In the past month the share price of British Petroleum’s stock (Ticker:BP) has taken a massive beating. The stock is down 35% in the past month. In the past five days alone the stock is down 20%.
The question is, is the stock overvalued or undervalued? There are good arguments on both sides, but I think this is a classic case of investor overreaction, and the stock is a good buy.
James Altucher wrote a column in the Wall Street Journal recently examining the question of British Petroleum’s potential liabilities due to the recent oil spill. He believes in a worst case scenario the company would be liable up to $40 billion. In addition, there are several unknown factors that could weigh negatively on BP. What action will the Government take to curtail offshore drilling? BP’s reputation has been severly damaged, will this hurt future profitability? Both these questions cannot be quantitatively measured, and only time will tell the answer.
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Some people are far even more pessimistic than Altucher. There are uncertainties as to how high the liabilities of BP will truly reach. A recent news report stated that BP may be forced to declare bankruptcy.
Despite these uncertainties there is a strong bullish case to be made. It seems investors are assuming the worst- that BP will be on the hook for tens of billions of dollars. Even, if this happens BP should be a safe investment, since BP is a cash machine. BP had $7 in free cash flow last quarter. BP’s cash flow from operations in 2009 was $28 billion. The company also has $8 billion of cash on it’s balance sheet, and total current assets are close to $70 billion.
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Whitney Tilson is very bullish on BP, and recently purchased the stock. Here is a video of Whitney on CNBC yesterday:
Disclosure: Long BP