BP Plc - British Petroleum

[Ross812]

btw,

 

I noticed that SHELL (RDS.A) is also trading at a similar valuation.

1.1x book and near 5% div yield

so , shouldn't we buy SHELL instead of BP ?

With marginally higher valuation, it is litigation risk free

 

I bought some recently at $41. The reasoning behind the purchase is BP is selling at a P/E discount of 2-3x to bring it to parity with Shell and Chevron. Over the next 2-3 years the stigma from the oil spill will wear off and mutual fund managers will no longer 'window dress' BP from their holdings and the P/E should return to 7x to 8x on the low side.

 

This is a price appreciation of 40-60%. Stress tested in 2009 with earnings at $5.25 and your still looking at $37 - $42 at a P/E between 7 and 8. Sit there and collect the 6% yield. The bear case: in 3 years you make $37+$6 div. - 41 = $2; bull case $8*8 + 6 div. - 41 = $29 (19%/yr).

 

This is without considering an earnings increase due to the buy back or the possibility that oil prices may continue to increase. There is a reason Seth Klareman has a 5% stake in this company.

 

P/E parity with the industry is just a quick way of looking at this. P/BV is not the way to value an oil major. P/DCF, EV/Flowing Barrel, and EV/Reserves will give you a far better apples to apples metric. Cash flows are going to be all over the place for oil majors due to cyclical capital spending, oil prices, and sales long lived assets. The companies try to make it easier for the market by smoothing EPS, so you can use EPS for the majors. Accounting tricks are common with minors so you have to be really careful when using EPS.

 

As far as EV/BPD and EV/Reserves go the two are hard to compare because Shell has more refineries and service stations than BP. I'll take their interest in each refinery at 2B and service stations & infrastructure at 1.5M each.

 

BP adjusted EV = 148.37B - (17 refineries)*2B - (20,700 service sta.)*1.5M =  83.32B

RDS.A adjusted EV = 221.9B - (35 refineries)*2B - (44,000 service sta.)*1.5M = 85.9B 

 

BP- EV/BPD = 83.32B/4.1Mbpd = $20,300 

RDS.A- EV/BPD = 85.9B/3.3Mbpd = $26,000

 

BP- EV/Proved Reserves = 83.32B/17B = $4.9 per barrel

RDS.A- EV/Proved Reserves = 85.9B/14.25B = $6 per barrel

 

Not only is BP more efficient at extracting the oil (meaning RDS.A has more challenging oil fields) but you are paying less for each barrel of oil in the ground by buying BP. BP's proved reserves should actually trade at a premium to Shell's.

[Kiltacular]

P/E parity with the industry is just a quick way of looking at this. P/BV is not the way to value an oil major. P/DCF, EV/Flowing Barrel, and EV/Reserves will give you a far better apples to apples metric. Cash flows are going to be all over the place for oil majors due to cyclical capital spending, oil prices, and sales long lived assets. The companies try to make it easier for the market by smoothing EPS, so you can use EPS for the majors. Accounting tricks are common with minors so you have to be really careful when using EPS.

 

As far as EV/BPD and EV/Reserves go the two are hard to compare because Shell has more refineries and service stations than BP. I'll take their interest in each refinery at 2B and service stations & infrastructure at 1.5M each.

 

BP adjusted EV = 148.37B - (17 refineries)*2B - (20,700 service sta.)*1.5M =  83.32B

RDS.A adjusted EV = 221.9B - (35 refineries)*2B - (44,000 service sta.)*1.5M = 85.9B 

 

BP- EV/BPD = 83.32B/4.1Mbpd = $20,300 

RDS.A- EV/BPD = 85.9B/3.3Mbpd = $26,000

 

BP- EV/Proved Reserves = 83.32B/17B = $4.9 per barrel

RDS.A- EV/Proved Reserves = 85.9B/14.25B = $6 per barrel

 

Not only is BP more efficient at extracting the oil (meaning RDS.A has more challenging oil fields) but you are paying less for each barrel of oil in the ground by buying BP. BP's proved reserves should actually trade at a premium to Shell's.

