by STEPHEN GANDEL
It’s a long held mantra on Wall Street to buy straw hats in winter. The notion is that you should buy the shares of a company when no body wants them, or when things look their worst. Buy at the low. So based on that logic here’s the question: Is BP’s stock a buy?
Did the markets really think the top kill was going to work? Evidently so — BP shares fell 15% today, to $36.52. But before we declare this the end of BP, let’s put this in perspective: the shares traded as low as $34.06 in March 2009. And over the last three years, BP is down 46%, compared to 30% for the S&P 500 (and Exxon Mobil) and 93% for Citigroup.
The most likely fate for BP at this point isn’t death but rather takeover. There’s been a lot of speculation along those lines, and with BP’s leadership looking even weaker than its stock price, the rest of Big Oil is surely salivating at the prospect of picking BP up without much difficulty.
I don’t think the acquirer would be Exxon. Other than that I do think another oil company could come in and pick up BP assets effectively erasing the reputational risk and making those assets worth a lot more.
I don’t think the acquirer would be Exxon. Other than that I do think another oil company could come in and pick up BP assets effectively erasing the reputational risk and making those assets worth a lot more.
UPDATE: The New York Post has more today on why analysts think BP is a buy:
A number of top oil analysts see BP as a summer bargain, and predict cash flows could jump as much as 30 percent next year. Analysts said that once engineers get a grasp on their new plan to tame the gushing oil, investors could see a quick pop in the share prices of all three oil companies involved in the mess. If the latest fix shows signs of working, “we believe it’s likely that the shares of BP will see a near term move higher,” analyst Pavel Molchanov of Raymond James said in his bullish report yesterday on BP. Also, I missed this earlier, but JP Morgan’s analyst also weighed in on BP pointing to the size of what they think the stock buying opportunity could be:
Struggle to rationalize BP’s extreme share price reaction – JPM says they had originally assumed a total containment cost of $7.2bn (100%, based on 120 days at $60m per day). So far, the costs have averaged $24m per day given 42 days since the tragic loss of well control occurred. BP’s 65% share of their original cost estimate is approximately $5bn including the cost of the two relief wells. The difference between this figure and the relative loss of market value ($37bn) is around $32bn. The firm struggles to believe that litigation settlements, claims payments and punitive damages will rise anywhere close to rationalize the difference ($32bn).
How low will the yield on Treasury bonds go? The new consensus is that yields could continue to drop throughout the summer. I have a story up today on Time.com about the bull market in Treasury bonds. The Wall Street Journal is also on Treasury bonds this morning with a round up of where the different investment banks believe yields are headed. And there is another interesting move in the Treasury market today. For the past few weeks, Treasuries have been moving in the opposite direction of stocks. So the assumption has been that when stocks rebound, Treasury prices will fall. Not today. Stocks are up, and bonds are up. Long live the Treasury rally.
