Ein (sehr) langer Artikel, aber definitiv lesenswert. Die beiden haben
sich ganz offensichtlich sehr
gut überlegt warum sie die Aktie gekauft
haben. z.B. wurde eigentlich nirgends erwähnt daß es im
Golf von Mexiko schon einmal einen noch schlimmeren Unfall gegeben hat?
------------
Why We’re Long BP
By Whitney Tilson and Glenn Tongue, T2 Partners
June 11, 2010
We recently established (and disclosed publicly on CBNC; see here and here) a modest (4-5% of our
funds) position in BP, and the blowback has been unlike anything we’ve encountered in our careers –
and being value investors, we’ve owned a lot of unpopular stocks over the years! This blowback,
combined with hysterical headlines, rumors and speculation, have not shaken our confidence, but rather
reinforced it, as we love buying when other investors are panicking.
And panic
there is: even with the rebound of the past two days, the stock is down 44% since the Deepwater Horizon
accident, the credit-default swap spreads have widened to all-time highs, seven analysts have cut their
rating this week alone, and well-known energy investment banker Matt Simmons said on Wednesday that “I
don't think BP is going to last as a company for more than a matter of months.” Politicians at all
levels are engaged in ever-more-heated tough-sounding rhetoric, including President Obama saying that he
would fire BP’s CEO, Tony Hayward, if Hayward was his employee. Finally, while BP has said it will pay
for the clean-up and direct damages to those affected by the spill, the Obama Administration is going a
step further and threatening to force BP to cut its dividend and “repay the salaries of any workers
laid off because of the six-month moratorium on deepwater exploratory drilling imposed by the U.S.
government after the spill.”
So why on earth would we own the stock of this
pariah company? And if we think it’s cheap, why don’t we wait for the dust to settle, the panic
selling to stop, and for the outlook to become more clear, and then buy it when it’s safer to do so?
The second question is easy: because by the time the outlook is clear, the stock will be at least 50%
higher. The former is a tougher question, which we discuss at length below, but in short we own the
stock for two simple reasons: 1) BP is not going bankrupt. It is the 4th most profitable company in the
world, which means it’s highly likely that it will be able to cover the clean-up costs plus all
damages/fines/lawsuits, especially since these costs will be spread out over many years; and 2) the stock
is extraordinarily cheap, currently trading 5.4x this year’s estimated earnings (it’s also yielding
9.9% at today’s closing price of $33.97, but the dividend may be suspended temporarily, as discussed
below).
Note that in owning the stock, we are not defending the company or its
CEO. BP appears to have an atrocious safety record, and it wouldn’t surprise us if regulators and the
legal system determine that it cut corners on the Deepwater Horizon rig, leading to the tragedy.
Compounding this, BP so far has botched both the clean-up and the public relations. We think the company
should have to pay for all of the damages it has caused, plus a huge fine. Thank goodness BP is so
profitable that it should be able to pay for all of this.
Here are the key
questions about which we’re thinking:
1) How big is the spill today and how bad
could it get? How much could the clean-up cost, and what might legal liabilities be – and, critically,
over what time period might BP have to pay? Are there any relevant precedents?
2) How profitable is BP? What do its balance sheet and free cash flows look like? Does BP have the
liquidity to handle this crisis?
3) How much might future profits be impacted?
What would be the impact of a permanent ban on offshore drilling in the Gulf of Mexico? How tarnished
are BP’s brand and reputation, and what might be the impact of this?
4) What if
BP cuts its dividend? If need be, could it raise cash in other ways?
5)
Regardless of how cheap BP’s stock is, is it immoral to try to profit from owning it, in light of the
company’s bad behavior?
We address all of these questions in Appendix A
(below), but in summary, we think what’s happening to BP right now is similar to the overall market in
March 2009: the near-term fundamentals are terrible, nobody knows when they will improve, and
fear-mongers dominate the headlines. But for investors with courage, conviction, and an outlook longer
than a few months, we think this market overreaction is a wonderful buying opportunity.
