Blue chip bet
PORTFOLIO JOHN BULL
British Petroleum has become a gambling stock —and not a bad one at that. Waves of Ameri- can buying have held the price steady against the general fall in the market. At 103s 3d a case can be made for the shares on normal considerations, but what is attracting the hot money at the moment is the group's Alaska concessions. One of the best firms of brokers in London, W. Greenwell, has recently ad- ifanced the thesis that if BP strikes it lucky in Alaska it could double its profits. This startling conclusion depends upon the fact that North ,American oil commands a very good price locally because of the high degree of pro- tection which it enjoys. Also, the Alaska field looks like being very big, judging from the results obtained by Atlantic Richfield and
Humble. Thus the argument is worth looking at in some detail.
First, what is up there in Alaska? An authoritative estimate puts the recoverable re- serves of oil at 5,000,000,000 to 10,000,000,000 barrels. Those figures should be compared with United States reserves at the end of 1967- 40,000,000,000 barrels. So the Alaska field is highly important, indeed it must be one of the largest single reservoir oilfields ever discovered. So far only Atlantic Richfield and Humble Oil (an Esso subsidiary) have found oil, but these are early days; BP could be next in line because it has 90,000 acres of exploration leases immediately to the west, south and east of the recent find. In fact, BP territory runs at one point to within two miles of one of the two discovery wells. And it should be re- membered that the group has the best drilling record of any company in the world. In the Middle East, North Africa and in the North Sea (where it found the first gas and will get twice as good a price as its rivals) BP.has done amazingly well.
Second, can the oil be got down from the Arctic wastes to civilisation and markets? Well, there is one technical consideration which helps. Oil has what is called a 'pour point': that is, the temperature level below which it will not flow conveniently. In the case of the Alaskan oil already discovered, the pour point is —10 degrees Centigrade. This means that there is probably no need to heat the pipeline to the south—or to dewax the crude at the oil- field. It will, of course, be a tough job to lay a pipeline.
Third, what is the oil worth at the point of sale? Greenwells reckon that, despite the high costs entailed, there should be a profit per barrel of between $1 and $I That is a very high return indeed and compares with BP'S average of about 16 cents per barrel. Here
Valuations at 16 October 1968 First portfolio £6,430 (details next t.eek) Second portfolio 600 Pillar Holdings at 14s 51d £433 500 Negretti and Zambra 'A' at 12s 3d £306 410 Gallaher at 30s 3d xd £620 15 Kaiser Steel at £39 £585 250 Lonrho at 38s £475 100 British Petroleum at 103s 3d .. £516 Cash in hand .. £2,456 £5,391 Deduct: expenses £122
Total £5,269 Note: The figure for cash in hand includes £1,032, proceeds of the sale to American Tobacco of 590 Gallaher shares.
lies the importance of an Alaska oil find for BP. If the company could come up with a reasonably good output, say 500,000,000 barrels a year, it would more than double its present level of profits--in time. Any sort of favour- able news from Alaska could, therefore, have a most potent effect upon the shares. As it is, without such news, the shares are not un- soundly based. Profits will recover sharply as freight rates decline post-Suez and as new low-cost oil tankers come into service. More- over, BP'S sales of refined products in western Europe are a source of growing profits. I calculate that the shares are selling at fifteen to sixteen times earnings in the early 1970s. In sum, if Alaska comes up, BP is very cheap; if it does not, I shall slide out. For the time
being I have decided to buy 100 shares for my second, speculative, portfolio.
I have sold 59 per cent of my holding in Gallaher to the American Tobacco company at the takeover-bid price of 35s a share--my original stake was bought at 27s 3d.
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