Half of UK Equity Income funds hit by BP’s woes
The equity income favourite is still struggling with the consequences of the Gulf of Mexico oil spill and its ill-fortuned Russian venture.
Poor results from BP will hit more than half of UK Equity Income funds, but the Share Centre says investors should hang on for the longer term.
The company’s share price lost 3 per cent in early trading after second quarter results showed falls in production figures, cash flow and profits, while it wrote down the value of certain poorly-performing assets.
However, Helal Miah, investment analyst at the Share Centre, says the company is restructuring and its outlook for the longer term is positive, meaning investors should hold on.
“We believe BP is taking the right approach in offloading relatively low yielding assets,” he said. “The group hopes to double operating cash flow by 2014 and increase production once again by focussing on higher margin upstream projects.”
“The reshaping of the portfolio will result in a leaner operation and increase the capital available to invest in more efficient facilities. Although near term production will be sacrificed, we expect longer term gains.”
FE data shows that 59 out of 101 funds in the UK Equity Income sector list the company in their top-10 holdings.
Investors have stuck with the company in the years following the disaster in the Gulf of Mexico that caused the company to cancel its dividend for the following three quarters of the financial year.
There are currently 22 funds in the IMA UK Equity income sector that hold 5 per cent or more in the stock, including the huge Newton Higher Income
, M&G Dividend
and Scottish Widows UK Equity Income
Performance of stock over 5yrs
Source: FE Analytics
Data from FE Analytics
shows the company’s stock lost almost half of its value following the spill in April 2010, and still hasn’t recovered its losses.
Legal and political problems involving TNK-BP, its joint venture in Russia in concert with a consortium of oligarchs, have also plagued the company in recent years, with BP currently seeking a buyer for its share in the project.
Miah praised the planned exit from the tie-up, saying that it would help the company free itself of political interference and become better-focussed.
There were sector-specific factors that hurt the company, with Royal Dutch Shell reporting disappointing figures last week. Weak oil and gas figures and the ailing world economy were both cited by BP.
However, maintenance and sales of under-performing assets played a significant role, with Miah suggesting they would set the company on a stronger footing going forward.
“The group continues with its plan to become a smaller and leaner operation and has already entered into agreements to sell $24bn of assets since 2010. The total target is set to become $38bn before the end of 2013,” he said.
“BP pays a decent yield and as it remains focussed on long term growth we continue to rate it as a ‘buy’,” he finished.