Important: What follows is not a recommendation to buy or sell BP shares. I’m just a private investor, storing and sharing notes for interest and entertainment. Read my disclaimer.

Despite the recent micro-rally to 435p as I write, BP shares are still down over one-third on where they were before its Deepwater Horizon oil rig exploded on April 20^th.

On a trailing basis, BP shares yield nearly 9% – an incredibly high yield given that this company pays £1 of every £6 churned out by UK companies every year in dividends.

Clearly, the market fears BP may cut its dividend.

If BP isn’t able to maintain its dividend, it’s going to hit UK investors (including pension holders) hard. The share price fall from 650p to 435p has single-handedly knocked around 185 points off the FTSE 100 index, too.

Yet if BP can maintain its dividend, the shares look to cheap. Now could be a textbook example of an opportunity to invest in a crisis for profit.

The two issues with buying BP shares

There are two main dimensions to whether you should buy BP shares:

Moral: Is it right to profit from an oil rig explosion that cost 11 workers their lives and has caused an ecological catastrophe?

Financial: Is buying BP shares likely to deliver a greater return than buying the market as a whole?

Anyone want to buy the shares for profit has to answer both questions for themselves.

The morality of buying BP shares

Let’s deal with the moral dimension first. Investors, like everyone else in society, walk a tightrope of moral compromises every day. People invest in tobacco firms, companies that make engines that go in jets that bomb civilians, and transport companies that contribute to global warming.

Unless you’re going to opt out of society completely, that is the reality.

I’m not saying ‘anything goes’ – I’m saying we have laws and politics that set and change the rules, not a system of voting by buying shares. If you don’t take an investment opportunity because of the ‘ick’ factor, you’re likely being inconsistent.

You might choose to be inconsistent, true. I have never bought tobacco stocks because I hate smoking and the export of this cancerous business model to the Third World. So I’m not claiming to be immune to the ick factor.

Yet equally, I know I have money tobacco shares in my tracker funds, and also my income investment trusts. My hands are not clean.

Returning to BP, I’m nonplussed by the more extreme U.S. commentators’ outcry over the oil well. I understand the pain having such a hideous disaster off your doorstep must cause, but that doesn’t make the more extreme views rational. In particular, elements of the US media are applying a ‘one rule for the USA and another for everyone else’ mentality to the disaster.

American commentators need to look further before singling out BP. Just last month, for example, ExxonMobile spilled one million barrels of oil into the Nigerian delta. I’d wager roughly 0.1% of Americans know or care. According to The Guardian, more oil is lost in Nigeria every year than has been shed so far in the Gulf of Mexico.

And that’s to not be drawn into the murky world of overseas wars waged to secure oil supplies, or even the idea of banning offshore drilling around the US for righteous moral reasons while greedily sucking it in from Brazil, Australia and elsewhere, where the risks are just as great but US college students don’t expect to find sandy white beaches.

Finally, US oil consumption drives the global market. It’s hypocritical to condemn out of hand companies pushing the boundaries to try to fulfill those needs.

None of this means I’m not appalled by the leak. I wrote recently about how ecological disaster is the biggest risk to my wealth. I’ve spent hours reading about the doomed efforts to protect the marshes and wetlands from oil, and ideas they haven’t tried such as digesting the oil by promoting bacterial growth.

In fact, the one good thing to come out of this is that ecological regulations will hopefully be tightened up worldwide.

For instance, why don’t they drill a relief well as standard, just in case? It’s ridiculous we have to wait three months to stop this leak.

The financial case for buying BP shares

Assuming you’ve not got a moral problem with buying BP shares, is there a financial case for doing so? I think there might be.

I’ve written before about how in a crisis the market can overreact to news, and misjudge the long-term impact on the company.

Certainly the news here looks bad. But has the 35% drop in the share price already compensated for this pain?

