BP slump drives investor quest for safer havens

A security worker waits behind a metal detector at the entrance to BP's AGM at the Excell centre in east London, April 15, 2010.

LONDON (Reuters) - BP's U.S. oil spill has driven a short-term hunt for other sources of big dividends and left the long-term investors reassessing whether direct exposure to commodities will deliver the best future yields.

BP (BP.L) has cut its dividend for 2010 to pay for the spill begun when the Deepwater Horizon rig exploded and sank in the Gulf of Mexico. Its shares have rallied this week, but are down 45 percent since April 20.

For investors looking to own a European oil stock, an obvious substitute is Royal Dutch Shell (RDSa.L), but analysts say the company -- like BP, a big player in deepwater drilling -- might not be immune to its rival's problems.

"The most obvious alternative to BP is Shell. However, given the incident in the Gulf of Mexico, broader issues have come to the fore around investment in international oil companies operating at the edge of technology," said Neil Tong, senior investment manager at Alliance Trust.

"It is now worth looking at other sectors with similar yields but safer business models," said Tong, who manages 700 million pounds. "From a UK perspective, these could include the utilities and pharmaceuticals sectors."

Save for a cut in BP's dividend in 1992 when the company had overspent -- so long ago BP's press office could barely recall details -- the payout has been considered a virtual certainty.

In 2009, BP accounted for one pound in every seven pounds paid in dividends in Britain, handing $10.5 billion (6.9 billion pounds) to its shareholders.

A pension fund or other long-term investor, for whom a change of portfolio direction is a major decision, could well decide to do nothing in the hope the shares will recover and the dividend resume. Others consider that is not an option as testified by the huge drop in share price.

"If you are income-orientated, you need to start looking at ways to offset the suspension or elimination of the dividend," said Ted Harper at Frost Investment Advisors, which manages $6.8 billion mainly in the United States.

SEEKING SIZE

Those like Harper, who said he had sold his small position in BP, could just switch to other firms that pay a big dividend.

"People are just looking for alternatives, so companies such as Vodafone (VOD.L) started to do well around that time," said an executive at a British-based asset manager. "You're just looking for other large dividend payers.

Vodafone, with a dividend yield of 5.9 percent, has risen more than 9 percent since May 21, versus a 28 percent decline at BP in the same time.

Even before the BP spill, a trend was established among long-term investors to reduce risk by moving towards bonds and by creating a more diverse portfolio, which could include direct exposure to the commodity rather than a firm that produces it.

"We are seeing net inflows to commodities, not the reverse," said John Cavalieri of Pacific Investment Management Co. (PIMCO), which manages the world's biggest bond fund.

"We are also seeing greater investor awareness of the need to reduce their overall risk exposure to equities."

Bonds are one obvious, mainstream solution, while commodity exposure, as part of the modest portfolio allocations classed as alternatives, has grown over the last decade and new institutions are still moving in.

Historically, direct exposure to oil through investment in an index, or basket of commodities, has generated higher returns than equity stakes in resource-holding companies.

During the oil-price boom from 2002 until July 2008, when oil hit a record high, the S&P GSCI .SPGSCI rose by more than 400 percent, compared with around 190 percent on the energy sector of the S&P 500 Index. .GSPE

So far this year, however, commodity indexes have been sapped by an oil price that fell by nearly 5 percent in the first half and a challenging market structure that deepened doubts over passive, index-style investment.

Since the start of 2010, the S&P GSCI has lost around 7 percent, with total returns falling further, against the 13 percent decline of the S&P 500 energy index and the 40 percent slide at BP.

GOING TO EXTREMES

Still, advocates of indexes, which include newer-style vehicles to take account of market structure, say the argument for direct oil exposure holds and the BP spill only adds weight.

About 30 percent of the 85 million barrels per day (bpd) of oil consumed globally comes from offshore wells and its share is rising steadily -- meaning companies are drilling ever deeper.

"The growing slick touched land and demonstrated the extremes to which oil companies have gone to keep the world supplied with oil," said an S&P GSCI market commentary shortly after the BP rig exploded.

The implication is oil prices will inevitably rise as extracting a finite resource becomes more costly and difficult.

Any price rise is most clearly reflected in the pure commodities play of a commodities index, in contrast to equity stakes, which reflect other factors, such as the cost for oil companies of dealing with accidents.

But the difficulty of extracting oil has also focused public minds on the ethical and environmental risks, which imply investors should look not just beyond equities, but beyond oil to the energy of the future.

Then the dilemma is the weak financial performance of more environmentally-friendly forms of energy, which remain less commercially viable than fossil fuels.

Since the start of 2010, the Wilderhill Clean Energy Index .ECO, made up of green energy companies, has sunk 21 percent -- not quite as bad as BP's decline.

(Additional reporting by Gerard Wynn; editing by Sue Thomas)