 

Ross,

 

Nice, useful insights Ross.  Thanks

[alwaysinvert]

If I only knew that they would keep buying back stock after the current program... This looks like one of the best opportunities atm to me.

 

I have no clear grip on the range of that the legal costs will come down to, but my intuition is that they will (in some combination) be watered down considerably from current claims or/and be pushed years down the road.

 

Is there anything that can be considered as a legal precedent when it comes to the states' claims? If not they will have to run it all the way to the supreme court* and what kind of timeline are we talking then? 10y+? Is there any real indiciation that something in the process will be very different from the Exxon-Valdez spill here going forward?

 

Stalling and postponing seems like the best course of action from a  purely economocial standpoint, but I don't know about other ramifications of that strategy.

 

 

*I don't know if that's the correct agency in this case

[Ross812]

If I only knew that they would keep buying back stock after the current program... This looks like one of the best opportunities atm to me.

 

I have no clear grip on the range of that the legal costs will come down to, but my intuition is that they will (in some combination) be watered down considerably from current claims or/and be pushed years down the road.

 

Is there anything that can be considered as a legal precedent when it comes to the states' claims? If not they will have to run it all the way to the supreme court* and what kind of timeline are we talking then? 10y+? Is there any real indiciation that something in the process will be very different from the Exxon-Valdez spill here going forward?

 

Stalling and postponing seems like the best course of action from a  purely economocial standpoint, but I don't know about other ramifications of that strategy.

 

 

*I don't know if that's the correct agency in this case

 

I believe they will continue their current buy back and continue the buyback as long as the company remains below IV. At some point they switch back to dividends at a 40% - 50% payout ratio. Somewhere around $2.5 - $3.5/year. BP does not have a good track record of reducing share count over the long term. Share buybacks at this point continue to coil the spring that will be released when the investment community once again accepts BP. 

 

 

[alwaysinvert]

If I only knew that they would keep buying back stock after the current program... This looks like one of the best opportunities atm to me.

 

I have no clear grip on the range of that the legal costs will come down to, but my intuition is that they will (in some combination) be watered down considerably from current claims or/and be pushed years down the road.

 

Is there anything that can be considered as a legal precedent when it comes to the states' claims? If not they will have to run it all the way to the supreme court* and what kind of timeline are we talking then? 10y+? Is there any real indiciation that something in the process will be very different from the Exxon-Valdez spill here going forward?

 

Stalling and postponing seems like the best course of action from a  purely economocial standpoint, but I don't know about other ramifications of that strategy.

 

 

*I don't know if that's the correct agency in this case

 

I believe they will continue their current buy back and continue the buyback as long as the company remains below IV. At some point they switch back to dividends at a 40% - 50% payout ratio. Somewhere around $2.5 - $3.5/year. BP does not have a good track record of reducing share count over the long term. Share buybacks at this point continue to coil the spring that will be released when the investment community once again accepts BP.

Any special reasons for this belief?

[fareastwarriors]

BP Says Accord Can’t Be Approved Unless Dispute Is Fixed

 

 

http://www.bloomberg.com/news/2013-08-30/bp-says-accord-can-t-be-approved-unless-dispute-fixed.html

 

BP Plc (BP/) told an appeals court that its $9.6 billion settlement of economic damages from the 2010 oil spill can’t be approved if a dispute over claim payments isn’t resolved in the company’s favor.

 

...

 

 

This “misinterpretation,” BP argues, has already swollen the estimated cost of the settlement by almost $2 billion since the deal was announced in March 2012.

 

 

[fareastwarriors]

BP Spill Accod Appeal Fast-Tracked by New Orleans Court

 

http://www.bloomberg.com/news/2013-09-06/bp-spill-accod-appeal-fast-tracked-by-new-orleans-court.html

[anders]

I have been following BP since the Gulf of Mexico incident and bought some shares at panic level. The reason was quite simple really, the market discounted in a 100bn spill cost for BP and as a corollary the company was traded down 100bn.

Now, with the risk substantially reduced coupled with a accumulated charge of ca 43bn to date, everyting equal suggests a higher market cap.