As of June 3rd, the company is valued at £35 billion less than it was on April 20^th. The P/E rating of BP shares (before they were de-rated by the slick) was roughly 11.

One way of reading this is that the market sees BP’s future earnings as being permanently impaired by:

• £35 bn / 11 = £3.2 billion a year, forever.

In reality of course, the hit to BP’s earnings will be far lumpier. The cleanup has already cost around $1 billion in actual cash. The final bill will be much higher. There will also be the eventual cost of compensating local businesses, legal damages, and potentially even costs for long-term health complications.

I’ve seen estimates of the final cost vary from $1 billion to more than $30 billion. Notably, however, even the highest figure is already in excess of the lost value as per the market cap – approximately $50 billion.

And remember, that’s a high estimate. The Exxon Valdez disaster looked like costing that company a fortune, but the actual amount it has to pay has turned out to be far, far less – around $4.5 billion after appeal. In 1989 dollars, that’s small potatoes. Two decades have passed since then.

I’d hope BP will be brought to account far quicker for the sake of those affected and the region, but it’s still going to take years to sort out.

There are other reasons to think the hit to BP won’t be fatal, too:

Obama is all hot air in the long run

America is a legally driven country, not a dictator state that will throw its toys out of the pram to make an unfair example of one company. BP’s lawyers will be given the opportunity to defend the company. The US will not want to seem unreasonably vindictive, especially in 5-10 years time when all this is forgotten yet the court cases are only just getting resolved. Obama is making a lot of noise because he’s as appalled as anyone else by the catastrophe I’m sure, but also because it costs him nothing.

BP isn’t the only company on the hook

Right now BP is getting all the blame, but it’s only a 65% owner in the Deepwater Horizon rig. Services companies like Transocean and Halliburton will also be taken to the courts – not least by BP – and may end up shouldering some of the costs.

BP can afford to pay

As far as I can tell from its March 31^st balance sheet, BP has $7 billion in cash. Knock off maybe $1 billion for the cost so far, and it still has a lot of free cash to play with. It’s also got less debt than some rivals – BP’s gearing is about 23% compared to 35% for Conoco, for example. Despite recent downgrades, it could easily take on £10 billion or so in addition debt to keep its dividend while shouldering further costs.

BP is a vast company

It has other operations that are going well. BP’s upstream operations produce about 4 million barrels of oil a day, while its downstream activities (from refineries to petrol stations) process 2.7 million barrels. Even assuming it’s kicked out of the Gulf, which I don’t think is likely, it’s got plenty else going on to support a valuation well north of 435p per share.

BP shares are surely a buy, albeit risky

If you’re ever going to look at a crisis play, you’ve got to look hard at BP. From the press and political witch hunt to the scale of the disaster to the size of the share price fall, everything here except the ecological impact looks overblown.

And as the ecological impact is always – tragically – the least regarded element to our human folly, I think the shares will end up much higher than 435p. ExxonMobile’s shares are nearly ten-fold higher than when they trashed the Alaskan coast in 1989.

I even think BP’s response to the crisis has been good. Sure there have been some gaffs, but what do you expect when spending $1 billion in barely two months? US politicians should be glad that the company was already trying to rebuild its reputation and has clearly grasped the scale of this crisis in my view. If it had happened to a cheaper, recalcitrant company, they’d know it.

Compare BP’s response to President Bush’s response to Hurricane Katrina. From where I’m standing it seems BP has moved faster, more meaningfully and more transparently than the US government itself did when faced with that natural disaster and had no third-party private company to deal with it.

I’m not suggesting it’s certain BP will recover from here. As I write the well is still gushing oil, and every element of the criminal case as well as the normal corporate investigations are yet to begin. There are many, many unknowns.

But on a risk/return basis, I think the shares look good value.

All that said, I’m not buying BP shares directly myself. I’ve got other individually risky stock picks going on elsewhere (such as Lloyds) and I don’t want to take on another uncertain investment; my trading activities are only a complement to my more passive or long-term investing, and the number of positions I take is not unlimited.

