BP: Oil Leak Rivaled by Leaking Valuation

BP’s (BP) Deepwater Horizon rig disaster has dominated headlines for about six weeks now, and there is still an undetermined quantity of oil leaking into the Gulf of Mexico.  As the oil seeps into the ocean, investors are faced with a risk/reward proposition that is difficult if not impossible to access.  The potential costs of clean up continue to climb, recently crossing $1 billion already spent, yet the market has already docked the company more than $100 billion in market cap from its highest point this year.  Their stock has now fallen below $30, the lowest level since 1996.

The drastic fall, including more than 13% decline just today, has even introduced the idea of bankruptcy into the conversation as it would somewhat limit the oil giant’s liability.  Noted energy investment banker Matt Simmons interviewed on CNBC’s Fast Money said that he believes BP is increasingly likely to declare bankruptcy “possibly in a matter of months” in the wake of this disaster.

Of course, opinions vary widely as T2 Partners Whitney Tilson discussed why he is actually going long BP stock in this situation for the long term opportunity.  He believes the company is earning nearly “$100 million per day” and the negative press and horrendous PR have sunk the stock too far.  Furthermore, he believes that the dividend will not be cut at all, and BP will be allowed to payout the nearly $11 billion it plans to pay to shareholders over the next year.  Talk about a bold call!

Of course the two opinions expressed above are only a small (if extreme) sampling of the wide range of opinions regarding BP and its future.  The reality is likely somewhere in between the sanguine Tilson and the gloom and doom Simmons.  At Ockham, we continue to believe the short term risks are simply too great for investment (as opposed to speculation).  There is mounting pressure in Washington that the company should not be allowed to pay its shareholders a dividend this quarter.  The President is talking tough to BP, and now members of the House are looking to force BP to spend no money on advertising or dividend payouts and devote all its resources to cleanup.

BP selling in the $20’s is sure to pique the interest of opportunistic investors, but for us to recommend the stock we need more clarity into when they can actually stop the leak.  Furthermore, it is never a good idea to invest in a company that is drawing increasing attention from the political class.  One of the few certainties I see in this situation, US politicians will do everything in their power to make sure BP pays; a pound of flesh will not cut it either.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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