Prediction: BP vs. Drillers

I have now been asked by many different people about the valuation of BP.

My response to them is the same as before: “I would not bother thinking about this [buying shares] until BP has cut their dividend.”

However, I will offer up a prediction:

Over the course of the next 2 years, $10,000 invested in BP (NYSE: BP) at the closing price of June 16, 2010 will under-perform $10,000 evenly invested in Transocean (NYSE: RIG) and Noble (NYSE: NE). Assume dividends are not reinvested and remains as zero-yield cash.

The analysis of BP has converted from a financial/resource calculation to purely a political risk calculation. The current US administration is very adverse towards their non-donor constituents and while BP has donated scalds of money to the Democratic party in 2008, it is very likely they will still be made into a scapegoat for the Gulf of Mexico oil spill.

I am very interested in the drillers, and I am waiting for one more “shoe” to drop before likely placing some bids. Implied volatility on Transocean would suggest that selling near-the-money put options is a viable strategy for entry, but I am waiting for a price drop before executing on that. This also goes outside of my “don’t invest in companies outside an English-speaking jurisdiction” rule, but there are times to make exceptions and it seems to be close to one.

I also notice that Canadian oil sands companies are getting quite a bid – I am guessing capital is flowing into the politically safe Alberta oil sands. Suncor and Cenovus are the big players here, although there are a couple interesting bitumen plays that have a smaller capitalization worth looking into.

All of these oil investments assumes an implicit risk that the price of oil will at least be stable or preferably increase.

1 thought on “Prediction: BP vs. Drillers”

  1. In this fictional bet, the following shares were purchased:

    BP – 313.9717 shares
    vs.
    RIG – 106.3377 shares
    and NE – 159.8465 shares

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