Appendix A
Question 1: How big is the spill today and how bad could
it get? How much could the clean-up cost, and what might legal liabilities be – and, critically, over
what time period might BP have to pay? Are there any relevant precedents?
These
are the most important questions, and the lack of clear answers has caused investors to sell first and
wait for answers later. The fear is that, regardless of BP’s profitability, the company will be
swamped by astronomical liabilities associated with untold environmental damage.
Given that these liabilities can’t be known with any degree of certainty, how can we get comfortable
owning the stock? The answer is that we think we can make some reasonable guesses, based on numerous
precedents, and while we can’t rule out a disaster scenario entirely, we think that the expected value
among many different possible outcomes makes this an attractive risk-reward situation.
Wall Street analysts are scrambling to come up with loss scenarios – for example, here’s what
J.P. Morgan Cazenove analysts write: “BP’s loss of relative value has overshot a worst case. The sum
of clean up costs ($5bn), a fine under the Clean Water Act ($8.1bn) and litigation ($16bn) is around
$29bn.” Other analysts are in the $30 billion range as well. (Note that BP has paid roughly $1.4
billion to date.)
$30 billion is less than one year of operating income for BP.
Even if the total amount is double or triple this, keep in mind that the payout on these liabilities will
be over many, many years, allowing BP to earn its way out of trouble (similar to what the nation’s big
banks are doing right now). This is a critical point that isn’t being discussed: everyone is focused
on what the total costs to BP might be, without asking the equally important question of when BP might
have to make these payments. The clean-up costs will be spread out over the next few years, and the
legal liabilities and fines over a much longer period. In the case of the Exxon Valdez oil spill, for
example, the Supreme Court didn’t make a final ruling until 2008, 19 years after the spill.
But what if the liabilities are much larger? What if the spill permanently destroys the
ecosystem and tourist industry in the Gulf of Mexico? In this case, BP’s shareholders will likely get
wiped out. But is it likely? We think not.
Pretty much the only good news about
this spill is that the Gulf of Mexico is huge, covering 615,000 square miles of surface area and
containing 660 quadrillion gallons of water. Let’s compare this to the amount of oil spilled, where
one team of scientists just estimated that “the Deepwater Horizon well is most likely spewing at least
25,000 barrels of oil a day, and may be producing 40,000 or even 50,000 barrels a day” – more than
double the high end of current estimates.
Let’s take the high end of 50,000
barrels per day and also assume that the well isn’t capped until mid-August, four months after the
accident. Let’s also assume that the cap captures no oil (the latest reports are that it may be
capturing most of the oil, but let’s be conservative). 50,000 barrels/day x 120 days x 42
gallons/barrel = 252 million gallons of oil released.
252 million divided by 660
quadrillion is one gallon of oil for every 2.6 billion gallons of water in the Gulf of Mexico. That’s
equal to roughly one ounce of oil spread over 300,000 bathtubs full of water.
Of
course the oil from the Deepwater Horizon spill isn’t spread out evenly throughout the Gulf of Mexico,
and we’re certainly not minimizing the severe environmental damage. We’re simply pointing out that
– while it may not be politically correct to do so in this emotionally charged environment, with scenes
of dead oil-covered birds – the Gulf of Mexico (and the beaches, tourist and seafood industries, etc.)
will likely recover from this spill.
Our belief that, eventually, this too shall
pass is rooted in five precedents, all of which bode well for the Gulf of Mexico (and BP).
1) Though almost nobody has heard of it, the second largest oil spill ever was in the Gulf of
Mexico in 1979. Ixtoc I, an oil well owned by Pemex, Mexico’s state-owned oil company, suffered a
blowout and spewed an estimated 30,000 barrels of oil per day into the Gulf for nearly 10 months. An oil
slick covered about half of Texas’s 370-mile gulf shoreline, devastating tourism. Did this bankrupt
Pemex? Hardly. It spent $100 million to clean up the spill, avoided paying compensation by asserting
sovereign immunity, and Texas beaches recovered quickly.
