When tragedy strikes we should never forget, but eventually forgiveness is a good thing. I, like most people, was horrified at the time of the Deepwater Horizon oil spill in 2010 and felt that somebody had to be punished for the human and ecological disaster it caused. In terms of stock price, BP (ADR:BP) whose name was on the rig certainly were, along with Transocean (RIG) who actually owned the Horizon, Anadarko (APC) who had a 25% stake in the operation and Cameron International (CAM) who made the blowout preventer that failed in the accident.
Both Anadarko and Cameron have since recovered and both now trade at around a 50% premium to their price at the time.
To date, however, neither the stock of Transocean nor BP has fully recovered.
The two cases are different. Transocean’s problems are more of an existential nature. It is hard to remember now, but 5 years ago, as hydraulic fracturing was just beginning to show its potential, deepwater drilling was seen as the future of the oil industry. RIG, as a leading specialist in that field, was flying high. The Horizon disaster pointed out some of the potential for problems in that area, but the real reason for the underperformance of deepwater exploration and production since then was a more mundane one; cost. Drilling offshore is much more expensive than on land, and as fracking technology has improved, the cost of de-risking land locked shale oil and gas reserves has dropped, exaggerating that difference.
Given that dynamic, RIG looks to be fairly valued at current levels around $43, but not much more. BP, on the other hand, is beginning to look seriously cheap.
It should be said that, in order to invest in BP, one has first to forgive them. Subsequent investigations into the disaster have indicated that there was a lot of blame to go around but, as the principal beneficiary of the profit from the rig, the buck stops with BP. The painting of BP as the ultimate villain may have been a little overdone, but the oil giant has not helped by spending the last four years seeking to deflect blame. Continuing court cases have, apart from racking up huge legal costs, actually managed to extend the period for claims against the company to be filed.
If you are able to put that aside, however, BP looks like a good buy from a purely business perspective. Since the Horizon disaster, BP has been attempting to shrink in order to grow. They are looking to divest around $10 Billion of assets. This is at least in part to pay claims resulting from the Horizon spill, but, ironically, may have benefits for the company.
It is easy for large multi-nationals to lose focus and a case can be made that that was the situation at BP prior to 2010. Refocusing on their core business could actually turn out to be an advantage. If that is the case, then a forward P/E of 11.31 is incredibly good value. Even in the low P/E world of big oil that represents a 20% discount to fellow giant Exxon Mobil (XOM). A 4.5% dividend and the fact that some of the proceeds of the sales are being used for share buybacks don’t hurt either.
There is no doubt that BP was at fault to some degree in the events leading up to the spill, but they have paid, and continue to pay, a hefty price. The renewed focus on their core business that the aftermath has led to has left BP as a sharply focused business in a still growing industry, and one that trades at a discount. If you can forgive their mistakes, you should buy the stock.