June 23, 2010 – The Value Player’s Take on BP

Featured Trades: (MDR), (BP), (RIG), (HAL),
(GZPFY.PK), (XOM), (RDS/A)


2) The Value Player's Take on BP. OK, I promise I won't talk about BP again until the stock breaks one way or another. But no sooner do I put out the call to buy the pariah stock at $29, than I hear Whitney Tilson of T2 Partners, one of the giants of the value corner in the hedge fund universe, is doing the same. Whitney has come up with a few more arguments that I haven't thought of, which I will happily pass on. For a start, no company has ever made more mistakes than BP, and panic is rife. Great time to buy. BP has the fourth largest revenue of any company in the world after, guess what, three other energy companies, Gazprom (GZPFY.PK), Exxon Mobile (XOM), and Royal Dutch Shell (RDS/A). Pre crisis Q1 operating profit estimates were at a staggering $34 billion, and the net at $22 billion. While the environmental damage is substantial, it is nowhere near as bad as when 11 million barrels of crude poured into the Persian Gulf during Desert Storm in 1991, which is one sixth the size of the Gulf of Mexico. The spectacular estimates for the federal fine are based on top end flow estimates at the well head. The real number will come in closer to the actual amount landed on the beach, which could be 0.1% of the headline figure, or so BP lawyers will argue. While the cleanup cost may come to $2 billion and is payable up front, there may be 20 years of litigation before a payout is ordered for punitive damages. The Exxon Valdez incident in the end only cost $3.5 billion. The best historical analogy is not asbestos or tobacco, but the 2004 Vioxx disaster at Merck. The stock halved and then more than doubled, once the initial liability was shaved by 90%. It all harks back to my belief that there is way too much fear priced into this stock than the fundamentals justify.

BP Amoco PLC


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