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As you non-US of A folks maybe not know there is a huge oil spill in the gulf of mexico. BP stock has gone down roughly 8 dollars a share. The company has lost 24 billion dollars in market cap in the last week.

 

The business is obviously very strong and it has strong barriers to entry.

 

I get a EV of roughly 170 billion dollars. In addition you get operating incomes on average of 30 billion a year. Simple calculations result in an EV/EBIT of 5.6. Isn't this a very small number for one of the largest companies in the world that you know will be around 50 years from now? The company also has a dividend yield of roughly 7%. The dividends alone will allow your investment to double in 10 years. What am I missing here.

 

Should be interesting to watch and see what happens. They say that the crude oil might not get turned off for months. Maybe someone (not me!) can calculate the slope of - market cap/ gallon of oil spilled into the ocean. In all seriousness this is pretty bad and its obvious that this not the best socially desirable outcome.

 

Also the thing i noticed is that cash from operations is essentially eaten up by capex and dividend payments every quarter.

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I wouldnt buy BP. I live in Houston and work for one of the oil field services.

 

Louisiana produces 1/5 of the US's seafood and 75% of the shrimp. If the oil goes in land to the marshes and inland water way then .....

 

The fishermen have already filed a law suit and they won a similar suit in Alaska for $1 billion dollars during the Valdez.

 

HAL (Performed the cementing), CAM (built the BOP which isnt working), and all the offshore drillers have all sold off (RIG, ESV, DO). I would pick up ESV and DO, I own some ESV and think its a good buy at this point. The President of the US and Louisiana have both said BP will be on the hook for the clean up. I would avoid them because this will be expensive if it goes on for much longer. HAL and CAM would be good buys to but were very expensive before. Basically the whole sector has sold off so its worth looking in the pond to fish in.

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I think that BP is getting interesting in terms of valuation. However, there is a history of catastrophes here that isn't present at other majors:

 

- Deadly blast at Texas refinery in 2005.

- Major oil spill in Prudhoe Bay, Alaska in 2006.

- Platform catastrophe today.

 

If you recall, there was quite a bit of hand slapping following the 2005 and 2006 events and the stock valuation vs others has never fully recovered from these events. Cost cutting was blamed.

 

I think that this stock may go down some more over coming weeks/months. More lawsuits will come out, initial clean up cost estimate will likely climb and the U.S. government after issuing severe warnings to BP in the past about its U.S. operations may take some drastic actions. There is a cause for the blast and they will say that it could have been prevented. Sometimes it is a chain of simple small things leading to a big one.

 

There is a passage in one of Peter Lynch's book (Beating the Street or One Up on Wall Street) on when/how to buy into companies being hit by disasters. He was looking mainly at utilities such as the owner of Three Mile Island. You can also look at what happened to Exxon following the Valdez and more recently to Merck following Vioxx and Maple Leafs Foods following a listeria outbreak.

 

IMO, there is another side to this event. Democrats were totally opposed to expanding offshore drilling during the Bush years while this thought got relaxed with Obama's energy plan. See State of the Union. I suspect that we may see quite a political backlash relative to offshore drilling (they are already saying no to any new offshore drilling permit). Think also about the kind of fear that will be present in the media in just two months from now as hurricanes start to roll into the Gulf.

 

Status quo for Obama or the democrats does not seem feasible considering this background, their support by environmentalists (Al Gore and vast following) and a mid-term election coming up. We may now see a higher push toward onshore natural gas as a near term alternative source of energy. Nuclear, solar and wind will certainly see higher interest, but the quantity of energy generated or lead time is an issue.

 

If this happens, with wells depletion at high rates, an economy recovering (think chemical production and electricity demand), Boone Pickens' plan gaining traction and an industry that has been operating at very low rig utilization rates for a few years now, perceived never ending supplies may turn out to be just that; a perception. I suspect that we could see higher natural gas prices in the short term. This could finally lead to quite a resurgence for conventional reservoirs drilling or an activity that has been almost abandonned for the past couple of years.

 

Cardboard

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You might want to consider what happens if it only takes 4 months to cap this thing.

- At 5000 bbls/day its 600,000 bbls; or 2 1/2x the Exxon Valdez. But unlike Alaska this seabed is porous, so oil will stay in the seabed & the gulf seafood industry will be wiped out for a good decade or so. 

- BP has self insured this. Every $ spent on shut-off & clean-up, anywhere, is coming back to them.... & every $ of loss from the seafood industry as well..... & every $ in other 'related' losses. Black hole. 

