Why BP plc Is Still On My Shopping List

Last November I declared that BP (LSE: BP) (NYSE: BP.US) was my next buy. The liabilities from the Gulf of Mexico oil spill were about to be settled, and the company had pulled a rabbit out of the hat in Russia.

That meant BP could concentrate on its business and its shares would revert to being valued conventionally as an oil stock.

Well, the shares are still on my shopping list, but I haven't yet bought.

Trials and tribulations

Things haven't gone smoothly in the US. BP couldn't agree a settlement of civil liabilities, and is in the throes of a court case that could last up to a year. US prosecutors have taken a hard line and the worst case scenario could cost BP $18bn in fines, $14bn more than it has provided. That's half a year's cash flow.

The administrator of BP's settlement with private claimants is also -- in BP's view -- being over-generous. It has gone to court to try to rein him back, and has given up estimating the total cost.

On top of that, BP didn't join the bidding for new drilling rights in the Gulf of Mexico because it's not sure the US government would give it the necessary licences.

Share price

So uncertainty still weighs on BP's shares. They have underperformed the FTSE 100, even after a 2% jump last Friday when BP announced an $8bn share buy-back. The market reaction was illogical: the company is returning cash raised by its sale of TNK-BP in Russia, doing what it previously said it would do. But since when have markets been logical?

More substantially, BP has sealed the deal to buy 20% of Rosneft, the Russian state-owned oil major. The two companies have announced projects to ramp up exploration and development in the Russian Arctic.

BP's previous Russian partners had blocked its collaboration with Rosneft. Now it's best friends with a company that produces more oil than Exxon, and is run by Vladimir Putin's right-hand man. At the moment, the wind is blowing BP's way in Russia.

Unique upside

That makes it a distinctive play, with unique upside and unique risks. I'd prefer to see the US liabilities put to bed, but there's still a good investment case.

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