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David E. Beard, CFA, founded Winterport Capital in 2008. Prior to founding Winterport, David co-managed a US equity focused long short hedge fund at portfolio at Morgens, Waterfall, Vintiadis & Co. and managed long only accounts at Trainor Wortham, both based in NYC. Previously he worked at... More
My company:
Iberia Capital Partners
  • BP “Where’s the Cash?” 0 comments
    Jun 21, 2010 11:55 AM | about stocks: BP
    BP “Where’s the Cash?”
     
    Let’s start with some disclosures: I am not an oil analyst, nor do I follow British Petroleum (NYSE:BP) all that closely and I do have a position in out of the money puts on BP common stock.
     
    Now maybe my position as a generalist enables me to take an unbiased look at BP’s financials, and they look pretty grim. However, my lack of detailed understanding of the company means I could miss something, most importantly 1. A rise in oil prices could dramatically boost BP’s cash flows*, 2. Sales of “hidden assets” (i.e. assets which are valuable but contribute to current EBITDA or cash flows)
     
    Summary and Conclusions:
    1.       Company cash flows is tight. For example, they borrowed to pay the 2009 dividend.
    2.       Post Spill analysis says company’s free cash flow is very low ($3b or about 30c/share)
    a.       This doesn’t support dividend resumptions any time soon
    b.       Low free cash flow could mean greater downside risk in the common stock
    3.       The CDS and bond markets seem to be much more worried about BP lack of free cash flow
    a.       The CDS market is pricing in a 30-50% chance of bankruptcy, where as the equity at $30-ish is NOT, in my opinion.
    b.       No wonder banks are asking for 10% coupons on new debt. Most likely they have done a much more detailed, through analysis yet have come to the same conclusions.
    4.       No wonder the Company is trying to raise $50b from new bank loans and asset sales. They need the CASH!
     
    Selected BP Financials:
                                                    Reported                                              
                                                    2009A
    Production                            3.95mmboe/d                                                                     
                                                    Up 4% y-y            
    Reserves                                18.0 MMboe
    Reserve Value                      Using $10/bbl reserve value
    assume $40b npv Spill costs
    NAV is about $40/share
    Finding   Costs                      $4/bbl
    Lifting Costs                          $7/bbl
     
    Memo: March Balance Sheet
    Cash                                                       $8.5b
    Debt                                                       $25.1b
    Net Debt                                                $16.6b
     
    POST SPILL ASSUMPTIONS:
    Oil Price                                 $70/bbl
     
    Revenues                              $300B
    EBITDA                                $35B
    CAPEX (net)                        $15B cut from current $19B
    Dividends                              no divi’s paid
    Cash Taxes                           ($7B)
    Cash Interest                        ($2B)
    Cash Acquisitions                --- no more acquisitions
     
    Post Spill
    Spill Costs                             ($8B) $2b/quarter no cap
     
    TRUE FREE CASH FLOW = +$3B
    EBITDA - CAPEX - Taxes – Interest – Acquisitions - Spill Costs = +$3B
     
    *A $10 Change in the Oil Price Assumption could contribute about $10b in free cash flow
     
     
    David E. Beard, CFA – Founder & CIO – Winterport Capital – dbeard@winterportcapital
     


    Disclosure: Long BP Puts
    Stocks: BP
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