- Financial relief can only come from the insurance industry (via HAL or CAM), the UK &/or US government, corporate profitability, or the financial market (via new debt/equity offerings). Regulatory dealing is going to be par for the course, but untill we know the likely outcome; any firm/industry related to this incident is going to take a hit.

- You still need oil, but if you cant drill off-shore (global moratorium) you can only drill on land. So why wouldn't some of the (reduced) offshore drilling budget not shift to land drilling, esp when its comparatively cheap?

 

Most would be hedging BP & going long the land drillers & oil sands.

 

SD 

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  • 4 weeks later...

Did you guys ever looked into Total S.A.? That is the oil & gas French giant or 5th worldwide. Is there anything wrong with reserves, growth or other?

 

I noticed that it is trading at a P/E multiple of 6.5 times vs BP at 6.4 times which is intriguing since it is not involved in any big issue that I can find. Even Repsol or the Spanish oil company is trading at 7.5 times which is closer to the roughly 8 times of Chevron and ConocoPhillips, so it does not appear to be a discount due to the Euro situation. The dividend is also better covered by earnings than BP and is now at 7.0%.

 

Also, Pargesa Holdings owns 4% of Total and is an active shareholder. It is controlled by the Desmarais and the Frere Group of Belgium. So you have smart people certainly looking to maximize shareholder value.

 

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Well, this is starting to get interesting.  BP stock (in sterling) is closing on the levels reached during the financial meltdown.  I have been starting to read up on the company.  Not ready to take a position. 

 

I dont know enough about stopping oil leaks to determine the total liability here.  It seems very possible at this point that oil could leak until the well just runs out of oil or self plugs.  This, with a probable nasty hurricane season ahead could be enough to kill the company.  We shall see.

 

 

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I think contrarians taking positions in BP and Transocean are fooling themselves. It reminds me of Bill Miller with the financials.  It may workout but I am guessing Obama will take them all down if he goes down because of this. If the story about the 10k barrels a day and giant plumes of oil under the sea are true then BP is ......

 

Berkowitz talks about killing a company, Well BP and RIG are 2 of the easiest companies to imagine dying right now. Again they may workout but they have brought down entire industry so thier are plenty of fish in a barrel right now. Every oil filed service company is on sale, but I am guessing they get a bit cheaper.

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Myth, I agree that there is a lot of uncertainty regarding BP, but I think there is much less with RIG. Unlike the financial companies, we know what is on their balance sheets . . . The ultimate size of BP's liability is unknown, but I think its quanitifiable at $5-$20 Billion. This is a lot different that not knowing the value of the assets at a levered financial company (where a 5% overvaluation of assets means the company is insolvent).  BP has lost $60 Billion in market cap . . . I don't think anyone thinks their liability will reach that level, but even if it somehow does, its already priced in (and ultimate liability will be down the road and will need to be discounted to today). I think a $60 Billion hit to the company is pricing in an ultimate liability of $100 Billion.

 

As for RIG, I'm not sure they have any liability, as I have read that BP indemnified them from liaibility for a spill or other event, and they have made money on the insurance settlement for the rig. I think the danger to RIG is from a ban on offshore drilling, but I don't think there is much of a possibility of this happening. Even if the US congress bans deepwater drilling (dumber things have been done, think nuclear energy policy after 3 mile island), there is no way that Brazil, China and africa will do the same. One accident every 25 years is a pretty good safety record (although this accident was preventable and I don't think an accident of this magnitude should ever be risked). I'm sure new regulations will be put in place, but even if you have to put in an extra blow-out-preventer on top of the first and take more time for cementing and pressure testing, drilling will continue. The US might be willing to kill a $25 Billion per year industry (an estimate I heard for deepwater gulf drilling and associated support services) but no other country can afford to do so.

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I wouldn't put a range on BPs liability. Its a known unknown. The US Attorney General is meeting with the State Attorney General to see what crimes have been broken. The public is pissed and everyone is looking for blood. My guess is unlimited and unquantifiable at this point. Many said $10 billion 4 weeks ago. What if those waters cant be fished for 6 years due to the oil and disbursements. What will the fisherman, hotel owners, other O&G operators, restaurant owners, and people who live near the ocean get. How long will they get it. BP just got about some fisherman sick because they don't want them to wear masks during the clean up. What happens when a hurricane comes through. The disbursement being used is banned in the UK and the EPA told BP to stop using it. BP said no. What happens if the relief well isnt finished prior to hurricanes spawning in the gulf. From what I have read there is a 0% chance of the first hole drilled hitting the spewing well. They will have to drill 3 - 8 holes to hit the current one. Just too many ways to loose. I think.

