Next week marks three months since the BP Deepwater Horizon explosion and spill, which, in addition to its impact on wildlife, the local fishing industry, and regional tourism, has severely depressed BP's stock price. During the first 2 months following the disaster, BP's stock price decreased sharply, though in recent weeks it has rebounded, culminating in today's 8% jump on the announcement that the leak has been stopped during a cap test.
We asked 5 model managers for their take on BP's stock today and their outlook for the future. Here's what they had to say:
Alejandro Paschalides (BULLISH):
For an investor with a long time horizon, I believe BP offers an attractive risk-reward proposition. The total costs of the spill would have to be roughly $75 billion to account for the drop in market share since the event, and most estimates are below that. Also, BP is a cash cow given it generates $25 billion to $30 billion in cash a year, so it can definitely pay for the spill without too much in the way of asset sales or borrowing. From what I've heard, the $20 billion it has paid up-front is tax deductible, so it will get $7 billion of it back this year via a tax credit. Couple this with a bullish long-term oil price outlook, and you have a stock that could provide a nice return over the next year with little risk from this point forward.
YH&C Investments (BULLISH, currently long):
The BP oil spill is tragic and as a BP shareholder I feel awful for the workers who died in the explosion and their families, the people and industries in the gulf who suffered during the last four months, and the ecological system which has been uprooted. The pictures of the oil covered ducks and birds left me disappointed and sad.) The issue in question is whether the common equity of BP is a buy? I believe the answer depends on an investor’s time horizon, the opportunity cost of possibly a better investment with the capital used to buy BP, and the great unknown of how large BP’s liabilities are in the future. If an investor is willing to wait a few years, owning BP is a strategic investment based on the continued growth of the worldwide demand for oil, led by the U.S., China, India, Russia, and any country with large energy needs. As such, I believe the share price is undervalued and will probably recover. However, if one needs a capital gain in two or three years time, I would not be a buyer of BP as the liability amounts will probably not be determined in this time frame.
Chen Yuan (NEUTRAL):
The recent BP Deepwater Horizon has made many value investors salivate looking at BP stock. Whitney Tilson and Glenn Tongue’s T2 Partners has publicly disclosed their bullishness towards BP. Their long case for BP is an insightful read. It is hard to argue the case laid out by T2. The crux of the long argument is BP will survive because it generates a lot of cash and is capable of paying out the claims. The short term, however, could be a very painful ride. When the government is demanded by its citizens to punish BP, the government usually obliges for political reasons if anything. Besides, it is the Robin Hood thing to do; take from the shareholders and give to the victims. Obama has indicated his intention to force BP to cut its dividends. For how long, nobody knows. Granted the shareholders in UK, a majority of whom are pensioners relying on the dividends for income, will protest as loud as they could, but that is really all they can do besides watching their dividends go to the rightful victims. When this happens, income investors may begin massive selling causing the stock to drop sharply. This could create a great buying opportunity. Until then, I’m content sitting on the sidelines. Getting in too early, even if you are right, could still be a costly mistake as I have learned in the past.
Capital Ideas (BEARISH):
Capital Ideas owns no BP and we are not eager to acquire any. Not long ago the stock was trading in the high 30’s. At that time analysts, and other reliable contacts in the energy business, told us the company, net of its North American assets, was worth $25 per share. If they are right we missed a chance to buy a great company, at the $26.75 low, with limited downside risk. However, we passed on the opportunity for several reasons. First and foremost we do not think it is possible to compute current value, or future cash flows, for BP. The unknowns are simply too numerous. Secondly, we take note of the less than 50% price retracement on BP’s chart. From a technical standpoint this does not bode well for the near term future of BP’s stock price. Last, we believe that short of a major asset sale or tender offer for the whole company, the stock is a value trap without catalyst for movement. With no likely catalyst and no dividend to defray lost opportunity cost we are not willing to commit capital to BP common stock.
Vivian Lewis (BEARISH):
If proof were needed that the stock market moves in anticipation rather than on actuality, it is proven by the performance of BP's shares. The full price of the cleanup and damages from the Deepwater Horion disaster so far is unfathomable. The impact on the British company's earnings cannot be forecast. Its dividend has been omitted under US Government pressure. The likelihood of deep and long restructuring of the BP asset portfolio is high. The future retention of its top management is unlikely. With so much to worry about, the share price is inching up consistently. I don't want to spoil the party, but if I had to buy into the Gulf of Mexico mess, I would not buy BP, but rather a more innocent party in the sinking: Transocean (RIG). In our Covestor accounts we looked for a likely beneficiary of the disaster with a real and rising payout, which we found, Cenovus (CVE), a Canada spinoff. It is doing nicely and we recently cut our stake so it is no longer our largest holding.
