Why BP Should be in your Portfolio or on your Watchlist
The BP Gulf oils spill is a horrendous disaster. I hope the promised $20B relieves a little of stress many of the people around the effected gulf area must be under.
Investors should have already run their ruler over BP. There are a lot of good investors already long, are you among them? I’m not. I see BP as good value right now, but am prepared to wait and see if I get outrageously good value. An easy pitch with bases loaded.
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Mike Klein’s log charts highlight the opportunity and why you should be at least kicking BP’s tires. BP is trading substantially below it’s long term trend at around three standard deviations away from its mean, with a RMS of -3.17 and return factor of 2.39.
Value oriented mangers have been loading up on BP, see the video below. Newsletter and many other investors have been getting long in the market soaking up BP shares.I’m counting on them having bought on the way down as is their want to get aboard early. I’m hoping for a second wave of selling as some pension funds and funds mandated to only hold dividend paying shares start to sell down.
Whitney Tilson of hedge fund T2 Partners touting BP on CNBC.
Clearly I might miss out. I think we’re near the peak of reporting and interest. As solutions prevail and uncertainty is replaced by certainty the price will adjust to a fair value. FV is still uncertain, but realistically the future price of oil is a bigger determinant to the value of BP than the cost of this environmental tragedy. A price of $50 within two years seems like it would be in the ballpark, with maybe $30 and $70 being the outer edges of the park. Of course I’m hoping BP trades lower than that in the near term.
I’ve read discussion about selling puts. Yes the yields are attractive, but as always you’re trading away the upside and holding all the downside. Selling ITM Puts increases the possible return with an obvious corresponding rise in risk due to reduced time time premium.
Why should BP in your portfolio or watchlist? It currently represent a better than average return to risk. When people start talking about bankruptcy for a company with 1-2% chance of that occurring then risk to return is likely to be momentarily skewed. Legally BP America is holding the bag and although BP appears to be standing behind it, the boards first responsibility is to shareholders. The worst case scenario is BP America is sacrificed which is around 25% of the group. There is so much analysis out there on BP at the moment that there is no point in me recapping it here. The number one reason BP should be on your radar is that it is an opportunity to gain experience dealing with fear.
A plan of how to play the unfolding random walk from here is in order. First let’s ignore the concept of random walk and try to predict what is most likely.
The chart layered with fundamental information suggests a bottoming process at around these prices. U bottoms are most common and with ongoing uncertainty and further selling pressure, better prices could occur over the next month or two, I give that 60% likelihood. Prices consolidating here I give 20%. With the $20B promise giving some certainty despite all its uncertainty, the price could firm from here. I’ll give that a 20% likelihood, if it happens I’ll miss out on investing.
I may enter an opportune buy order to catch any one day sell offs. In general I keep these 10% below the market for 1/3 to 1/2 of a full position.
Other steps should include. Investigate BPs debt for bargains. Look at the sector for other opportunities like ATPG, whose price has been beaten down due to drilling embargo.
Disclosure: No position at time of writing.
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One of the main risks must be sovereign risk. Obama has said he will make BP pay for damages. He has a big political incentive to do this. Is there any way they can pass legislation that will make BP liable for damages of the BP America subsidiary? If BP is listed in the US then I presume this could be a possibility. With the legal system in the US damages could blow out.
Isn’t the point of sovereignty that you get to make the laws that apply to entities within your borders. BP is registered in England. The English get to make the laws that apply to their companies. It appears that on top of BP America Inc sits the English registered BP America holdings Ltd and on top of that BP International Ltd also English registered until you finally get to BP. While anything is possible I doubt we’ll see English, international and commercial law rewritten over this.
BP PLC, registered in England at Britannic House, 1 Finsbury Circus, London, is the overall BP holding company.
First order subsidiaries of BP PLC include many national and regional divisions of BP such as: BP (Indian agencies) Ltd, BP Africa Ltd and BP China Ltd (all registered in England) The most notable first order subsidiary remains BP International Ltd (registered in England). Below the BP international umbrella lie many further subsidiaries such as BP America holdings Ltd (registered in England), BP America Inc (registered in USA) and BP Chemicals (International) Ltd (registered in England). Exploration and production (Ex-Pro.) is mostly divided into national subsidiaries under the BP Exploration Operating Co. Ltd, Ex-Pro. Subsidiaries include, for example: BP Exploration (Angola) Ltd and BP Exploration (Caspian Sea) Ltd. via BP subs
In my sensitivity analysis, the price of oil was the key characteristic in the long run.
I think that is a critical assumption and one that you would need to look into. BP could still be subject to civil claims as the parent company. The market is saying that could balloon out to 80-100B based on what has been wiped off the market capitalisation.
At the very least BP would need to place the US subsidiary into bankruptcy and if that cuts off the stream of liability then the stock would be free to move. That process could take 1-2 years. At the moment they are bending over to please the government, which indicates to me that they acknowledge that they could be worse off without government support. If the parent company is end-liable, they will need some sort of regulatory intervention to cap damage claims to a reasonable amount. If the relief wells do not work as expected, the blowout in liabilities would be huge.
If the parent company is not end-liable, then the stock is a bargain. The US subsidiary would be worth zero and the stock could be worth 20% more than it is currently valued.
Also I’m a bit wary of declines over a 2 month period. I think a sharp decline over days or a week which is overdone due to distressed sellers over-reacting and where the fundamentals of the business have not materially changed (eg QBE after sept 11) are good to buy into but in this case the market has had plenty of time to digest the material ( 2 months) and it does in fact materially change the fundamentals of the business. In this case you will be betting on legal issues and the structure of the company. Soemthing to look into would be how Exxon shareprice responded after that oil spill. Did the stock drop and go nowhere for years or did it rebound strongly? My guess is the former, liabilities estimates could ballooon and eventually crystalise decades later at a much lower value. But in the meantime there is worry about the company going broke and the stockprice may go nowhere.
Interesting decline in GPG from 72c to 52c, not sure if anything has actually fundamentally changed, which puts it on my radar for value.
Hi Sean, the share price of Exxon hardly registered a blip after the Valdez disaster in 1989. Take a look at this long term chart http://invest.kleinnet.com/bmw1/stats30/XOM.html can you even spot the hiccup? Here is a comparative chart http://media.economist.com/images/na/2010w23/201023NAC573.jpg
I recall the Valdez disaster and people talking about $10-20B costs for that. It ended up costing $3-4B spread over many years.
The fall in GPG is interesting. Any more thoughts on that?
Big news on Telstra today.
Hi Dean, I have no idea why GPG has gone down. I haven’t bought any yet as if they delist in Australia it could be a bit of a drag to offload later. Perhaps part of the decline is Australian holders selling out? Or maybe a reverse effect, everyone anticipating a breakup and then when it happens it goes down and people question whether it adds value.
Interesting news in Telstra, but not interesting enough for me to buy again! Once or twice bitten…
With the job thing, another route would be to find a good mentor. I suppose you expect this with work but it doesn’t often happen. Sometimes people are very generous with their time and experience and a good mentor is worth a huge amount.
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