Selling Shares of BP with Changes in its Fundamentals

100422-G-8093-004-Deepwater HorizonThe oil spill from BP’s offshore platform has been in news since last week. I do not have any first hand idea of the ground realities. Based on news media and reports, as of today, the oil spill continues unabated, with many different estimates of rate of flow of crude oil in the sea. To me, this is an indicator that nobody knows how serious or trivial this crude oil spill is. There are no signs that in will stop in near future.

The news agencies government organizations have been showing that potential short term damage and long term impacts would be very significant (to local population and local businesses). At least for now, BP has also mentioned that it will pay for clean up and considers itself partially responsible. In short, BP is on the hook for cleanup, irrespective of what are the ground realities and technicalities.

According to one estimates, it is expected that BP will be liable up to $6 billion for clean up, $ 1Billion for litigation, and $3 Billion for compensation, and $4 billion in lost revenue. This is a total of $14 billion. I am not so sure if these estimates are in the ball park. However, it gives some idea on the scope of the financial impact.

Looking at the 1989 Exxon Valdez spill in Alaska, the original damage awarded was $2 billion. This was reduced to $500million with continued litigation. So, it is likely that $14 billion could be overestimated or it could be under estimated. The difference is Alaska is thinly populated and economic impact was probably lower than Gulf States.

How does it affect me?

Dividend investors realize that dividend suspension or reductions are reality. Businesses faces challenges, sometime screw ups, sometimes business model driven, sometimes economic environment, sometimes accidents, and probably many more reasons. It is characteristics of the doing business.

In this case, I believe BP will have significant financial impact in long term. To me, this oil spill is fundamental change in strength of BP. The financial implications on this cleanup will shows up in BP’s cash flow, income statement, and balance sheet. And we do not know yet what would be the future financial hits because of lawsuits and other legal obligations.

I have owned shares of BP since early 2008. I had continued to buy two more times during the downturn. It has been good dividend growth company. The question that we dividend investor always ask is when to sell? Should we wait until BP cuts its dividend? Should be believe in market speculation and sell it when in money?

As of April 30, 2010, BP represented 3.5% of my portfolio value and 2.5% of my dividend cash flow. I expected that BP will either suspend or reduce its dividend in intermediate future. Therefore, I decided to sell all of the shares of BP while I was still in the money. My personalized return, i.e. XIRR, from BP shares was 13%. I will re-invest this cash into some other dividend growth company.

While I do continue to pursue dividend growth as my investment philosophy, I also realize the importance of value of capital. Any changes in fundamentals affect the company performance in short run. I do not know if I sold a consistent dividend performer. Time will tell.

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3 Responses to “Selling Shares of BP with Changes in its Fundamentals”

  1. Timothy Tallman says:

    So after the crisis is over do you plan on looking at BP again in the future?

  2. Greg says:

    I don’t own BP but,
    they have a Net Income of 16 billion each year.
    So they give up 10 billion. (Take off your 4 billion in lost revenue). And overall still not bad.
    This won’t be payed out for years and years. Look at the tobacco lawsuits.

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