BP: Oversold or Just the Beginning?

 On Saturday, May 1, 2010, Andrew Bary of Barrons, wrote an article titled, "BP, Transocean Priced For Disaster."

According to Bary, Bernstein analyst Neil McMahon wrote in a note to clients that the recent loss of $25 billion in BP's market cap was "extreme" relative to the potential worst case cost scenario of $12.5 billion for the oil spill.

 According to Reuters, posted on CNBC,

The final bill for cleaning up the spill could be $7 billion, Neil McMahon, analyst at investment firm Bernstein said.

Analysts at Morgan Stanley put the figure at $3.5 billion, while analysts at Citigroup, Evolution Securities and Panmure Gordon put cleanup costs at under $1.1 billion.

Compensation that must be paid to those impacted by the slick could also amount to billions of dollars. The cost to the fishing industry in Louisiana could be $2.5 billion, while the Florida tourism industry could lose $3 billion, Bernstein predicted.

BP will also have to spend $100 million to drill a relief well to try and stem the flow of the well...

There seems to be no consensus, as to what the projected price tag will be for BP. All we know is it is worst than originally believed to be, and according to the media, it is becoming progressively more challenging. The situation is definitely dreadful and BP has an uphill PR battle for most of the foreseeable future. However, the stock has plummeted over 13% since the incidence has occurred.

Barron's makes a good point towards the stock being oversold, in comparison to the worst case scenario that could stem from this disaster. Especially since we know hedge funds are expecting a rise in oil, per my post "Hedge Funds Are Adding To Their Long Positions In Crude." The drop in price makes BP an attractive value play. It trades at 8.2x trailing earnings, compared to CVX at 15.5x, XOM at 17x and COP at 18.25x. It also has a PEG of 1.6. The dividend at these levels is a whopping 6.44% (The Ex-Dividend date is 5/5/2010, so in order to get the $.84/share payout on 6/21, you need to be holding shares by this date). Throw all that in with the above mentioned possibility that the stock could be oversold. It makes sense why experts are jumping in. Even Jim Cramer and Karen Finerman are holding to the oversold thesis.



There are many reasons why one should consider a position in BP, but there are also some uncertainties. The analysts could be wrong in their estimations, the spill could spread even further, BP's brand could become tarnished, the government could enforce detrimental regulation or a global initiative of drilling reduction could all prohibit future profit. Not to mention a whole slew of legal liabilities that the company will be faced with.

This situation is a tough one to digress. However, if the scale were to tip in BP's direction, investors should be handsomely rewarded with an increase in share price and a nice 6.44% dividend payout.


Do not rely solely on the opinions of this blog or any other site when making an investment decision. Any investment could result in the risk of loss of capital. Please consider seeking professional advice before initiating your investment ideas. 

Disclosures: Long BAC, Long C, Long F, Long DNDN, Long GLW, Long SPF, Long HD, Long APPL, Long XOM, Long BP