There's a Great Opportunity developing with BP (BP)

As a long-term value investor, I'm licking my lips at what's going on with BP (BP). Here's why.

Things just seem to be getting worse and worse for BP (BP). The company has been ordered to put $20 billion into an escrow account by President Barrack Obama (despite the fact he has no authority to do so), while oil continues to gush from the Deepwater Horizon rig which exploded several months ago.
The company has also suspended its dividend to shareholders, in an effort to quell attention from the US Government and population. BP (BP) is certainly feeling the fury of a public backlash, which really has been building since the financial crisis. Strange how these days we don’t see much about Goldman Sachs (GS) in the papers.
What exactly is the investment case for BP (BP)? The company currently trades at $31, for a market capitalization of just under $100 billion. This is in stark contrast to its market value of $191 billion, or $61 per share, less than six months ago.
There have no doubt been big losses in BP (BP) stock, where investors may have been drawn in at $50, and $40 and now sit with big paper losses. Investor behavior is strange though – if McDonald’s decided to lower the price of hamburgers today, would you avoid them? What if the price was cut by 50%? Why then do investors flee when a quality company is sold down by over 50%?
At $31, BP (BP) is incredibly attractively priced. The price to earnings ratio sits at a juicy 5 times, while the price to sales is just 0.37. The company is now trading below book value and has a price to cash flow of 3.05 times. There’s no other quality asset in the market trading on such a low valuation. The dividend yield is over 10% although dividends have been suspended. That’s the key word really: suspended. It’s my opinion that these dividends will be reinstated at some point in the future and investors made good on what is owed. It’s far more convenient to suspended dividend payments now in the face of public fury and pay them out at a later date, when nobody cares about the problem anymore. My money is on that occurring.
BP (BP) is an international oil and gas company, operating in more than 80 countries, providing its customers with fuel for transportation, energy for heat and light, retail services and petrochemicals products. Upstream activities include oil and natural gas exploration, field development and production, while Midstream activities include pipeline, transportation and processing activities related to its upstream activities. Marketing and trading activities include the marketing and trading of natural gas, including liquefied natural gas, together with power and natural gas liquids. The company is integral not only to the United States and United Kingdom economies, but the world’s oil supply chain too. As such, it’s not going anywhere.
While investors that are looking for immediate income should steer clear of BP (BP), I think the market is providing a golden opportunity for the more aggressive value investor. I believe given BP’s (BP) reserves and operations, the company is worth at least $200 billion, before the costs of litigation and related oil-spill expenses. That figure has been put at $20 billion at the moment, which would imply on a conservative basis perhaps a valuation of $160 billion. That’s 60% above the current market price and with the catalyst of restored dividend payments (in the form of a special dividend) in the future.
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  • Avoid

    June 23, 2010

    Your effort to analyze BP without looking at it's liabilities is way off. This stock should be avoided at all cost as should the bonds. It is going to zero.

  • Sean Riskowitz

    June 25, 2010

    Avoid - you think it's going to zero, I think it's going back towards 50. Hence why we have a functioning stock market.

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