The pair believe the long term investment case in BP remains attractive at current levels and have increased their absolute weighting in the stock from 2.8 per cent to 3.5 per cent.
Over £12bn was wiped of BP’s market value on June 1 in its worst one-day share fall for 18 years following news that it had failed to contain the Gulf of Mexico oil spill and US authorities had launched criminal and civil investigations into its actions. BP shareholders and investors are to quiz chief Tony Hayward on whether the firm will halve its dividend or suspend it altogether.
Kirrage rejects estimates that the firm could be slapped with a $50bn fine which would hamper its ability to pay its dividend.
He says: “In the case of BP, the question we ask specifically is what level of fine would be required to put the BP balance sheet in jeopardy? A reasonable estimate for the total costs of this environment disaster is c.$15bn. However, we believe in excess of $50bn would be required to put moderate stress on the balance sheet. The market clearly disagrees and has already removed more than $60bn from the company’s capitalisation.
“An unemotional appraisal of BP’s cashflows reveals that at current oil prices, despite the assumed impact of the spill, BP has the ability to sustain its dividend.”
Kirrage acknowledges that political considerations could force the firm’s hand into a short term reduction in distributions but stresses that investors should focus on the potential for BP’s future share price to grow and not just their dividends.
He says: “We believe the long term investment case in BP is attractive at current levels. We do not see it as attractive as say healthcare or telecoms in terms of cash flow and undervaluation, but nonetheless it is attractive and consequently we have increased the weighting in the portfolio.”
Shares in BP opened at 440p this morning, stabilising from a low of 411.50p on Tuesday.
Kirrage and Murphy took over the reins of the fund from Nick Purves and Ian Lance in May after their shock departure last month to join RWC Partners.
Kirrage joined the firm in 2001 and has co managed Schroder Recovery Fund alongside Murphy since 2006. The pair have also taken over the income mandate of Schroder’s income maximiser fund and are part of the firm’s specialist value team which is captained by UK equities head Richard Buxton.