British Petroleum is off 2.6% currently and trading $40.45 after a DOJ report slammed BPs’ report and settlement with New Orleans Court in regards to personal and business suits for $7.8B. I’ll leave it up to you to read the full article or any of the recaps such as this one:
The bullish case is that the current price reflects worst case scenario of a “gross negligence” case against BP. The maximum fine of $21B is reflected in the price and should the actual fine be less, the upside could be greater then 12%
The DOJ report is, admittedly, pretty damning. There were a number of instances where management failed to contain the crisis or had an opportunity to do so. Additionally the report references some ecological damage that the company is downplaying.
Long story short, if BP is found to be grossly negligent, the company will be liable for approximately $21B under the Clean Water Act. The company currently only has set aside $3.5B for CWA fines and increase total fines by about $10B. A big delta to say the least.
However looking at the worst case scenario, and utilizing numbers from Credit Suisse, the worst case total fine could amount to ~$56B resulting in a $45 price target or 12% upside. A nice scenario analysis chart:
In the meantime, BP is paying a 4.6% dividend yield, XOM is only paying 2.6% for comparison. Should the CWA fine be less then $21B, the upside to BP could be even greater. So the “inefficiency” is the market has overshot the worst case scenario of an otherwise stable, dividend paying stock. In this post, I am relying heavily on Credit Suisse analysis of the numbers however the analyst variance between numbers on a company this large and well followed, is quite small.
But just a cursory look. the company has ~$4.50 in cash per share, made about ~$5 per share in EPS last year. So at 7x last year EPS you have a $35 company. $40 with cash, and a tasty dividend yield to boot.
Ultimately it’s impossible to figure out how litigation will play out, and even harder to develop a timeline. However with it’s current yield & price, it seems BP represents a compelling investment.
Value Cap Trader 