After the spill, where does BP stand versus its competitors?

I take a quick look at how the Mexican Gluf disaster in 2010 has affected the company’s valuation and if there is still a good trade left in the company.

BP took a USD 41 bn loss to income and an increase in liabilities when the spill originally occurred, through recoveries from partners, payments to the trust and clean-up costs, so the company is now currently left with an 11 bn liabilty. This 11 bn liability does not include the possible civil penalties (excl. Clean Water Act penalties) that the company might incur. Although risk remains, we can take a look at how BPs valuation stands up relative to its peers.

If we use a basic Enterprise Value/EBIT model we see that BP is not particularly cheap. But this model only values the company as it is currently. It doesn’t value the company’s potential.

The true value of an oil company  lies in its ability to find oil reserves and extract them. The chart below shows the Market Capitilisation relative to the Barrels of Oil (BOE) that the company has in reserves. This chart shows that much of the reserves that BP owns have been too greatly discounted by the market as BP is way below the group’s average of USD14 per BOE of reserves.
 

In the following chart below we take the USD per BOE of reserves and plot this against the P/E FY1 and the Net Profit Margin, and yet again we see a similar relationship, as BP’s potential appears undervalued relative to its peers. 

The market appears to be expecting a higher liability from the spill. In the meantime if you are more of a momentum trader than a value investor, the stock has been an amazing investment as it has increased by 70 percent since its lows of 2010. Any type of legal settlement where the total cost of the spill would finish at around the USD 50-60 bn mark could create a massive catalyst for the stock price.