Confidential
BP
a contrarian and controversial
value bet?
Ernst Grönblom
01.07.2010
Premises
• We operate under the assumption that the market
usually over-reacts both on the upside (booms and
manias) and the downside (busts and panics).
• We currently live in the aftermath of the most
severe financial crises since the Great Depression.
• After the massive government bank-bailouts, public
outrage against (actual or perceived) corporate
wrongdoings is at historical highs.
BP – key data
• 2009 sales: 239 Bn$ (global rank: 4)
• 2009 profits: 17 Bn$ (global rank: 4)
• 2009 (june) market cap: 147 Bn$ (global
rank: 10)
• 2009 total net tangible assets: 81 Bn$
The Deepwater Horizon –spill is
probably the most widely covered
environmental accident to date
Costs to BP
• Cost can be divided into three main parts:
(1) Direct costs (stopping the leak, environmental cleanup).
Estimates: best case ~ 8 Bn $, worst case ~ 16 Bn $ (source:
UBS)
(2) Penalty fines under the US Federal Water Pollution Control
Amendments of 1972 (a.k.a. “Clean Water Act”). Estimates:
10 – 20 Bn $.
(3) Damages under the US Oil Pollution Act of 1990. Maximum
damages under the act capped to 75 M $, but BP has
committed to ignore the cap and “honour all legitimate
claims”. Estimates: 5 – 10 Bn $.
• Summary: worst-case scenario ~ 40 Bn $, best-case
scenario ~ 10 Bn $ (Nomura estimate: 12 Bn $ ).
Costs to BP (Bn $)
183
102
92
40
10
Market cap ( before accident 19.04.2010)
Net book assets (31.12.2009)
Market cap (current 02.07.2010)
Spill related costs (worst-case
scenario)
Spill related costs (best-case
scenario)
BP vs Shell vs Chevron vs Exxon vs
S&P 500 (January 2002 – July 1, 2010)
BP vs Shell vs Chevron vs Exxon vs
S&P 500 (April 1, 2010 – July 1, 2010)
BP vs Shell vs Chevron vs Exxon
relative valuations (02.07.2010)
P/E
Price / Book
Exxon
13,1
Exxon
Chevron
10,4
Chevron
Shell
10,4
Shell
BP
4,6
BP
2,39
1,44
1,09
0,88
Balance sheet analysis
Assets vs Liabilities (Bn $)
Asset breakdown (Bn $)
236
Cash
8
Receivables
30
134
Invetories
23
Other noncurrent assets
10
Total assets
Total liabilities
Property, plant
& equipment
108
Investments
30
Intangible
assets
12
Goodwill
9
Conclusions and investement thesis
summary
•
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Fact: since the accident, BP has lost approximately 90 Bn $ of market
capitalization.
Fact: most experts estimate the worst-case scenario cost to BP to be
approximately 40 Bn $.
Fact: considering the financial strength of BP, a bancruptcy can be
considered very unlikely.
Fact: the response to the accident of both the public, the media and the
political establishment has been very aggressive. Demands have been
made of, e.g. retroactive legislation (with unlimited liability) and seizure
of the company. Politicians – eager to win public points by appearing
tough – have made demands that clearly lack legal grounds.
The public – and most investors – seem to have failed to distinguish
between political rethoric and economic and legal facts.
Hypotheses: current investor sentiment (as reflected in market
capitalization) grossly over-estimates the probable final economic
consequences of the accident to BP.
Investment thesis: at current valuations, BP probably represents a deepvalue play with a potential short-term upside of 50 – 90 %.