Background
I never owned (BP) before (or for that matter, any oil and gas company - as I have enough exposure to this sector through many standard diversified mutual funds and through (DIG)).
The Gulf Oil Spill [GOS] changed all that! After the first few days when the stock price started to tank, I started looking up BP numbers. After a few weeks, I started to look at the political and external landscape for BP's future. And in early July, I took the plunge and bought some 2012 Jan calls (25 and 35 strike price) on BP. So, my arguments may be biased! :P
Numbers View of BP
How much Cash does BP generate per year? - 20 Billion USD or more!
How much Dividend is paid by BP per year? - 11 Billion USD as of 2009
What is the Debt to Equity ratio for BP ? - 1.33 (as against 1.11 for (XOM) and 1.44 of (COP) - only exception here is (CVX) sitting happily at 0.79)
What P/E is BP selling as of now? - 5.7 or so (against 11-13 for competitors)
What do numbers say to me?
BP is a cash generating machine and spends most of the cash on dividends. BP has room to increase its liabilities without hurting the balance sheet. Thus, by slashing dividends and securing more debt, BP can raise ~ 20-30 Billion USD to pay for GOS, which is good news! Looking at P/E, the stock is being sold at ~50% discount to its peers, so a good time to buy.
Political View of BP
Though UK has lost most of its economic and political muscle over time, most of the English have their retirement savings tied to BP in one form or another. The 50% drop is stock price is already causing enough rumbles in UK (I read the weekend tabloids while passing through London in Jun-Jul and they were full of anger at UK government for failing to support BP in its tough times). This is reflected in the statements coming from UK government as well.
On US side, Obama was harsh on BP and the whole Oil lobby is getting nervous about the consequences. The result is Obama has toned down his criticism. If I was Obama, I would hold all regulators and US congress in the line of fire that passed the regulations and ask for immediate significant changes (the lack of such strong action indicates to me that most of the anger being expressed by US government is a lip service till people forget about the mess).
What does political environment say to me
In short, there is no political will nor power to bring BP down (neither in US nor abroad). The 20 Billion escrow account can be paid with 2 years worth of dividends (hence, a dip in prices for next 2-3 years is understandable).
This leaves the question of long term liabilities. I work in Pharma sector and I've seen how the long term liabilities work out. I've seen companies still fighting liabilities raised in 1980's and it is a bleeding/nuisance, but nothing life threatening! I don't think BP will be different.... hence, I'm not worried about long term liabilities.
Investor/Trading Sentiments
Really low as of now with many predicting complete bankruptcy for BP within a year or two. What better time than now to buy if you are relying more on BP balance sheet than on guesswork?
Summary
A company that brings in 15-20 Billion USD per year in revenue from well established assets (20% capex as compared to PP&E) for a commodity whose price can only go up in the long run (crude trading at 75-80 USD a barrel in economic slowdown .... imagine the price when economic engine hums again), will not be hurt by the total liability of 20-30 Billion USD. Plus, the payments of such liabilities will be over next 10-15 years (depreciate that!).... barring the unexpected (another well explosion, world war 3, attack of the Martians), there is not much downside to BP at these prices and hence, my decision to buy the Jan 2012 Calls at strike price of 25 and 35! Time will tell.... :)
Why not own the stock itself? I'm optimistic and pragmatic, but still risk averse .... Call options limit my risk (plus when there is no dividend for this year or next, why sit on stock?) and allow me to control 100x shares with same capital...
Disclosure: Long 25 and 35 Jan 2012 Calls for (BP)
I never owned (BP) before (or for that matter, any oil and gas company - as I have enough exposure to this sector through many standard diversified mutual funds and through (DIG)).
The Gulf Oil Spill [GOS] changed all that! After the first few days when the stock price started to tank, I started looking up BP numbers. After a few weeks, I started to look at the political and external landscape for BP's future. And in early July, I took the plunge and bought some 2012 Jan calls (25 and 35 strike price) on BP. So, my arguments may be biased! :P
Numbers View of BP
How much Cash does BP generate per year? - 20 Billion USD or more!
How much Dividend is paid by BP per year? - 11 Billion USD as of 2009
What is the Debt to Equity ratio for BP ? - 1.33 (as against 1.11 for (XOM) and 1.44 of (COP) - only exception here is (CVX) sitting happily at 0.79)
What P/E is BP selling as of now? - 5.7 or so (against 11-13 for competitors)
What do numbers say to me?
BP is a cash generating machine and spends most of the cash on dividends. BP has room to increase its liabilities without hurting the balance sheet. Thus, by slashing dividends and securing more debt, BP can raise ~ 20-30 Billion USD to pay for GOS, which is good news! Looking at P/E, the stock is being sold at ~50% discount to its peers, so a good time to buy.
Political View of BP
Though UK has lost most of its economic and political muscle over time, most of the English have their retirement savings tied to BP in one form or another. The 50% drop is stock price is already causing enough rumbles in UK (I read the weekend tabloids while passing through London in Jun-Jul and they were full of anger at UK government for failing to support BP in its tough times). This is reflected in the statements coming from UK government as well.
On US side, Obama was harsh on BP and the whole Oil lobby is getting nervous about the consequences. The result is Obama has toned down his criticism. If I was Obama, I would hold all regulators and US congress in the line of fire that passed the regulations and ask for immediate significant changes (the lack of such strong action indicates to me that most of the anger being expressed by US government is a lip service till people forget about the mess).
What does political environment say to me
In short, there is no political will nor power to bring BP down (neither in US nor abroad). The 20 Billion escrow account can be paid with 2 years worth of dividends (hence, a dip in prices for next 2-3 years is understandable).
This leaves the question of long term liabilities. I work in Pharma sector and I've seen how the long term liabilities work out. I've seen companies still fighting liabilities raised in 1980's and it is a bleeding/nuisance, but nothing life threatening! I don't think BP will be different.... hence, I'm not worried about long term liabilities.
Investor/Trading Sentiments
Really low as of now with many predicting complete bankruptcy for BP within a year or two. What better time than now to buy if you are relying more on BP balance sheet than on guesswork?
Summary
A company that brings in 15-20 Billion USD per year in revenue from well established assets (20% capex as compared to PP&E) for a commodity whose price can only go up in the long run (crude trading at 75-80 USD a barrel in economic slowdown .... imagine the price when economic engine hums again), will not be hurt by the total liability of 20-30 Billion USD. Plus, the payments of such liabilities will be over next 10-15 years (depreciate that!).... barring the unexpected (another well explosion, world war 3, attack of the Martians), there is not much downside to BP at these prices and hence, my decision to buy the Jan 2012 Calls at strike price of 25 and 35! Time will tell.... :)
Why not own the stock itself? I'm optimistic and pragmatic, but still risk averse .... Call options limit my risk (plus when there is no dividend for this year or next, why sit on stock?) and allow me to control 100x shares with same capital...
Disclosure: Long 25 and 35 Jan 2012 Calls for (BP)