Last November I declared that BP  was my next buy. The liabilities from the Gulf of Mexico oil spill were about to be settled, and the company had pulled a rabbit out of the hat in Russia.

That meant BP could concentrate on its business and its shares would revert to being valued conventionally as an oil stock.

Well, the shares are still on my shopping list, but I haven't yet bought.


Trials and tribulations
Things haven't gone smoothly in the U.S. BP couldn't agree a settlement of civil liabilities, and is in the throes of a court case that could last up to a year. U.S. prosecutors have taken a hard line and the worst case scenario could cost BP $18 billion in fines, $14 billion more than it has provided. That's half a year's cash flow.

The administrator of BP's settlement with private claimants is also -- in BP's view -- being over-generous. It has gone to court to try to rein him back, and has given up estimating the total cost.

On top of that, BP didn't join the bidding for new drilling rights in the Gulf of Mexico because it's not sure the U.S. government would give it the necessary licenses.

Share price
So uncertainty still weighs on BP's shares. They have underperformed the FTSE 100, even after a 2% jump last Friday when BP announced an $8 billion share buy-back. The market reaction was illogical: the company is returning cash raised by its sale of TNK-BP in Russia, doing what it previously said it would do. But since when have markets been logical?

More substantially, BP has sealed the deal to buy 20% of Rosneft, the Russian state-owned oil major. The two companies have announced projects to ramp up exploration and development in the Russian Arctic.

BP's previous Russian partners had blocked its collaboration with Rosneft. Now it's best friends with a company that produces more oil than Exxon, and is run by Vladimir Putin's right-hand man. At the moment, the wind is blowing BP's way in Russia.

Unique upside
That makes it a distinctive play, with unique upside and unique risks. I'd prefer to see the U.S. liabilities put to bed, but there's still a good investment case.

BP's travails highlight the risks in the oil business, even for the majors. When it comes to smaller companies, the risks are bigger-but so are the potential rewards. It pays to diversify, and to pick stocks with care. "How to Unearth Great Oil and Gas Stocks" is a publication from the Motley Fool that can help you do just that. It's packed full of tips, and you can download it to your inbox just by clicking here -- it's free.

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The article Why BP Is Still on My Shopping List originally appeared on Fool.com.

Fool contributor Tony Reading has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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