, BP are currently reducing the amount of stock available by 10% a year. Fewer shares = higher price for same market share (supposedly)
-Growth through acquisitions - why can't BP get bigger by buying those second tier players instead of share buybacks?

Cons of BP
-Nobody loves it
-New management are really the old management that caused everyone to hate them
-Unlikely to grow any faster due to health and safety requirements restricting haste in developments
-Alternative energy sources are attracting resources.
-Anti-car lobby growing stronger.
-Cost of digging oil out of the ground is getting higher for the likes of Big Oil companies.

It's a difficult choice. I have some money from an excellent piece of prophecy this week on Rentokil. I bailed out on Monday at £1.64 - today it collapsed to £1.50 on news of a big profit fall. I'd had enough of it anyway, even if it did yield loads. An entire year of no price movement is just too dull to be in.

The graph shows BP in blue - under performing the overall oil sector in red and above the oil price (light blue) in relative terms. The oil price (shown with the oilw etf) has just started to lift so BP should be expecting a better performing next quarter (possibly foretelling a lift in the share price?) Anyway, I think I will buy in again to BP if it hits £5.00. That will have to be it (fingers crossed).