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British Petroleum (BP): Value Investment or Value Trap?

I’m sure this isn’t a new topic among financial authors, bloggers and investors but over the weekend I couldn’t help but want to express my…how should I say it…utter disgust with how British Petroleum (BP), in all levels, has handled the Deep Water incident since news broke back on April 20th.

As a value investor I’m inclined to look at stocks that are cheap, out of favour and without bright prospects because of bad news, poor earnings or other qualitative factors that don’t directly affect the earnings potential or instrinsic value of the company in relation to what I’m paying in the market.

British Petroleum (BP) is currently trading near $34.00 which looks cheap to a lot of investors and it is; but for a reason.  Some investors will trade into this stock hoping for a rise in valuation or to take advantage of what appears to be a high yielding dividend stock in a sector that commonly is referred to having a “license to print money.”

I haven’t studied this stock intently, have no financial position in the company (I do own shares in Total and Royal Dutch Shell) and don’t see myself being interested in this company at any price for a very glaring reason that I don’t have any problem acknowledging on this blog.  One of my Value Rules is that a company has to have competent, transparent and value added management which in my opinion BP does not have at this time.  Their current CEO Tony Hayward has made mistake after mistake in not only handling the Deep Water incident but attempting to clarify rescue efforts, deflect blame of the incident and improving the impression of BP amongst investors, the media and population.  It’s not working.

When any company encounters difficulties or is at blame for some event, incident or misunderstanding it is management’s job to give correct, concise and direct answers to shareholders, its board of directors and the media.  This helps to inform investors of the financial costs the company will encounter associated with fixing a problem, allows the media access to what activities are being done to fix the problem(s) and lets the population at large (consumers) know what the company is actively doing to improve itself and re-develop the trust it had with consumers in the past.

Playing dumb, spending money on public relation campaigns or directly blame/reasoning for events to other external factors that have no implication on the problem at hand today is counter productive.

BP will cut its dividend, will encounter multiple lawsuits and will have a long-term obligation financially to deal with the effects of this disaster.  The scale of it really is something difficult to grasp if you think of the impact today on the economy, ecosystem and oil industry.  There are millions of barrels, litres, gallons or any other measurement of oil pouring from this busted up oil well into the Gulf of Mexico every day, week and month this continues.

If I were an investor in this company I would want BP’s CEO fired yesterday and half the board of directors replaced because they haven’t fired him already.  I wouldn’t want another oil executive promoted to replace him but rather someone who could realistically spell out to investors, the media and public just how bad this incident is and will become; because it is bad and will be worse years from now.

Then I would sell all my shares.

I hope investors in this company and investors looking to invest in this company make a profit because my perception is that the risk far outweighs the potential return for the mess BP is in and currently continues to become entrenched in.  PR isn’t a difficult task.  A company like Maple Leaf Foods is a great example after their problems with Listeria in the past few years.  Their CEO admitted publicly that the company “f*cked up bad” and set out a plan publicly that was intended to restore trust in the brand and products it sells to consumers.  There will be a long shadow cast over the company for years because of what happened, but the company continues to operate today which speaks to the skill of its management in handling the crisis.

Value Investment or Value Trap?…..you be the judge but I think it’s clear where I stand on BP today.

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{ 3 comments… add one }
  • Think Dividends June 14, 2010, 8:57 am

    Great Post Brad. I am also disgusted with how BP has handled the situation. I hope they do the right thing today and suspend the dividend. I am surprised we haven't seen more of an uproar from the public. At the very least, Americans should be boycotting BP gas stations.

  • Anonymous June 14, 2010, 11:24 am

    British Petroleum could learn from the experience of Exxon Mobil (XOM), which was deemed by the US Supreme Court to be “worse than negligent but less than malicious” after the Exxon Valdez oil spill off Alaska in 1989. Exxon eventually paid only a fraction of the $5 billion fines originally imposed, and in 2008 it reported the highest single-year profit in American history.

  • Mark Carter July 13, 2010, 6:23 am

    You are right about the dividend being cut. When I bought in (349p [I'm in UK] on 21 Jun 2010, for the record), I had a good idea that the cut would happen. So that was a non-issue for me. The share price dipped to about 300p, and currently stands at 410p.

    I didn't own BP in the run-up to the disaster, and stood by over quite a few weeks as the share price collapsed. I didn't intend to invest, as I thought there was a load of uncertainty in it.

    Then a couple of things happened. I heard that a work colleague had bailed out of the shares. I thought, hmmm, that's interesting. Then I heard that fund managers were dumping shares in preparation for their quarterly accounting reports, and didn't want the company to show up on them. That I found VERY interesting. Selling a company because you don't want it to show on your books struck me as one of the worst possible reasons to sell a share. If that's their reason for selling them, I figured, then maybe I should be a buyer.

    All that uncertainty, bungled public relations, oil-soaked birds, and all the rest of it, is what creates cheap prices. What a potential investor has to do is sit down and try to sort out the facts. I put my own estimate of BP's worth, including the cost of the fiasco, at about 500p per share. I've seen other estimates of around 475p. Now, no-one really knows what the true cost is likely to be. But the price drop seems have been overdone. And that's all you can really do as an investor.

    At 410p, I don't think it's necessarily a buy. There's probably not enough margin of safety.

    Still, you never know, a bid might yet emerge for the company, and that would be really fun.

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