As BP Climbs a Wall of Worry, Here's the Risks You Should Consider Before Buying

BP's heavy reliance on Russian energy production and the ongoing civil trial stemming from the 2010 oil spill are two major risks to carefully consider.

Mar 18, 2014 at 11:11AM

Bp

European oil and gas giant BP (NYSE:BP) is constantly under pressure. Mounting legal expenses in the years since the 2010 oil spill in the Gulf of Mexico have cost tens of billions of dollars, and its ongoing civil trial carries the threat of billions more in additional financial penalties. And, a new set of concerns presents itself in the form of geopolitical risk.

The recent conflicts in Russia and Ukraine are a particular worry for BP, since it's heavily involved in Russian energy production. It's made a huge investment in Russian energy over the past few years, which is looking dubious now that geopolitical risk has reared its ugly head once again. As the company continues to climb a wall of worry, here are the risks investors should carefully weigh before investing in BP.

Renewed geopolitical concerns
Things are very uneasy in Russia right now, and the publicly traded energy companies that rely on Russia and Ukraine are starting to reflect this uncertainty. The Russian central bank recently raised interest rates from 5.5% to 7% after the Russian rouble fell to an all-time low against the U.S. dollar and the euro. This has had a pronounced effect on Russian energy stocks including Gazprom (NASDAQOTH:OGZPY). Gazprom supplies natural gas to western Europe through Ukraine, and saw its shares fall by double-digits in the immediate aftermath of the rate hike.

BP is heavily reliant on Russian oil and gas production through its equity position in energy giant Rosneft. BP owns 20% of Rosneft, which comprises a major portion of BP's production and reserves. In fact, its Rosneft investment represents 28% of BP's production and 37% of its proved oil reserves.

To put BP's massive investment in Russian energy into perspective, consider how much production and reserves BP has concentrated in Russia compared to other integrated super-majors. ExxonMobil (NYSE:XOM), the biggest energy company in the world, is almost three times the size of BP by market capitalization. And yet, ExxonMobil has a fraction of its production and reserves tied up in Russia as compared to BP.

ExxonMobil produced 46,000 barrels of oil equivalents per day in Russia last year, according to data compiled by Wood Mackenzie and BP. By comparison, BP's 2013 net production in Russia stood at 961,000 barrels of oil equivalents per day. Moreover, ExxonMobil holds 300 million barrels of equivalents in Russian reserves, while BP's Russian oil and gas reserves total 14.3 billion barrels. By these measures, it's clear just how massive BP's investment in Russia really is.

Ongoing civil trial presents an additional set of concerns
As if the situation between Russia and Ukraine wasn't tenuous enough, an additional risk to BP is that it's still suffering from the fallout of the 2010 oil spill in the Gulf of Mexico. To date, BP has paid $42.7 billion in total damages stemming from the Gulf of Mexico spill. Further penalties are likely once the civil trial is resolved, and how much more BP will pay is entirely dependent on whether it is found grossly negligent.

BP faces up to $18 billion in penalties if found guilty of gross negligence and if 4.2 million barrels spilled into the Gulf. If BP is not found guilty of gross negligence and its assertion that a lower amount of oil spilled is upheld, the tab will be closer to $3 billion. Clearly, there's a big difference between $3 billion and $18 billion, which makes it fairly uncertain how hard BP will be hit.

Carefully weigh all the factors
BP's massive investment in Russian energy production looks scary right now in light of the tensions between Russia and Ukraine. In addition, BP could face several billion dollars in additional financial penalties once its civil trial has concluded. These risks make investing in BP an uncertain proposition, but at the same time, there are potential rewards to be had for brave Fools.

BP pays one of the highest dividend yields in the industry, and its share price could rise if the geopolitical risks and civil trial resolve in BP's favor. That's why investors should carefully think about all the risks presently hanging over BP's head before jumping in.

Hopefully, BP's dividend can uphold the strength exhibited by these:

Dividend stocks, as a group, have historically outperformed their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it’s true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor’s portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Bob Ciura owns shares of BP p.l.c. (ADR). The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers