Thursday, June 3, 2010

BP Disaster provides opportunity for investors

British Petroleum PLC [BP.LSE] is a company in a fair amount of trouble at the moment. Apart from the fact that its oil well in the Gulf of Mexico is leaking the black stuff into the ocean and causing an environmental disaster of monumental proportions and it could get alot worse, the financial implications for the business could be just as catastrophic for the company and shareholders.

There are billions to be spent on clean-ups and further billions on compensation and legal cases for years to come and markets just hate uncertainty.

So far almost 40% of capitalisation has been lost from the value of BP over the last 4 weeks.

All this bad news of course presents a great opportunity to buy this otherwise top asset for much less than it is worth.

As I pointed out it will cost the company (and insurers) many billions to put this right and so it should but it shouldn't be forgotten by prospective investors that this company made US$6 billion of profit on nearly $9 billion in revenue in the last quarter alone so it can afford to take quite a big hit without it affecting the company badly in the long-term.

The value in BP now lies for smaller investors in not only the cheaper shares but also the distinct possibility that the company is now under threat of a takeover offer because it will be seen by possible suitors as a relative bargain.

While many possible risks remain for investors in BP, the market reaction seems a little like overkill to me and its shares are cheap. The longer the disaster in the Gulf continues on for the further BP shares could fall and present an even bigger opportunity. Just how further the shares will fall is anyone's guess but it seems clear that they will.

Fortune favours the brave.

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From Amazon

The History of the British Petroleum Company (History of British  Petroleum) (Volume 2)
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  1. Darren,

    Two questions and an observation.

    1.) How can we purchase BP stock from here in NZ?
    2.) Is your post indicitive of all oil companies at the monent or mainly related to BP?

    Observation: We have many offshore rigs around NZ, what are the chances of something like the current BP spill happening one day off our coast line. Don't you think deep sea drilling is inherently risky and the reality is that one day we will have a catasrophe in our own backyard.
    Is this such a godd industry to invest in from an ethical point of view?

    Your comments?

  2. RJ, I know little about oil companies but I know heaps about value and BP is already value or close to it.

    Other major oil companies like Exxon Mobil are overpriced by comparison.

    You can get BP PLC shares via your local broker (ASB SEC offers foreign markets)but there are a few charges on top of your trade charge. A LSE fee applies and I think another one or two - all in Pounds.

    On the risk involved in offshore drilling on our coast?

    I say go for it with gay abandon but use strict safety precautions. BP haven't followed good safety standards at all. Proves that "green" image they were pushing was just that, an image.

    NZ needs to mine and drilling for oil should be a big part of that. Our economic future depends on it.

  3. Darren,

    Oil is a dirty business.
    I hope these energy companies diversify into other cleaner energy forms in the not too distant future.

    I think technologies will evolve quickly and overtake and replace our need for oil with surprising speed. This will of course present other investment opportunities in the not to distant future.

  4. Darren
    Agree with you on mining & oil drilling here in NZ. However we need more debate about what happens with the royalties etc. Personally I think we should follow Norway's example where all royalties from oil or oil+mining go into a soveign fund. We should not follow the UK's example by pouring the royalties into the crown accounts to be wasted on welfare etc by the governments of the day.

    Also agree with you on buying BP. Apparently they are looking into alternative energies etc. Their name will be tarnished for a while, & I dare say they probably wont get any major US contracts for the short term.

  5. Darren, A report on share action today NYSE:BP
    From an american stock website:

    We are witnessing another incredible liquidation in BP (NYSE: BP) shares today, as the stock continues to be overwhelmed by big sellers. On the day, BP has fallen 7.37% to $32.12. Volume has been very heavy, with 73.90 million shares trading hands compared to a daily average of 48.60 million. Last night on Fast Money, Matt Simmons, the founder of Simmons & Company International and a prominent oil industry insider, said that he does not think the company will be around in a few months.

    Over the last 3 months, BP has lost 42.68% of its market cap, which is now $100.58 billion. The activity in the stock today can be traced to news that the company may suspend dividend payments in the future. There just does not seem to be any end to the bad news for the company at this point, and buying the stock, even at these levels, appears unreasonably risky

  6. I still think there is an opportunity there for another oil company to make a bid and for individual investors to go along for the ride RJ. What the stock price bottoms out at nobody can say but I think some commentators are over exaggerating things to say that the company "wont be around" in a few months. They sure are in alot of strife but they have deep enough pockets to clean up the mess they have made and the following years of lawsuits.

    They will survive in some form and I think they are increasingly looking like a takeover target as the stock price falls.

  7. An interesting articel RJ :

    As of today BP is currently trading at a capital value of less than its assets.

  8. It looks like the support levels have been reached RJ, for now anyway:

    Any further delays beyond the known of course will give the shares another rorting.


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