Value fund managers start buying BP shares

Date: Friday, June 25, 2010
Author: Reuters

Fund managers who focus on undervalued and unloved stocks have started buying shares of oil giant BP Plc (BP.L), which have lost about half their value since the Deepwater Horizon spill, and looking at related energy companies.

The purchases seem small so far and some portfolio managers are still analyzing whether the company will come out of the disaster intact, managers speaking at the Morningstar annual investing conference in Chicago said on Thursday.

"We're looking at it, as is every value investor," said Daniel O'Keefe, managing director of Artisan Partners.

The confluence of events that have torpedoed BP's share price signaled a classic market panic to some managers.

BP shares dropped modestly on initial reports of leaking oil in late April. But as containment efforts failed and political pressure increased, the company's shares were buffeted by sharp drops accompanied by huge volumes traded.

Artisan has yet to buy BP shares, O'Keefe said.

"The problem with BP is that there's shifting sands going on here, in terms of the rule of law and how much the U.S. government is going to extract from them outside of traditional legal channels," he said. "That makes it difficult to handicap."

Philippe Brugere-Trelat, manager of the Franklin Mutual European Fund and co-manager of the Mutual Global Discovery Fund, said he has bought some shares, although he too was wary of the degree of uncertainty still surrounding the company.

"We recently dipped a toe, a very, very small toe," into BP stock given its big price decline, Brugere-Trelat said. "It will never be anything but a small position in the funds, because of the extraordinary uncertainty surrounding the cost of the cleanup."

The comments followed news over the weekend that value-oriented hedge fund manager Whitney Tilson was buying a big stake in BP. Tilson, who was an early proponent of investing in beaten down mall operator General Growth Properties Inc (GGP.N), said BP was extraordinarily undervalued and unlikely to go to bankrupt.

"When we publicly disclosed a new position in BP stock recently, the blowback from clients and many of our friends in the business was unlike anything we've encountered in our careers," Tilson and his co-manager at T2 Partners, Glenn Tongue, wrote in an article in Barron's magazine dated June 19.

"It hasn't shaken our confidence, and neither have the weeks of hysterical headlines, rumors and speculation," the pair added. "We love buying when other investors are panicking, and we were still doing it last week."

BP shares, above $60 before the tragic accident that took 11 lives, were at $29.28, down 1.3 percent, in afternoon trading on the New York Stock Exchange on Thursday. That was the closest to the low the shares hit since the accident after BP had to remove a containment dome due to an accident on Wednesday.

The oil spill has also had a spillover effect on the share prices of other energy companies, which may be even more tempting "buy" targets.

Robert Gensler, manager of the T. Rowe Price Global Stock Fund, said he has not been buying BP shares but has been studying the spill closely because it has also driven down the shares of other companies involved, including Transocean Ltd (RIG.N) and Halliburton Co (HAL.N).

"I know it's creating opportunities," he said at the Morningstar conference. "I just don't know which among them might be worth buying."

Not everyone at the conference was as enthusiastic about BP.

Hersh Cohen, chief investment officer of Legg Mason's ClearBridge Advisors, said he had owned BP in part for its dividend, then sold it shortly after the spill began.

"We thought the dividend was secure. But when the oil (spill) didn't get capped in three or four days, I thought of the pictures of birds on shore," Cohen said during a panel discussion on dividend investing.

One reason for the sale was the "venom" he remembered was heaped on Exxon after its Alaska spill in 1989.

"Unfortunately sometimes you have to sell," he added.