BP Might Not Be Worth the Risk Despite Its Potential

Legal issues seem to dog big oil companies for years -- BP is the most recent example of the problem, and it ain't out of the woods yet.

Jan 15, 2014 at 9:35AM

BP (NYSE:BP) has vowed to keep fighting compensation claims arising from the massive Deepwater Horizon oil spill in the Gulf of Mexico. The problem is that it doesn't believe all of the claims have merit, to the tune of hundreds of millions of dollars. That's a good reason to keep fighting, but it means there's still oil-spill risk. Long-running legal woes aren't uncommon in the oil industry, and if history is any guide, BP has decades to go before this issue is behind it.

A big mess
There is no question that the Deepwater Horizon oil spill was a disaster. The leak, which couldn't be easily contained because it was so far underwater, was front-page news for weeks. And while BP was only one participant in the issue, it was the one that attracted the most attention. So much so that the company's name was changed from British Petroleum to BP -- maybe that wasn't because of the spill, but the timing was pretty suspect.

Another disaster of similar proportion is ExxonMobil's (NYSE:XOM) 1989 Valdez oil spill, which also captivated media audiences. However, the Valdez incident in Alaska shows that there is a light at the end of the tunnel. ExxonMobil was able to withstand the blow and grow into an even larger and more powerful company. That said, ExxonMobil's money is still being spent on environmental projects in Alaska more than 20 years after the spill.

The never ending journey
These things have a way of lingering. And that's partially why BP is fighting. It believes that businesses that didn't suffer any damages from the spill shouldn't receive compensation. And it believes that payments that have been made are, in many cases, too generous. If it doesn't fight, the feeding frenzy could become overwhelming.

Of course that belies the fact that as long as BP keeps fighting, it's still paying its lawyers. It's just a part of the process, but it adds up. And while ExxonMobil's settlement payouts show that oil-spill issues can linger for an excessive amount of time and continue to tarnish a brand, Chevron's (NYSE:CVX) travails show that even questionable accusations can take on a life of their own.

Chevron's problems stem back to its acquisition of Texaco in 2001. Ecuador accused Texaco of dumping hazardous waste from 1964 to 1992. The case, which involves a nearly $20 billion settlement against Chevron, looks more like a bad legal novel than a real-life court case, which is why Chevron continues to fight, most recently in the U.S. courts.

While Chevron will survive this lawsuit, it's provided 20-plus years of work for the company's lawyers. That's not good news for the expense side of BP's earnings statement.

Already big changes
And BP has already had to make some pretty big changes because of the Horizon spill. For example, the company sold billions of dollars worth of assets to help fund the costs, legal and otherwise, associated with the spill. And with that, its growth profile changed. Some recent growth initiatives have the company working with unreliable global partners like Russia. While it may have made such deals anyway, since most of the easy-to-find oil is gone, the Horizon disaster has pretty much forced it to take a more aggressive approach than it might have before.

It's easy to think that the Horizon issue is in the rearview mirror, but the history of Chevron and ExxonMobil on the oil-spill front suggests four years isn't enough distance to make that claim. BP's around 4.6% yield is enticing when compared to ExxonMobil's 2.5% or Chevron's 3.3%, but the extra risk may not be worth it. And that risk extends beyond legal issues to include the company's business direction after selling billions of dollars in assets. Conservative investors should still be looking elsewhere.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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