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BP – the ‘Baracking’ needs to stop!
Posted 10/06/10
President Obama’s motivational skills are coming into question as he continues his tirade against BP and more particularly the company’s Chief Executive, Tony Hayward, who has honorably been prepared to face the music, almost single handedly, since the Deepwater Horizon rig sank back in April.
In contrast, BP’s Chairman Carl-Henric Svanberg has ‘conveniently’ remained largely hidden from view. Although, to give him credit the former chief executive of Ericsson is the only member of the board who has put his hand in his pocket and acquired a material number of shares in the company since the disaster, picking up 175,000 shares on 28th April at the heady price of 618.92 – they were considered cheap back then!
Mr Obama’s first name apparently means “one who is blessed” in Swahili but his recent outbursts warrant the addition of another ‘r’ to reflect a more appropriate meaning!
It’s hardly helpful when the leader of the country starts openly bashing the CEO of the only organisation capable of sorting out the mess!
BP has a responsibility to its shareholders and employees not just the fishermen of Louisiana and they aren’t going to agree to freely give handouts to everyone, whatever the merits of the claim -can’t wait for BP’s legal team to get into full swing!
Following another material fall in BP’s share price (currently 364p) leading equity analysts are doing their best to offer suggestions.
Since 20th April, BP’s equity market value has now fallen by over US$81bn with the market capitalisation of Exxon ($288bn) now 2.6x BP’s ($112bn). It’s also worth noting that for the year ending December 2009 Exxon generated revenue of US$310bn and net income of US$19.2bn compared with BP’s US$244bn and US$16.5bn respectively.
JPMorganCazenove (‘JPMC) points out that consensus eps estimates for BP have fallen, primarily they suspect due to the oil price fall (since 20 April, Brent has fallen 14%) – surely the clean up costs have something to do with it as well chaps! BP currently trades at around 5.2x December 2010 estimates which is apparently almost half Exxon Mobil’s comparable PER of 10.7x. Assuming the dividend is maintained, which looks increasingly unlikely in the face of mounting US political pressure, the yield would be around 10%.
BP’s Q1 2010 reported net assets were $104bn, so we are reaching that Benjamin Graham/Value investor moment when the shares are trading just above historical cost net book value. JPMC has pointed out that ExxonMobil trades on 2.6x net book value.
JPMC’s Sum of the Parts (‘SOTP’) break up value of BP is approximately 950p share ($84 per ADR) with BP’s share price discount 57% and the ‘missing intrinsic value’ approximately US$159bn – all rather big numbers! Prior to this event, BP averaged a 23% discount to JPMC’s SOTP – the increased discount represents $91bn of equity value.
Morgan Stanley (‘MS’) considers that the recent share price reaction is telling BP’s Board to show its hand quickly, rather than wait for the Q2 results (27th July 2010), both on the payout policy and on how it intends for BP to provide a clearer line of sight on payment of future liabilities for the oil spill. They also consider that investors will want to see the board reiterate confidence in the management team. Without this, political pressure could continue to outweigh fundamental value.
MS considers that clarity on these issues should support a significant bounce away from the bear case and a 2010 PE multiple of 4.4x (a 38% discount to the group).
Many analysts have commented how much progress has been made with the containment effort, however, the pictures continue to show oil gushing from the well and until this stops entirely no one will have any faith in the figures being quoted.
Citi has pointed out that BP’s cashflow generation remains strong and on their estimates the group will generate c$40bn of cashflow a year between 2011 and 2013. Capex of c$20-25bn pa leaves headroom of $15-20bn which is more than enough to pay the $10bn dividend and fund the oil spill response.
The Obama administration clearly has little time for cashflow and financial statements and assumes that open BP bashing is all that’s needed.
This entry was posted 1 year, 8 months ago and was filed under BP plc.