Here’s an excerpt on
it from a recent Newsweek article, Four Environmental Disasters Worse Than the Deepwater Horizon
Spill:
Ixtoc Blowout, 1979
News reports on the 1979 blowout of an undersea
oil well off the Gulf of Mexico seem all too familiar today. There was a failure of the “blowout
preventer,” an undersea fail-safe device that is supposed to close off a gushing pipe. There were
frustrated reports about the Mexican government vastly underestimating the volume of oil gushing from the
seabed, much like the lowball guesses from BP in April.
Day after day for a span
of 10 months, a torrent of oil rushed into the Gulf of Mexico after the initial explosion near the
Yucatan Peninsula. The spill was checked only in part by a cap that was lowered over the leak to siphon
off a portion of the flow. After four months an oil slick had covered about half of Texas’s 370-mile
gulf shoreline, devastating tourism. Only by drilling two relief wells to connect to the initial hole,
then pumping mud and concrete into the gushing pipe could Petroleos Mexicanos, or PeMex, Mexico’s
national oil company, stop the leak.
“The accident does suggest that blowout
prevention equipment is not designed to handle the worst emergencies,” The New York Times wrote in an
April 1980 editorial after the leak was finally capped. “Could a blowout in American waters be quickly
capped and cleaned up?”
By the easiest measure—volume of oil
spilled—PeMex’s Ixtoc I oil well was far worse than the Deepwater Horizon well: 140 million gallons
of oil poured out of the Mexican well, compared to the estimated 94.2 million gallons that could escape
from the well near Louisiana by mid-August, when a relief well is expected to be complete. (The worst oil
spill in history occurred in 1991, when the Iraqi army ripped apart Kuwait’s oil infrastructure and
released more than 252 million gallons during the Persian Gulf War. The Exxon Valdez crash in 1989
released 10.9 million gallons.)
2) Consider the Gulf War oil spill in 1991, the
largest ever, when Iraqi forces, to foil a potential landing by U.S. Marines, deliberately released an
estimated 11 million barrels of oil into the Persian Gulf, creating a slick that reached a maximum size
of 101 by 42 miles and was 5 inches thick in some areas. Roughly 10 times the amount of oil than has
been spilled in the Gulf of Mexico so far was released into a much smaller body of water (the Persian
Gulf is less than 1/6th the size of the Gulf of Mexico by surface area and has an average depth of only
160 feet and a maximum depth of a mere 300 feet vs. a maximum depth in the Gulf of Mexico of 14,383
feet).
There is some dispute about the long-term environmental damage, but
according to an article in the NY Times, “a 1993 study sponsored by UNESCO, Bahrain, Iran, Iraq,
Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates and the United States found the spill did
‘little long-term damage’…About half the oil evaporated, a million barrels were recovered and 2
million to 3 million barrels washed ashore, mainly in Saudi Arabia.”
3) In 1989
the Exxon Valdez tanker hit a reef and dumped 250,000 barrels of oil into Alaska’s pristine Prince
William Sound. The spill covered 1,300 miles of coastline, 11,000 square miles of ocean, and killed
thousands of animals. BP’s spill is much larger and is in a more populated, economically sensitive
area, but it’s worth noting that the total cost to Exxon was only $3.5 billion (after multiple appeals
courts and finally the Supreme Court knocked a $5+ billion judgment down to $507.5 million).
4) A recent New York Times article speculating on a BP bankruptcy filing mentioned Texaco’s
1987 bankruptcy filing, but failed to include a critical piece of information: that Texaco’s
shareholders, far from being wiped out, in fact weren’t harmed at all. Here’s an excerpt from the NY
Times article:
This outcome might seem far-fetched right now. But on Wall Street
bankers have already coined a term for it: “the Texaco scenario.”
