I am by nature a contrarian investor: when others are selling, I am buying, and when others are buying, I am selling.
The devastating effect of Deepwater Horizon
As much of the worlds oil reserves have been extracted, the remaining oil is more difficult, and more dangerous,to extract. The Deepwater Horizon rig was the deepest oil well that had ever been drilled, with a depth of 10km thats more than the height of Mount Everest. Think of the technical challenges of drilling below more than 1km of water, many miles from the coast.
The Deepwater Horizon oil spill of 2010 had a devastating effect on BP. So far the company has paid out $43 billion in fines and clean-up costs. And nowit has been found to be grossly negligent about the Gulf of Mexico disaster, meaning it could face civil fines of an additional $18 billion. And Isuspect BP could be wrangling in the UScourts about these fines over many years. The Macondo spilllooks likely tocloudthe firmsfortunes years into the future.
But amid all the negativity, there are also some positives. To raise the cash to pay the fines and clean-up costs, BP has been reassessing its oil assets. It has taken an approach of value over volume, keeping its best assets and selling off the rest.
As the worlds remaining oil reserves are more difficult, and more expensive, to extract, it is taking a disciplined approach to capital expenditure, so that it can increase cashflow. It is also now placing much more emphasis on safety this is crucial as it has more deepwater oil reserves than any other oil company.
Smaller, simpler, more focused
Chief executive Bob Dudley has said that BP islooking ahead to a smaller, simpler, more focused future. This is because it has to raise cash after Macondo, and also perhaps because it realises that there is less oil to extract.
Much of the worlds oil is now produced by state oil companies, so it isnot surprising that BPhas bought20% of Russias state-owned oil companyRosneft.BP has oil fields around the world, from Uruguay and India to Egypt and Alaska.
How willthe companyact after the gross negligence ruling? I think it will act the only way it can, by selling off more assets.
So overall, how would I rate this company? Well, if we check the fundamentals, we find that that BP is actually quite reasonably priced. The 2014 P/E ratio is 9.8, falling to 9.1 in 2015. The dividend yield is 5.0, rising to 5.2.
This is not a company thatwill show rapid growth, butit may be worthconsidering as a dividend play. However, what puts me off from investing is the unclear long-term future of the oil industry, and the likelihoodthat BP will be clouded by the Macondo spill for years to come.
Where we thinkthe smart money is going
What is the worst kind of investment you could make? Well, in my view, it is an over-valued investment.
Over the next few years we at the Fool thinkthat stock-picking will be crucial. We always tell people to do their own research, and this applies more than ever now.
This is what we think the smart money is thinking, and we have written a free report about this, which explains all.
Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.