 

http://www1.voanews.com/english/news/usa/US-Attorney-General-to-Survey-Oil-Spill-Damage-95319984.html

 

Why would you want exposure to this, when BP and RIG have driven down every oil and gas stock.

 

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I think RIG will ultimately be fine, but cant say for sure, reports are already coming out which are saying that they screwed up. I know for a fact though that Ensco, Diomond, Seadrill, Pride, and Noble will come out fine and they are just as cheap. I cant imagine a situation where RIG rebounds and the ones listed above do not, but can see several situations where the opposite happens.

 

http://www.scribd.com/doc/32187785/GoM-JPM

 

I dont know whats on either balance sheet, because I am missing the legal and environmental liability number, which is a very important and growing number. DO is off 8% today and I know they will be around in 2-3 years. RIG, I hope but I am guessing they will take the biggest hit from this affair. Its not about killing the industry. There will be blood, its about who's. BP, RIG are more likely than anyone else. I see offshore drilling resuming, but think it will be a wild ride over the next few weeks. Drill Quip, HAL, Cameron, Ocean-erring are being hit each day for 3-4%. Sooner or later one is going to be worth buying.

 

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My general argument is both may come out fine. But they have driven down other players who either have no liability to this mess, or may gain from it (equipment manufacturers). Thank them for their incompetence and buy the other players vs speculating on where they will be and how it will play out.

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It may well be more realistic to think of BP as gone.

 

The administration has the power to force the sale of BP's US oil rights to other players (untrustworthy operator, that needs the $ to fund a cleanup trust), & can choose to stand aside should public anger show up as a 'freedom fries type mania' that produces a boycott at the pump. And one hurricane roiling the water & 'topkill' will have a whole new meaning, complete with lurid media pictures to drive public opinion. 'Blackout' becoming the new BP word for bankruptcy?

 

Let the media do its thing, & then reconsider.

 

SD

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In my opinion ATPG is a buy. It's worth calling up their investor relations and getting the reassurances that their primary wells coming online are not stopped by yourself to give yourself peace of mind. They have an AGM coming up on Friday that might provide more transparency to investors. 

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I use to own a bit of ATPG.  They have a sizable debt load and was basically banking on Titan working out fairly smoothly.  Any issues/delays with the Titan pumping oil and they could be in over their head.  With the unknown regarding what happens with the gulf, ATPG is a little to much risk for my blood at this time.

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Credit Suisse analysts yesterday said cleanup costs and legal settlements and claims ultimately may reach $37 billion, or almost nine times the costs incurred by Exxon when its Valdez tanker ran aground in Alaska’s Prince William Sound in 1989.

 

Source - http://www.bloomberg.com/apps/news?pid=20601087&sid=akXEqg6_doxQ&pos=2

 

I don't think anyone truly has any idea what the total liability cost is going to be.  I'll be staying clear of it as it is in my too hard basket.

 

Some of you may find it interesting that even with everything going on the 5-yr CDS spread is still at just 200 bps implying a very low default probability.  The bond market does not seem too upset.  (By comparison the Greek Gov CDS is ~700 and IG Corp ~150)

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Here is a good comparison on Safety - http://www.businessinsider.com/bp-has-been-fined-by-osha-760-times-has-an-awful-track-record-for-safety-2010-6

 

I actually found this to be an excellent interview. Its CSPAN and its by the Exxon Valdez Lawyer for the Fisherman he worked on the case for 20 years - http://www.c-spanvideo.org/program/293860-5

 

He doesnt see much happening to BP, Interesting stuff. He also talked about potential regulation.

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Setting aside safety record, environmental impact, etc. and concentrating solely on profit making, BP is incredibly cheap. Couple this with a superb dividend which BP should be able to sustain even with massive liability payouts and the noise level in the UK if they were to try based upon the number of pension funds that hold the stock, provides an ideal environment to generate profit especially on a day trading basis. If BP is successful in capping the well and slowing the flow of oil, I believe you'll see a nice upwaard bump in price.

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Couple this with a superb dividend which BP should be able to sustain even with massive liability payouts

 

Be very careful of counting on the div...most analysts expectations are for it to be cut 25%-50%....regardless if they have the "ability" to pay it due to the political backlash in the US on their recent comments to keep it stable.

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Couple this with a superb dividend which BP should be able to sustain even with massive liability payouts

 

Be very careful of counting on the div...most analysts expectations are for it to be cut 25%-50%....regardless if they have the "ability" to pay it due to the political backlash in the US on their recent comments to keep it stable.

