Opinions and observations expressed on this blog reflect the authors' individual experiences and should not be construed to be financial advice. None of the members of this blog are licensed financial advisors. Please consult your own licensed financial advisor if you wish to act on any recommendations here.

Saturday, May 22, 2010

Is BP a good buy at these levels?

Disclaimer: I am in no way trying to diminish the environmental damages to the Gulf Coast. In fact, I am more than outraged about it. However, remember that on this blog we play the role of cold, Ayn Rand-like, cynical capitalists. 

Whenever there is a company just getting its ass handed to it (that's a technical term) like BP (BP) is, there is always some appeal in possibly nibbling at it. Indeed, BP has gotten absolutely slaughtered over the past several weeks.

Compared to the other integrated oil companies, like Exxon Mobil (XOM) and ConocoPhillips (COP), it has been downright ugly. 

That being said, it is unclear exactly what the damages to BP will be. If the losses will be only in the range of a few billion dollars, then they're very cheap right now. If, on the other hand, they get hit with $40, $50, or $60 billion in damages and punitive fines, then they're not so cheap. Given that this is an election year and politicians love issues like this because they make for great righteous indignation and extreme sweeping measures, it's anyone's guess.

I personally say no to this because I am risk averse and I don't like the size of the unknowns here. There is the possibility that BP is barred from future exploration and development, for example. However, disagreement is what makes a market. What do you all think?


  1. I have the feeling that Republicans are getting less and less confident about their chances in the upcoming midterms. Assuming this is because they are not expecting to win, and then they don't win, BP may be made to actually pay for their mess. I could be reaching in the dark, though.

  2. This is one of those cases where politics does spill into potential profits. One thing that will happen is that any payments by BP will be stretched out far into the future through appeals and counter suits and everything else. Exxon Valdez was litigated for years. If the Republicans have a strong showing in the mid-terms, they have indicated that they want lower damage caps for BP than the Democrats do. Right or wrong, that does matter here. Still, even they will probably jump on the bandwagon and try to look tough against a foreign oil giant when it comes down to it.

  3. Of course, then there's this:

  4. This is one of those cases where costs are rapidly hurtling toward "indeterminate" and not in a good way.

  5. Just a follow on, BP's slide today I think is a pretty solid indication that the markets think that their troubles are far from over. In fact, I've heard some speculation along the lines of what I suggested which is that they might get barred from doing any future Gulf activities. That certainly hurts their earning potential in the future if that comes to pass.

  6. Examining Exxon Mobile's performance in 1989 makes me second guess our conclusions here, though. The Exxon Valdez spill in March of '89 appears to have had virtually no effect on the stock prices at that time. Additionally, the two decades of appeals since then reduced the damages they were meant to pay by $4.5 billion.

  7. That had been a comparison that I meant to look at. Thanks for bringing it up. That said, compare XOM to CVX and COP. It dramatically underperformed both of its largest competitors. Whether that was due to factors outside of the Valdez incident is very difficult to say. It doesn't seem that the market punished them quite the same way it is punishing BP now.

    The other point you bring up, which is a good one, is that BP could manage to push out payments through the appeals process to the point that they are basically not material to investors. This is because if they have to pay out ten or more years from now, the damages on a discounted basis are not material. Markets do tend to get these sorts of things wrong about as often as they get them right. Case in point, Phillip Morris in the late 1990s with the multi-tens of billions they had to pay the states. At the time it slaughtered the stock, but if you bought at the bottom then it roughly tripled in eight years.

    I'm still not sold on buying BP just yet. If the government strikes them down with something more than just hefty fines, then the fall in the price is justified. If it's just a bunch of one-time fines, then the stock isn't fairly priced. It's starting to get to the point where poking around at it might make sense under either scenario. We are talking about a company that earns close to $20 billion a year, after all. Once again though, I'm not sold on the idea just yet. If it starts getting around $35-37, I might think about it. If they maintain any part of the dividend, the worst thing you will probably have is essentially a kind of crappy bond. After all, it is currently yielding 8%.

  8. Hey guys, I for one like BP as an aggressive Buy right now ($37/share). Sure it may take a bit to "recover" the costs of the fix and clean-up, but with a dividend yield right now at about 9%...buy now, wait, and make money while you wait. The last time I looked, I believe BP was the 4th largest Oil Company in the world and I'm pretty sure they didn't get there from exploratory wells off the US coast. This is a huge, world-wide company with plenty of opportunities even if the US barrs BP.

    Also, with future oil demands on the rise, I see BP doing just fine down the road. If you're a graphics person, take a look at Exxon's stock after their oil disaster.

    Clearly BP is on sale right now. If you're long-term investor, this may be a good aggressive company to own.

    This obviously is all my opinion of course :)