I did however invest significant sums into two income investment trusts earlier this week that each have around 6% of their money into BP shares.

By in buying in when BP shares cost 435p, I expect the trust’s NAVs to rise due because of their BP holdings in time. It’s far from a racing certainty, but on balance BP shares look too cheap to me.

Does a high salary make you happy? To answer that question, we need to backtrack a little bit to our discussion about friends and wealth.

I’m convinced having rich friends can make you richer. But I’m even more sure having rich neighbors will make you work harder.

Just try buying a flat in London for less than £250,000. You need to strive simply to own the ceiling above your head. (Forget owning the roof – decent houses cost far more than a quarter of a million quid).

To get a mortgage for a £250,000 flat, you’ll need to earn at least £60,000 a year – assuming you’ve begged or saved £30,000 for the deposit.

£60,000 a year is a high salary:

• The median full-time weekly wage is £489 as of 2009 (Source: ONS)
• Only 10% of workers earn more than £971 a week
• Even in London, the median full-time weekly wage is £627

£1,154 a week: that’s the salary of our London flat hunter on £60,000 a year, who is looking at the cheap end of the London property market.

It’s well into the top 10% bracket. Yet he or she is likely to be laughed at by a central London estate agent!

Here comes the science bit

Incredible though it may seem then, depending on your aspirations it’s very easy to feel poor on £60,000 a year in London. The UK’s wealthiest people live here, and a row of terraced houses could re-finance the Greek national debt.

In contrast, you can feel pretty flush in Scotland or Wales on £35,000 a year.

This relative affluence is the sting in the tail of surrounding yourself with people with more money than you:

• You’ll get richer, but you’ll feel poorer

It also reveals the problem with chasing a high salary as a means of finding happiness. Discussing recent findings from The University of Warwick, researcher Chris Boyce says:

“Our study found that the ranked position of an individual’s income best predicted general life satisfaction, while the actual amount of income and the average income of others appear to have no significant effect.

Earning a million pounds a year appears to be not enough to make you happy if you know your friends all earn two million a year.”

This is the key problem faced by bankers. Despite their fantastical bonuses, most of them know peers and friends in their company earning far more. Even the top bankers are made miserable by those they believe are earning more elsewhere (although they probably don’t call them friends).

Most of us can’t understand why bankers chase money so greedily, or react so ferociously to any move on their bloated bonuses. That’s because we don’t live in a world where income is everything – and yet ironically that’s also the very thing that makes the typical banker unhappy.

We do all though live in our own social networks of friends and relatives. And as the researchers found out, such networks are driven by ancient instincts that even a chimp would recognize are to do with status and the perception of superiority.

The bottom line on aspiration

Obviously I like to think I stand apart from petty comparisons with my friends. You probably do, too. Yet I wonder how much we can really step outside of such influences, beyond taking radical steps like ditching our rich friends? I can’t deny I do leave an evening out with mine nagged by doubts about whether I’ve made the right choices in my life and my career.

Chasing a fatter salary is no guarantee of happiness, that much is clear. But that’s no reason not to earn as much as you can, provided it meets your other aspirations of self-fulfillment and professional ambition.

It’s just that if you think happiness comes with a high salary, you’ll be disappointed. Focusing on your own high salary will upset your poorer friends, and your richer friends will bring you down. Best to keep quiet and strive to opt out from such comparisons whenever you can.

All hail John Redwood! Nicknamed ‘The Vulcan’ for his resemblance to a certain pointy-eared space elf, the MP for Wokingham is arguing against the Capital Gains Tax rise.

Good for Spock. Clumsy attempts by Liberal Democrats in line for a gold-plated, six-figure pension to judge what’s ‘fair’ with respect to investing cut little ice with me. I doubt most of them have ever risked more than the £10 they put into the ‘How Long Will Vince Cable Last?’ office sweepstake.

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