 

Without going into detail of the company, I like the case at this point in time and events have unfolded favourably.

To mention some; BP is now a cannibal - eating its own shares, cash flow is stable, the litigation process and spill cost is becoming clearer, the company is growing organically, Baupost increased its stake q2/q3 2013 to make it the second largest stake in their equity portfolio and, for those that like the relative game, its currently offered at a discount to its peers.

 

The reason im writing this is because I need help to come up with risks that I have not thought about. Anything that comes to mind will be very appreciated  :)

 

All the best to you all!

[racemize]

Seems like a good idea; however, there is a thread already started for it:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/bp-plc-british-petroleum/

 

you might find some more info there.

[fareastwarriors]

http://www.businessweek.com/articles/2013-09-25/all-against-bp-as-spill-trial-turns-to-coverup#r=rss

 

All Against BP as Spill Trial Turns to 'Coverup'

[fareastwarriors]

http://www.nytimes.com/2013/10/03/business/energy-environment/partial-victory-for-bp-in-dispute-over-settlement.html?ref=business&_r=0

 

Partial Victory for BP in Dispute Over Settlement

[fareastwarriors]

http://www.bloomberg.com/news/2013-10-29/bp-raises-dividend-as-quarterly-earnings-beat-estimates.html

 

BP Raises Dividend as Quarterly Earnings Beat Estimates

[LowIQinvestor]

Bob Dudley is doing a great job considering the cards he was dealt.

 

Happy to be a shareholder.

[fareastwarriors]

http://www.businessweek.com/articles/2013-11-22/bp-declares-total-war-on-trial-judge-in-gulf-spill-case#r=rss

 

 

BP Declares Total War on Trial Judge in Gulf Spill Case

[LowIQinvestor]

Good stuff!

 

"UK Backs BP Over 'Excessive' US Ban on Contract Deals -- Report

 

The U.K. government is backing BP PLC (BP) in the dispute over the oil company's future in the U.S., calling the ban that stops it from winning federal contracts "excessive," reports the Financial Times Wednesday.

BP has been barred from U.S. government contracts since the Deepwater Horizon disaster in 2010 but the paper quotes the U.K. as saying in a filing to court that the ban "affects jobs and pensions of workers in the United Kingdom, the United States, and elsewhere."

The U.K. has previously made behind the scenes intervention."

 

http://www.bbc.co.uk/news/business-25200795

[fareastwarriors]

http://www.businessweek.com/articles/2013-12-31/bp-oil-spill-settlement-imbroglio-enters-strip-club-phase

 

 

BP Oil-Spill Settlement Imbroglio Enters Strip Club Phase

[fareastwarriors]

 

BP to Conoco Seek Alaskan Oil Comeback as Palin Tax Dies

 

 

http://www.bloomberg.com/news/2014-01-08/bp-to-conoco-seek-alaskan-oil-comeback-as-palin-tax-dies-energy.html

[LowIQinvestor]

Einhorn's buying BP:

 

"We established a position in BP at an average price of $47.39. The Deepwater Horizon oil spill was nearly four years ago. Since then, investors have focused on the ensuing legal cases regarding clean-up and restitution efforts, while overlooking BP’s improved return on capital in its core businesses. Allowing for more negative legal outcomes than BP has currently provisioned, we believe the company’s net asset value (NAV) is nearly $70 per share. It can therefore create substantial value by selling assets at or above NAV and using the income to repurchase stock at a significant discount. This is exactly what BP has been doing. Further, BP has restricted capital expenditures and increased dividends – all evidence of a more shareholderfriendly approach. As the legal issues subside, we expect the market to appreciate BP’s portfolio value and its improved capital allocation. In the meantime, we own an industry leader at 9x earnings with a 5% dividend yield. BP shares ended the quarter at $48.61."