In 1987,
Texaco was forced to file for Chapter 11 because it could not afford to pay a jury award worth $1 billion
to Pennzoil. That award had been knocked down by a judge from a whopping $10.53 billion. (Pennzoil
successfully sued Texaco for “jumping” its planned merger with Getty Oil, in part, by moving the case
to local court near its headquarters. The jury awarded triple damages.)
And
here’s an excerpt from a 1987 Time Magazine article, explaining what really happened:
The $10 billion legal battle royal between Texaco and Pennzoil clearly entered a new and murky
phase after the country's third-ranking oil company (1986 sales: $32.6 billion) made its bombshell
decision on Sunday, April 12, to file for Chapter 11 protection. Whichever side was right in the dispute,
the horrendous legal tangle surrounding the two firms vastly increased -- along with the business
uncertainty.
Nonetheless, as New York Bankruptcy Judge Howard Schwartzberg
assumed his overseeing duties with Texaco, it seemed to many analysts that the company had suddenly
gained the upper hand in the high-stakes brawl it had appeared to be losing. Said Sanford Margoshes, an
oil analyst at the Shearson Lehman Bros. investment firm: "Texaco has bought time. Its prospects are not
as bleak." Wall Street seemed to agree. When the New York Stock Exchange opened trading after Texaco's
bankruptcy filing, the company's stock dropped from 31 7/8 to 28 1/2 a share. Then the holdings
rebounded, closing last week at 31 1/4. Pennzoil shares, which had surged from 79 3/4 to 92 1/4 during
the previous week, plunged by more than 15 points the day after the Chapter 11 action and closed the week
at 78.
The Big Board seemed to judge that Pennzoil's combative chairman, J. Hugh
Liedtke, 65, had overreached himself in the dispute.
5) But what about the
precedents for tobacco, asbestos or breast implants? The latter two bankrupted numerous companies, so
why won’t this happen to BP? In large part because the legal environment has changed: it’s much more
hostile to mass tort actions, thanks in large part to a conservative majority on the Supreme Court. If
the asbestos or breast implant class action cases occurred today, the outcomes would likely be very
different – witness, for example, the outcomes of the lead paint cases against Mattel and paint
manufacturers.
The closest analogy to today’s situation with BP is, we believe,
the Vioxx crisis in late 2004 when Merck withdrew one of the most prescribed drugs in history from the
market due to an increased risk of heart attacks – a risk Merck had known about years earlier, but had
not disclosed. Based on speculation that Merck’s liability could be as high as $50 billion, the stock
tanked from $45 to $26 in less than two months in late 2004. Here’s what Jim Cramer wrote at the
time:
Please don’t read the articles that tell you that Merck will come through
this whole because, after all, it’s a great American company, and great American companies always come
back if you just buy and hold ’em.
Close your eyes and ears to the Merck
sirens, because they don’t know what they are talking about. They are naïve. All of them. Because they
don’t recognize that with the Vioxx debacle, Merck, overnight, has become the trial lawyers’ next big
score, the next big bankruptable company out there. The Merck lovers don’t understand the vast powers
of the mass-tort bar. They underestimate the power of the American judicial system to wipe out companies,
innocent or guilty, for fatal mistakes. They don’t get that the plaintiffs have all the cards in these
lawsuits and management has none. In fact, if I were the New York Stock Exchange, I would put a big
skull-and-bones warning label on Merck’s stock that would say: “Warning—the security you are
purchasing may end up worthless to you. All Merck stock bought after the recall of Vioxx might soon
belong to those class-action plaintiffs who used Vioxx after the time when Merck knew that Vioxx may be
lethal.”
So what happened to Merck? It has settled nearly all of the claims
for around $5 billion, has won nearly all of the cases that reached juries (with relatively small awards
in the losses), and the stock rallied to over $60 in the subsequent three years.
