A bruised BP could reward patient investors

While its latest results show the heavy weight of the Gulf oil spill, eventually that will lift -- and so will the stock price.

By Jonathan Berr Jul 31, 2013 10:49AM
Shares of BP (BP) were slammed Tuesday by a double-header of bad news: Lackluster earnings and higher-than-expected costs associated with the 2010 oil spill disaster in the Gulf of Mexico.

Lower oil prices, higher tax rates and disappointing returns from its operations in Russia dragged down profit at Europe's second-largest oil company. Excluding one–time items, net income fell by 25% to $2.7 billion. That was far below the $3.4 billion average estimate of Wall Street analysts.
More worrisome, however, were comments from CEO Robert Dudley indicating that the company didn't expect to reach a settlement with the U.S. government over the environmental damage caused by the Gulf disaster that killed 11 and fouled huge stretches of the U.S. Gulf shoreline.

BP raised its estimate of the spill's total cost, including penalties, to $42.4 billion. It has long argued that many payments made under a court settlement have gone to people and businesses that suffered little or no damage from the disaster.

File photo of the BP logo (© Oli Scarff/Getty Images)The energy giant lost a bid this month to halt payments under the settlement that it says are being unjustly awarded. "The loss claims have really been misinterpreted from the agreement that we signed in good faith," Dudley told Bloomberg News.

First, BP agreed last year to pay the spill’s victims $7.8 billion. That figure, though, has climbed, and now the company estimates the cost of the court settlement at $9.6 billion. BP, though, has said that figure doesn't include future litigation costs, which it says cannot be reliably estimated.

A judge has refused to halt payments from the court-administered settlement while former FBI Director Louis Freh probes allegations of misconduct. Against this uncertain backdrop and a potential $17 billion fine under the U.S. Clean Water Act, BP may seem like a difficult stock to recommend.
 
But the beleaguered British company is worth buying. It's far from broke, thanks to tens of billions of dollars worth of assets it has unloaded since the Gulf disaster. The stock is dirt cheap, trading at a price-to-earnings multiple of 6.17, well under peers such as Exxon Mobil (XOM), and near a five-year low, according to Reuters. The average 52-week price target on BP shares is $50.74.

When the bad news around BP starts to fade -- and it will eventually -- the shares likely will climb, rewarding patient investors.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.

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