 

The backlash in the UK, however, would be more severe if the dividend were to be cut. Based upon this, I'm willing to take the risk and put my money down as the potential to make a profit short-term is too irresistible.

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You have the same profit opportunities and no risks in most other oil and gas names. Drillers, Deep Water Producers, EU Based Producers, and Services companies are all dirt cheap right now.

 

Again it reminds me of Bill Miller and financials. Sometimes the sentiment is correct. You are essentially making a political bet and not an investment at this point in my opinion.

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Even if BP were to trade back to the level before the spill (highly unlikely until there is clarity over their losses imo), the upside is only 50%.

 

Is the risk worth taking for such limited upside? There may come a time when BP is an attractive bet but surely it is premature right now when there is still so much uncertainty over the extent of their potential liability. I would rather go bet "red" at the roulette table - at least the potential upside is 100%!

 

 

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Keep in mind that when a 'widows & orphans' stock materially cuts its dividend; the share price usually drops 35-40% - & it stays down untill the CEO is fired &/or some institution (collecting assets from those widows & orphans) commits to a sizeable equity issue.

 

US presidents have often commented that one of their greatest challenges has been the management of American 'bloodlust' following an attack; & if you're one of the millions living on the US Gulf Coast, this slick is an attack. Given BPs safety record, & 'foreign' status; it is very difficult to see why a US president would not force BP to sell their US assets to other US sisters (Exxon, etc) - to appease both the public & the US oil industry. 

 

Most would expect a fall of at least another 50% over the next 4-6 months; & more still if there's a feeding frenzy &/or further UK/Euroland economic disruption.

 

SD

 

 

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Yep.  If I were running BP, I'd have my counsel looking at how to move its US operations into a Canadian shell company as quickly as possible.  Any attempt to expropriate BP's assets including retroactively applied  legislation that increases their liability would then be subject to NAFTA rules, and BP could oblige the Government of Canada to litigate on their behalf to recover losses resulting from the expropriation....

 

SJ

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Coincidence or Pattern of Negligence?

 

2005:  Texas City Refinery Explosion

2006:  Prudhoe Bay Oil Spill

2006:  A Texas City worker was crushed between a pipe stack and mechanical lift

2007:  A Texas City worker is Electrocuted to death

2007:  Four BP Energy Traders found to be manipulating Propane market; BP settles for $303 million, largest commodity market settlement ever in the US

2008:  A Texas City worker was killed by a 500-pound piece of metal

2008:  Russian Federation finds BP/TNK joint venture guilty of manipulating crude oil prices

2009:  A BP helicopter ferrying employees to platform in North Sea of Scotland crashes in good weather killing all 16 passengers

2010:  Deepwater horizon explosion

 

No other energy company has a track record even approaching this bad...and this is within a five year span.  Exxon and Chevron have had incidents, but there is no pattern of major incidents within such a short time span.

 

As for BP's stock, it is trading at about 4.5x pre-explosion 2011 projected income.  10x is probably a "normal" multiple.  The difference between the 4.5 and 10x multiples is about $140 Billion in value.

 

Are the clean-up costs going to be more than $140 billion?  Probably not more than $50 billion, so it could prove to be a good long term buy.  However, the risk is whether this is an isolated event, or whether there is a good chance of additional "incidents" in the near term based on the track record above.  Bottom line...I'm not buying at this level...

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http://blogs.telegraph.co.uk/finance/ianmcowie/100006015/23-billion-shock-for-safe-and-steady-savers/

http://blogs.telegraph.co.uk/finance/rowenamason/100006019/bp-oil-spill-tony-hayward-faces-the-city/

 

Keep in mind that UK pension funds are holding 23B pounds of BP, & that the BP dividend is roughy 1 pound in seven of the industry total dividend income. Cut the div, or risk the US leases?

 

SD

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Are the clean-up costs going to be more than $140 billion?  Probably not more than $50 billion, so it could prove to be a good long term buy.  However, the risk is whether this is an isolated event, or whether there is a good chance of additional "incidents" in the near term based on the track record above.  Bottom line...I'm not buying at this level...

 

My guess is that BP has raised it's attention toward safety to a very high level. They will probably add a lot of talent to avoid a repeat of what's happening. The thunder never hits twice at the same spot. It's funny how many people put a lot of price on risks of offshore drilling companies while before it was not a concern at all. I believe at the current valuations, people are reacting as if there was going to be a spill every years or so.

 

BeerBaron

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