Question 2: How profitable is BP? What do its balance sheet and free cash flows look like? Does BP
have the liquidity to handle this crisis?
According to the Fortune 500, BP has
the 4th highest revenues of any company in the world, and also earns the 4th highest profits, trailing
only Gazprom, Exxon Mobil and Royal Dutch Shell. Profits were depressed in 2009 due to the global
economic crisis, but analysts are projecting (and robust Q1 results affirm) operating profits of around
$34 billion ($93 million per day) in 2010 and net income of around $22 billion, consistent with the
2005-2008 average. (These estimates are before Deepwater Horizon costs are factored in.)
BP has an exceptionally strong balance sheet, that has been getting stronger over the past few
years, as this table shows:
Q4 2006
Q4 2007
Q4 2008
Q4 2009
Q1
2010
Cash
$2,590
$3,562
$8,197
$8,339
$6,841
Debt*
$24,010
$31,045
$33,204
$34,627
$32,153
Net Debt
$21,420
$27,483
$25,007
$26,288
$25,312
Equity
$85,465
$94,652
$92,109
$102,113
$104,978
Debt/ Debt+Equity
.20
.23
.21
.20
.19
* Excludes minor adjustments for
“fair value asset (liability) of hedges related to finance debt”
According to
CA Cheuvreux, “BP has over $5 billion of accessible cash on its balance sheet, $5 billion in banking
facilities, and $5 billion on standby alliance. BP has thus got considerable fire power to deal with the
costs as they accrue.”
BP’s cash flow statement is also healthy, as this
table shows:
2006
2007
2008
2009
Q1 2009
Q1 2010
Operating Cash Flow
$28,172
$24,709
$38,095
$27,716
$5,572
$7,693
Cap Ex
$15,125
$17,830
$22,658
$20,650
$4,817
$4,289
Dividends
$7,969
$8,333
$10,767
$10,899
$2,730
$2,629
Very simply, BP takes its $30
billion of operating cash flow (it’s averaged $29.7 billion over the past four full years) and
reinvests two-thirds of it into the business and pays the rest out as a dividend to shareholders.
In summary, by any measure BP has extraordinary financial strength.
Question 3: How much might future profits be impacted? What would be the impact of a permanent
ban on offshore drilling in the Gulf of Mexico? How tarnished are BP’s brand and reputation, and what
might be the impact of this?
A key pillar of our investment thesis on BP is that
the earnings power of the business remains intact. We’ve heard two contrary arguments: the first is
that BP’s entire offshore Gulf of Mexico operation, the largest of any company in the region, could be
shut down permanently. While we think this is unlikely, BP could weather this hit as it accounted for
only 15.3% of BP total oil production and 3.6% of natural gas production in 2009.
To consider an even more extreme scenario, what if BP stopped (or was forced to stop) doing business in
the U.S.? Even then, BP would survive: in total, the US accounted for 33.3% of BP’s exploration and
production profits in Q1 2010 (E&P was 93.2% of BP’s total operating profit).
The second argument is that BP’s brand and reputation have been so tarnished, or the rumors about BP
filing for bankruptcy have so spooked folks, that drivers will shun BP’s gas stations and BP’s
counterparties won’t do business with BP or demand onerous terms like cash prepayment. It’s an
interesting theory, but we can find no evidence for it – and we’ve looked.
Our best guess is that when all is said and done, BP’s normalized profits might be a few percent
lower due to this crisis. There will surely be expensive new safety regulations (which will apply to all
offshore drillers) and BP may lose some business with the U.S. government (it’s currently the “top
supplier of refined fuel, including jet fuel, to the Department of Defense last year. It was also one of
the top suppliers of gasoline, diesel and other fuels to the federal government.”).
Question 4: What if BP cuts its dividend? If need be, could it raise cash in other ways?