[plato1976]

I always have a hard time to understand these big oil 's free cash flow yield

Looks like even though BP has an earning yield > 10%

It has a capital investment requirement much more than the depreciation, so that its free cash flow is only 60%+ of its earning, making its FCF yield way less

 

I also don't see they can grow their cash flow quickly - in that sense these capital expense is just to maintain their cash flow capability. So why are we interested in such business ? FCF yield of 7% is not terribly bad but also not that good either

 

Einhorn's buying BP:

 

"We established a position in BP at an average price of $47.39. The Deepwater Horizon oil spill was nearly four years ago. Since then, investors have focused on the ensuing legal cases regarding clean-up and restitution efforts, while overlooking BP’s improved return on capital in its core businesses. Allowing for more negative legal outcomes than BP has currently provisioned, we believe the company’s net asset value (NAV) is nearly $70 per share. It can therefore create substantial value by selling assets at or above NAV and using the income to repurchase stock at a significant discount. This is exactly what BP has been doing. Further, BP has restricted capital expenditures and increased dividends – all evidence of a more shareholderfriendly approach. As the legal issues subside, we expect the market to appreciate BP’s portfolio value and its improved capital allocation. In the meantime, we own an industry leader at 9x earnings with a 5% dividend yield. BP shares ended the quarter at $48.61."

[frommi]

EPA lifts ban on BP winning federal contracts

 

http://www.latimes.com/business/money/la-fi-mo-bp-gulf-mexico-epa-spill-20140313,0,2189090.story#axzz2vuQdlqy5

 

That can bring back a lot of confidence for the stock.

[Valueguy134]

http://www.ft.com/intl/cms/s/3/d82fdd4a-b341-11e3-b09d-00144feabdc0.html#axzz2wtz691ZJ

 

Interesting given that BP owns 20% of Rosneft.

[LowIQinvestor]

Deepwater Horizon Oil Spill Linked to Failed Blowout Preventer

Chemical Safety Board Says a Piece of Safety Equipment Punctured Pipe, Releasing Oil

 

http://online.wsj.com/articles/investigators-fault-blowout-preventer-in-deepwater-horizon-oil-spill-1401984643?mod=yahoo_hs&cb=logged0.8244260069914162

[Ross812]

BP found grossly negligent in the 2010 oil spill.

 

http://www.reuters.com/article/2014/09/04/bp-brief-idUSWEN00DY220140904?type=companyNews

 

Down 6%.

 

(Reuters) - * U.S. judge says BP Plc is subject to enhanced civil penalties under

 

clean water act in connection with 2010 Gulf of Mexico oil spill -- court

 

ruling * U.S. district judge carl barbier says discharge of oil was result of bp's

 

gross negligence and willful misconduct * Barbier says BP, Transocean and Halliburton Co are each

 

liable under general maritime law for the blowout, explosion and oil spill * Barbier says bp's conduct was reckless, transocean's conduct was negligent,

 

and halliburton's conduct was negligent * Barbier apportions fault as follows: BP, 67 percent; Transocean, 30 percent;

 

Halliburton, 3 percent * Barbier says although bp's conduct warrants punitive damages under general

 

maritime law, it cannot be held liable for such damages under precedents

 

governing his court * Barbier says transocean's and halliburton's indemnity and release clauses in

 

their respective contracts with BP are valid and enforceable against BP * Barbier says Transocean Holdings llc, Transocean deepwater inc, and

 

Transocean offshore deepwater drilling inc not entitled to limit liability

 

under limitation of liability act * Barbier, who sits in federal court in New Orleans, rules in a decision

 

outlining his findings of fact and conclusions of law in phase one of gulf

 

spill trial

 

I believe this means the court was not allowed to assign damages, but they will be assigned in a different court.

 

Interesting Tansocean was found 30% liable yet its shares are up today... 

[CorpRaider]

I think avoiding the gross negligence tag means their potential civil fines under the CWA will be a lot lower than they could have been.  Maybe that's it.  Also, I suppose having their limitations of liability validated and having a judge tag BP with gross negligence could help in any follow on litigation between them and BP.

[fareastwarriors]

BP May Be Fined Up to $18 Billion For Spill in Gulf

 

 

http://www.nytimes.com/2014/09/05/business/bp-negligent-in-2010-oil-spill-us-judge-rules.html?ref=business