There was a heightened air of nervousness at last month’s Offshore Technology Conference in Houston, Texas.
This was hardly surprising given the catastrophic explosion on the Deepwater Horizon oil drilling platform, which had been working for BP in the Gulf of Mexico.
This resulted in the tone being markedly different from past OTCs I have attended, particularly with regard to the anti-British undercurrent that became apparent in many quarters.
The fall-out from the explosion and the consequent spill has seen shares in BP take a battering, with the stock having lost nearly one-third of its value by last Wednesday. However shares rallied slightly on Friday amid growing confidence that the leaking well could be capped.
Nevertheless – and this takes in the impact the disaster will continue to have on the company’s cash flow for years to come – we believe a solid long-term investment case remains.
Clearly, Deepwater Horizon will continue to dominate news in the short-to-medium term, completely overshadowing the company’s good first-quarter results, and sentiment, rather than fundamentals, is likely to remain an important share price driver in the short term.
It is anticipated that the continuing clean-up operation coupled with far-reaching revisions to safety regulations and mechanisms could end up costing BP billions of pounds, although uncertainty around this number remains high.
This loss, however, will arise and be accounted for during a number of annual periods and is unlikely to equate to more than a fraction of the company’s annual profitability, even with the expected dividend yield of 9%.
The question of whether this dividend will be paid occurs because of politics, rather than a constraint on cash flows.
Considering the effect events will have on Scotland’s oil companies, there is both good news and bad. There is likely to be a negative impact on firms within the oil exploration sub-sector, of which Edinburgh-based Cairn Energy is one.
Conversely, with the expected overhaul of systems, the prospects of oil service companies such as Aberdeen-based Wood Group might be enhanced; presenting investors with the perfect opportunity to buy into their stories.
Wood’s extremely strong balance sheet – its net debt sits virtually at zero – should allow it to fund both organic capital expenditure and acquisition programmes.
Its full-year results showing it had protected margins thanks to cost cutting, while its production facilities segment continued to perform well because of a combination of extensions and new business.
Mark Flynn is vice- president at Barclays Wealth Aberdeen
