Commodities are going straight down. While the S&P 500 and its tracking exchange traded fund, SPY (SPY), has fallen nearly 10% in the last month, oil prices have fallen nearly 30% since early March. Oil stocks have also sold-off hard over the last several months.
While the OIH is an index of oil service stocks, many oil producers, such as BP (BP) have fallen nearly 30% in the last several months as well.
BP has faced three major legal challenges since the spill nearly 2 years ago. First, the company faced civil suits from families and business along the Gulf Coast, the Gulf States, and the Federal government.
BP recently settled most of its civil liabilities with families and business who were not already paid by the previously administered BP spill fund when the company announced a roughly $7.8 billion settlement several months ago.
While BP still faces claims from the Gulf States and federal governments, signs are also increasing that a fairly favorable settlement could be reached shortly.
As an attorney I've always maintained that the fact that BP is a major employer in the gulf and England is a major ally in the War on Terror, with BP having a number of major contracts, Obama to seek a settlement that would be favorable for the company and the industry as a whole. The fact that BP has been able to fund the BP spill fund over a number of years also suggests that the administration is interested in working with the company.
BP's management is currently seeking a $15 billion settlement, while reports are the government is seeking $25 billion. BP originally guided to a total liability of around $40 billion for the spill over a year ago, and if the company is able to settle its liabilities with the federal government at around $20 billion, BP's total liability will likely be significantly less than what the company projected over a year ago. BP will also likely settle its liabilities with the States soon after a settlement with the Justice Department is reached, since some of the money paid to the federal government is obviously likely to be return to the affected state. Settlement talks are likely to conclude by September with a possible trial scheduled for January.
Obama or the new Republican president will not want to kick of a new term in office with a massive lawsuit against a company that is still one of the largest employers in the Gulf and the country's biggest ally's largest energy producer. The clean-up process was an embarrassment for Obama as well, with the clean-up effort taking much longer than originally thought, poor government regulations and inspections partly to blame and Obama only visiting the Gulf well after the spill was known to be significantly larger than originally expected. It is unlikely the administration wants to relive the clean-up process.
Obama has already recently taken BP Gulf City refinery unit off of criminal probation with allegations pending, BP has sold few of its deepwater assets in its effort to raise cash, and permits in the gulf have been increasing, with BP recently announcing the launch of production from three new deepwater sites just this week.
With BP likely to resolve most its biggest legal challenges within the next six months, the stocks looks very cheap. BP yields over 5% today, with the company's current payout ratio of 16% far lower than the pre-spill average of 40%. BP's payout ratio of the company's North America peers, Chevron (CVX) and Exxon-Mobil (XOM), who each payout between 25-30% of each company's respective revenues.
BP has also sold significant assets and the company has solidified its balance sheet. BP has sold significant assets in the Gulf, though not most the company's deepwater positions, as well as some of the company's more mature properties in places such as Alaska, and the company is looking to liquidate its position in TNK with its Russian partners soon as well. BP is a much smaller company today than it was nearly 2 years ago, and the company's market capitalization of around $120 billion makes the company significantly smaller than its North American peers, Chevron (CVX) and Exxon-Mobil (XOM).
To, conclude, BP still faces challenges ahead, but with oil prices having dropped over 30% in the last two months and BP's share prices having fallen around 25% in the last several months, BP looks to be bottoming. Institutional investors also have likely avoided investing in the company while BP's total liabilities remain tentative, and the company currently trades at less than 7x average estimates of next year's likely earnings. While the energy stocks have significantly underperformed the S&P 500 and most of the broader indexes, the best value is often found in the most beat-up sectors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
