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Bill Wolf
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Former hedge fund analyst with Tiger Cub, currently managing a private account.
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  • Some Facts About Gulf Fishing Industry
    I've pulled some statistics on the fishing industry in the Gulf of Mexico.
    Here is the location of the data, from the National Marine Fisheries Service (OTC:NMFS). This data gives the pounds caught, and dollar value of the seafood landed by commercial fishers...  
    http://www.st.nmfs.noaa.gov/pls/webpls/FT_HELP.SPECIES 

    In the gulf states, which includes Texas, Louisiana, Alabama, Mississippi and the West Coast of Florida, the data looks like the following:
                 
    So, doing some quick math, conservatively assume the landed $ value is about 20% of industry value or throughput.  (have to pay the canneries, etc.)  That means over the last 4 years, the total industry value was about $3.3 billion per year. For the sake of giggles, assume BP has to pay 100% of this.  

    Also assume BP hires 95,000 people (more than coke, or microsoft employ worldwide) to clean up the mess at $50,000 per year.  That's another $4.75B per year in cleanup costs.  That's a total of $8.05B per year in costs to clean up the spill.  Assume it lasts for 20 years, and you have an NPV of $79B in total cleanup costs.  Given average historical profitability over the last 5 years, you also have more than $22B in operating profit left over every year after paying for $8B in cleanup costs.  

    These assumptions seem rather draconian to me, yet they are about what the market is pricing in.  The market has seemingly gone too far!

    Disclosure: Long BP stock, LEAPS and RIG LEAPS

    Disclosure: Long BP stock and LEAPS, RIG LEAPS
    Tags: BP, oil
    Jun 09 5:56 PM | Link | Comment!
  • Quick and Dirty Relative Valuation
    Let's compare three companies.  All are in the same industry, all have similar scopes of operation and all are roughly the same size.  The value of the exercise will be enhanced if the companies are anonymous until the end of the article. All figures were quickly taken from 10-Ks or equivalent on edgar.sec.gov.

    Here is a comparison of Company A and Company B.   
    Company A vs. Company B

    This comparison shows that over a 5 year period, Company A has 75% of the revenues of B, 50% of the profits (lower margins), 100% of the assets, 60% of the operating cash flow and 100% of the capex.  Presumably the capex is equal because Company A has found more projects with a positive NPV to invest in, within the last 5 years.  Free cash flow, because of Company A's capex, is only 37% of the amount for Company B.  

    Putting all this together, I would make a quick estimation that Company A's equity should be worth about 50% of Company B's equity.  

    Now, let's compare Company A and Company C.  

    Company A vs Company C 


    This comparison shows that Company A has 133% of the revenues of B, 100% of the profits (lower margins), 150% of the assets, 120% of the operating cash flow and 112% of the capex.  Free cash flow, because of Company C's higher capex, is only 140% of the amount for Company A.  

    Putting all this together, I would make a quick estimation that Company A's equity should be worth about 120% of Company C's equity.

    In summary, we estimated that Company A was 50% of the value of Company B, and 120% of the value of Company C.  In reality, Company A is only 33% of Company A and 66% of Company C!  What's going on!?!?

    Astute observers may have already figured out the names of the companies:

    Company A is British Petroleum (NYSE:BP), Company B is Exxon-Mobil (NYSE:XOM) and Company C is Chevron (NYSE:CVX).  The actual equity valuations are:
    BP: $95B, XOM: $286B, and CVX: $143B.  


    Going back to our assumptions we said BP should be:
    50% of XOM, or $143B, or 120% of CVX, or $172B.  
    For proof of concept, BP traded at $178B on April 28th.  

    So, this analysis tells us that the market is pricing in the present value of the liability for BP of $48B to $83B.  Not only does this seem extraordinarily high, it seems fantastical when one considers that the $48-$83B amount is a present value.  Assuming BP had to pay a lump sum in 5 years, and using a discount rate of 6%, the present value is only 75% of the future lump sum.  At a 10% discount rate the present value is only 62% of the future payment.  So, taking the midpoint of the current valuation discrepancy ($65B), and assuming the payment is made in 5 years time and the discount rate is 6%, the market is saying the payment will ultimately be $87B.  That's very hard to believe.  

    In sum, it appears that the uncertainty regarding the tragic Gulf of Mexico oil spill has the market spooked.  BP stock has fallen too far.



    Disclosure: Long BP and RIG LEAPS
    Jun 09 2:39 PM | Link | Comment!
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