Investment Insider: BP has acted decisively to recover from oil spill

Before the Gulf of Mexico oil disaster three years ago, BP was a must-own share for UK investors. The company was not only one of the most generous dividend payers, it had been a spectacular growth share too. Consequently, many investors held BP shares either directly in their portfolios or indirectly (and perhaps unknowingly) through their pension funds.

At the time, opinion was divided as to whether BP could weather one of the worst environmental disasters in recent history. Apart from the financial damage, BP also faced severe reputational damage – which tends to be harder to repair.

Financially BP looked reasonably sound. It was cash rich. It not only had liquid funds but it was also capable of generating more. It was reckoned that BP could generate more than $20bn a year from its ongoing operations. In other words, shareholders would have to take a short-term hit on their dividends until such time that the company could properly assess the financial damage.

BP shares have yet to return to their pre-disaster levels of 658p, but at about 460p are well above their post-spill low of 296p.

The company has not wasted any time in restructuring its business, and has embarked on a major programme of asset sales. It has also restored its dividend.

Interestingly, BP is what seasoned investors would classify as a value share. The company is valued at about eight times profits, which is below the market average. What's more, profits are expected to improve this year and next. The dividend yield, at about 6 per cent, is also above the market average. Additionally, BP is forecast to lift its dividend for at least the next two years.

BP has debts of about £18bn – not excessive relative to its market value of £88bn.

It would seem that BP has turned the corner and that better days lie ahead. But the lesson for investors is that no investment is ever a certainty. While some investors may prefer, say, Royal Dutch Shell, a better strategy may be to have some of each. You never know when another oil disaster will strike.

David Kuo is director of fool.co.uk

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