Ask Justin

Asked by Franj, submitted 10 June 2010.

I have held onto my BP shares during recent weeks and - with the threat of additional costs and calamitous legal actions as well as potentially no dividend - am I wise to keep hold of them having lost 50% value? Or is this the time to buy some more? I saw your answer on 7.6.10 on BP.....but that now seems an age ago?

Answered by Justin on 10 June 2010

No-one knows how much compensation BP will end up paying so the share price is incredibly sensitive to any hints, good or bad. President Obama’s aggressive stance has continued to hurt the share price as it suggests the compensation bill could be very high. But it would probably only take a comment or two that suggests a softening in Obama’s stance to send the share price upwards.

My gut feeling is that BP will likely be fine longer term and the shares are probably underpriced at the moment. However, buying now is not for the faint-hearted, as short term volatility is likely to remain very high. You could find yourself losing 10-20% in no time at all if there’s more negative news flow.

There is a risk of take-over bids, if other companies try to capitalise on BP’s predicament. This would be bad news for BP shareholders as it could lead to selling out at a very unattractive price. However, while not out of the question, I’m less convinced there will be a successful bid unless BP’s position deteriorates further.

I’d be tempted to sit tight and ride out the storm if you can stomach the volatility. And while there’s a reasonable argument for buying BP shares at present, only do so if you’re feeling very brave.