BP shares proving popular amid speculation a rebound won’t be far off

News - Funds

Written by Ray Clancy

Friday, 04 June 2010 11:00

The current trouble facing BP in the aftermath of the oil spill in the Gulf of Mexico is seen by some investors as a great opportunity as shares are expected to rebound after their recent battering.

Hedge funds and individual investors have picked up BP shares at what they regard as a bargain price after they have fallen 36% since April when the spill began.

‘We are seeing some hedge funds have started building stakes. Political risk is driving the stock price down and makes it highly speculative. It could be value or could be a major break-up,’ a Zurich-based trader told Reuters.

The trader added that bondholders and big institutional investors such as pension funds were buying protection against BP debt default to hedge risk exposure.

Another trader said he had bought BP shares and sold Royal Dutch Shell/BG Group shares in a pair trade. ‘I have taken the strategy by taking the spread ratio between two closely correlated stocks within the same peer group. They are at an historical wide level and because of that it’s a compelling trade. I believe this strategy will be very good in a couple of days,’ he said.

BP has a market cap of £79.4 billion pounds and was recently surpassed by HSBC as the biggest UK company by market cap.

The oil company has successfully managed to place a new cap on the leaking oil pipe and Washington has launched criminal and civil probes into the disaster.

Iain Armstrong, oil analyst at Brewin Dolphin, said the drop in BP shares had fallen so far it was as if everyone thought nothing would fix the leak and he did not believe that was the case. ‘I wouldn’t be surprised if some of the longer term shareholders are starting to think that this is a really good buying opportunity because you don’t normally get a 40% fall in the market value of the shares of a very large company over a very short period of time,’ he said.

However, Credit Suisse is less optimistic and has cut its price target for the oil company to 560 pence from 685 pence. The broker said in a note that the clean up costs could total $15 to $23 billion plus $14 billion of claims, and the risk its dividend would be cut was rising.