Although it's been a pretty awful several weeks for BP, yesterday it had reason to exhale: its stock was up nearly 13%, closing at $32.78. Of course, that's after it fell 16% to a low not seen since 1996 the day prior, which was down more than 50% from its April high. The terrible spill in the Gulf has made investors nervous. They worry about the risks in the energy firm's future, so many are selling. Yet at its still incredibly low price, is now actually a good time to buy?
Without an amazingly accurate crystal ball, it's pretty hard to know. The stock did so well on Thursday mostly because investors decided that they had gone too far, as it fell to 12% below book value. By the day's end, the share price was nearly back to being equal to book. So what's it worth? To know that, you need to estimate the size of the risks that it faces.
The big, obvious risk is the ongoing cost of the spill. According to BP, so far the spill's tally is $1.43 billion through Thursday. For the approximately 50 days that have elapsed since the explosion that triggered it occurred, that averages out to around $29 million per day.
That sounds like a lot, but BP's replacement cost profit last year (after taxes) was $13.9 billion, and that's less than it made each of the two years prior. If you divide that by 365, then the company's average net income per day was $38 million. So even with the disaster's enormous costs, if this year's revenue is assumed to be close to last year's, then the company is still making a profit of $9 million per day.
Of course, the equation isn't nearly this simple. Its costs could increase, and its revenue could be less. For example, there are some people who have begun boycotting the firm, which might cut into sales. But its 2009 results show that the U.S. is only responsible for less than one-quarter of its revenue from oil. And oil sales are a small portion of its overall revenue. In other words, even if every driver in the U.S. boycotted BP's gas stations, it wouldn't devastate its bottom line.
There will be lawsuits as well, however. But its damage claims are currently caped at a measly $75 million. There's some talk in Washington about raising that cap to $10 billion. Obviously, that would hurt the company a lot more, but even then, a company with BP's profitability can probably withstand a one-time charge, even of that magnitude.
Arguably the biggest threat to the firm's revenue is new political risk. This spill will undoubtedly cause lawmakers to create tough new regulations for drilling. That will increase BP's costs and reduce its production. But since it's such a massive player in the industry, regulations might actually work to its advantage: those new costs will hurt smaller producers more.
At this time, it looks like BP will probably survive. How high its profits will be over the next several years is impossible to know at this point, because there are too many cloudy variables like political risk, ongoing cleanup costs, and liability for damages. But unless something really unexpected occurs, then the company will manage to endure this ugly episode. If it staggers back to a $3+ annual dividend in a few years (or quarters), then its stock's decline from more than $60 in early April to nearly half that now -- meaning around $100 billion in market cap -- might be unjustified.