BP: Did analysts ignore the obvious?

7th April 2011

Financial analysts are the people investors rely on to tell them or their fund manager about a company and to set a target price. Such analysis can make the difference between investors deciding to buy, sell or hold.

But did analysts get the price of BP wrong by failing to factor in some very obvious environmental concerns about the oil giant's operations in the US?

Among other things, BP received more than 700 warnings of the highest level from US safety authorities about its five US based refineries between June 2007 and March 2009.

All the other firms running US refineries received a grand total of one at this highest level.

Some experts say this was not factored into the share price of the firm by the broader analyst community and things need to change to tackle this environmental mispricing.

That is certainly the view of Louise O'Halloran, executive director, of the Responsible Investment Association Australasia who was in London recently talking about the issue.

In Britain, the issue could be of huge concern for many investors, particularly income investors who had relied on BP.

It had always been a reliable payer of dividends and made up a significant part of retirement portfolios as a result, until it stopped paying the dividend during the Gulf of Mexico spill.

The firm started paying a dividend again earlier this year but at half previous levels while many of its deals worldwide continue to attract controversy. Maybe those investors need to ask – is BP now being appropriately valued for the risks it is taking?

Of course, Louise O'Halloran has her own agenda. She is trying to convince analysts worldwide to incorporate responsible investment into their thinking and not in the piecemeal way she feels they do now. Her organisation is offering a learning academy to help them do so.

But perhaps her argument is worth listening to. Mindful Money has quoted her at length from her recent Australia House talk.

She said: "In the marketplace BP, Shell and lot of its competitors looked very much the same but in the background there was a lot of information about things that were going on with BP that was widely known in the responsible investment community.

"The Occupational Safety and Health Authority of the United States had been collecting information over the period from June 2007 to March 2009 and had issued 760 egregious wilful citations to BP. This was across its five refineries in the United States.

By comparison, there was one egregious wilful citation issued all across all of the other 145 refineries in the United States."

BP already had a poor record dating from a fatal explosion at its Texas City Oil refinery in 2005. This incident and problems at its Prudhoe Bay oil field which closed, had led to a vast number of wilful citations the lower category of warnings.

But O'Halloran added: "During that time, BP was issued with a vast number of wilful citations, which implies there were issues they could have corrected, that they hadn't.

"When those issues were not addressed many of those were upgraded to egregious citations, which is the most dangerous citation you can receive and in the end there were 760 of them. This is the sort of information that investment analysts can use, and should use and would definitely affect a valuation."

"Common financial analysis is largely limited to information that is readily quantifiable. What analysts want is information that is different and that is material and is going to be important to the share price."

"On the other hand, Environmental and Social Governance (ESG) tries to identify strong issues that are material to the valuation of that company and forecast those issues and include those in the valuation models.

"The conclusion is that the mispricing of ESG risk and the non-inclusion of this information on valuations can lead to a gap in the target price."

Many UK investors in BP will simply want steady progress in the share price and a reliable dividend payout.

They may not have strong environmental concerns about the shares or funds they invest in.

But if looking at ESG can lead to mispricing on the upside maybe they should consider asking questions about it too, before another previously reliable company sees its share price slump and its dividend payments stop.

Seb Beloe, head of SRI research at Henderson Global Investors, said his team sold out of BP in 2003 on the basis of concerns about their management of health and safety issues.

He said: "BP was [at that time] also the recipient for the then biggest H&S fine in UK history (£1m)."

Beloe pointed out that the 700 warnings issued to BP only became public via a freedom of information request.

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