BP

It is rare indeed for the share price of very large companies to fall ‘out-of-bed’ in response to a one-off event.  And when they do it is often a buying opportunity. Warren Buffet’s purchase of American Express shares in 1963 following the 'Salad Oil Scandal' (Wikipedia) has long been part of value investing folklore.  And perhaps, in years to come, BP and the Gulf of Mexico will attract the same ‘once-in-a-lifetime’ tag. Of course we don’t know this for a fact and this is why BP’s shares keep falling. But we do know some things: i) BP’s shares have fallen by 40% since the Macondo tragedy, an equity value loss of $75bn; ii) the cost so far to BP of the spill has been $1bn, with estimates of the total likely cost trending up towards the $10bn mark; iii) BP has $250bn of revenue (if it was a country it would rank in the top 30 in the world), a strong balance sheet with over $100bn of equity, modest net debt of $25bn, and $40bn of annual cash flow so it can afford these costs; iv) BP is the third largest listed oil company in the world, with 6% global share, and its debt is AA rated (higher than most sovereign debt); v) the valuation of BP is almost unheard of for a global mega-cap, a PE of less than 6 times, yield of almost 9% and a cash flow multiple of less than 4, to quote the Oils team from JP Morgan “We have never recorded such a universal set of extremely depressed fundamental metrics”; and last, but probably not least vi) heads will have to roll because the political pressure has become intolerable. I suspect longer-term investors are buying BP shares.

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