I'm sure that everyone is familiar with the oil company, BP even before the recent oil spill disaster in the Gulf of Mexico, which has been making the headlines beside the World Cup. The oil spill disaster has and will cause BP to pay billions in damages. With such a consequence, it is not surprising that the share price has taken a huge tumble from its recent peak of around $60 to its current price of around $28.
From a general point of view, without doing an in-depth analysis of the financials and business model of BP, I would say that the market is short-sighted with regards to the share price of this company. Why ? The main question for me will be, is the long term profitability of this BP being threatened ?
We don't have to look far back to see examples that are analogous to this. The SARS period that occurred in 2003 caused a decline in the stock market. This was because SARS represented a health threat worldwide. Companies that were affected by this includes those in hotels, tourism and aviation industries since people were very reluctant to travel and venture out due to the fear of catching SARS. On the other hand, there were companies who benefited from SARS and these companies are mainly in the healthcare and services segment. On hindsight, the market is rather short-sighted. This is because, all crises will eventually end although the time taken for the crises to end may be rather long. And if the crises only affects the companies temporarily but the long term profitability of these companies are not affected, the depressed stock prices of these companies may prove to be a bargain. As the SARS crisis ended, the stock market began to bounce back. Thus, those who managed to pick up bargains, benefited from the short-sightedness of the stock market.
Now given this example of the SARS period, do you think that the stock market is being too short-sighted on the long term profitability of BP ?
(The opinion expressed by the writer does not constitute an endorsement of the purchase or sale of the stock mentioned in the article. One should do a thorough research and analysis before deciding on any investment decisions)
Posts
the problem is not of short sightness. it is a very different problem from SARs. the question to ask is:can you give a price valuation factoring all the uncertainty what is the right price to buy?
ReplyDeleteHi,
ReplyDeleteA worst case scenario as suggested by Goldman Sachs will result in BP paying a total of around $60 to $70 billion. The net profit for BP has been around $20 billion except for the previous year at around $16 billion. At a glance, their balance sheet is also quite healthy with no excessive gearing or leverage. As such, we would be looking at a worst case scenario that the profits of BP will be used to pay for the damages for the next 3 to 4 years. However, this crisis is an extraordinary event. The long term profitability and prospects of BP is likely to remain intact. The same can also be said of the oil and gas industry unless a cheaper and reliable source of energy is available. In my opinion, the stock market is only pricing the financial impact of the oil spill damage which is short-term and will blow over soon.
Kay
Hi,
ReplyDeleteWhat price did you buy BP at?
Hi LP,
ReplyDeleteThat is a secret.
Kay