There’s a great deal of speculation that BP might be forced to cut or even suspend
its dividend (currently 9.9%) due to the costs of the cleanup and/or political pressure (the Obama
administration is pressuring BP on this front and recent reports are that the company will indeed do
so).
From an investment perspective, we don’t really care, as we don’t own
the stock for the dividend. In the short term, a dividend cut would likely lead to a drop in the share
price, but it might be wise for the company to retain its earnings and strengthen its balance sheet.
From a financial perspective, it doesn’t appear that BP will be forced to cut its
dividend unless clean-up costs rise dramatically (the vast majority of the legal liabilities, which will
likely exceed clean-up costs, won’t be paid for many years). Costs to date have been $1.4 billion, BP
has plenty of cash and liquidity, and in the seven weeks since the accident, it has earned nearly $5
billion in operating profits.
The political question is trickier. It’s not
clear cut that the U.S. can (or should) force BP to cut or suspend its dividend, and this could become a
testy issue between the U.S. and one of its closest allies, as this article notes:
Almost every pension fund in the U.K. owns shares in the energy giant, raising serious questions about
the impact the firm's plummeting value will have on the retirement plans for millions of Britons.
President Barack Obama's threat to block a BP dividend payment in order to ensure victims of the spill
get compensation has also sparked widespread alarm.
“Obama’s boot on the
throat of British pensioners” read the front-page headline in Thursday's Daily Telegraph, which added
that the president's "attacks on BP were blamed for wiping billions off the company’s value."
“U.K. alarm over attack on BP” was the Financial Times' take on the crisis, which it
suggested could damage transatlantic relations. The newspaper accused President Barack Obama of employing
"increasingly aggressive rhetoric" against BP.
And this Financial Times article
notes that BP pays 12% of the total dividend income of the UK market. Finally, according to BP’s web
site, U.S. investors own 39% of BP’s stock (almost as much at the 40% by UK shareholders), and the
company has over 430,000 small shareholders (less than 10,000 shares).
In a
worst-case scenario, BP could of course suspend the dividend, but what if it needed more cash? The
obvious next step would be to cut cap ex, a far bigger expense than the dividend (the dividend is
currently a bit under $11 billion annually vs. an average of $21.7 billion in cap ex annually over the
last two years). In its Q1 2010 earnings release, BP gave the following guidance for cap ex: “For 2010
as a whole, we continue to expect organic capital expenditure of around $20 billion and disposal proceeds
of $2-3 billion.”
It’s hard to know how quickly and by how much BP could cut
cap ex, but one clue is that “Depreciation, depletion and amortization and exploration expenditure
written off” – often a reasonably proxy for maintenance cap ex – was $12.7 billion last year.
Finally, BP has valuable assets all over the world – property, plant and equipment
on the balance sheet is worth $108 billion – but of course it would take time to sell.
Question 5: Regardless of how cheap BP’s stock is, is it immoral to try to profit from owning
it, in light of the company’s bad behavior?
As noted earlier, BP appears to
have an atrocious safety record. In owning the stock, we are not endorsing its behavior, either before
or after the Deepwater Horizon accident. But as value investors, we sometimes have to hold our noses
when we invest because the cheapest stocks are often the ones of companies that have behaved badly or are
otherwise tainted. Example include McDonald’s, which many believe bears responsibility for the obesity
epidemic in this country (see Fast Food Nation and Super Size Me), and Goldman Sachs, which many blame
for the global financial crisis (see The Great American Bubble Machine).
That
said, we would have a problem owning stock in a company if we believed that its core business harmed
people – most subprime lenders at the peak of the housing bubble, certain multi-level marketing firms
and tobacco companies come to mind. BP certainly doesn’t fall into this category.
As for BP’s safety record, we don’t defend it, but we don’t think BP is deliberately
blowing up its own rigs and refineries and killing its employees. If an email emerged that the CEO or
board of BP were warned that the Deepwater Horizon rig was likely to explode and failed to act, we would
certainly rethink the morality of holding the stock.
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