Friday 5 September 2014

British Petroleum - BP

There are generally 3 types of situation which creates great value propositions: Unknown, Unloved. Special Situations. In the case of British Petroleum, it is unloved.

http://www.forbes.com/sites/robertwood/2014/09/05/bp-grossly-negligent-in-gulf-spill-eyes-18-billion-penalty-and-tax-deduction/

While the work was not mine, David Einhorn of Greenlight Capital estimated that the Net Asset Value (NAV) of BP was $70 per share, after allowing for a more negative legal outcome. Although the actual legal outcome was probably far more severe than expected, I believe that value still exists.

BP has also been selling down non-core, unproductive downstream assets which they hold so as to return capital to shareholders. This is value accretive for two reasons.

1) The company can create value by selling assets at or above NAV and buy back stocks at a discount to NAV.
2) The remaining company would be a more focus and higher ROC company.

Over the long time when the legal situation slowly subsides. I believe BP would at least trade at NAV, which using Einhorn's estimation, be at least $60 per share. $60 per share allows for a $30 billion in additional legal damage. I believe this is conservative.

At the current $46/share, this represents a 30% upside. In the meantime, you will be holding an industry leader that trades at 12x earnings with a 5% dividend yield.

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