Fine-tuning my BP model

About two weeks ago I stated to exit “between $45 to $50/share”, but there have been a couple significant events between now and then and the price response I’ve judged – one is the departure of the CEO (which was to be expected for his very lackluster performance in this whole matter – he did not care, and won’t be caring after a massive severance package payout) and the accrual for the project (approximately $32 billion dollars) which was roughly what I had expected (my estimate was $40 billion). Note that this amount is not a cash amount, but rather it is an accrual expected to be paid out in the future. If the oil spill is less damaging than expected, they will reverse this in the future and take a gain.

Because of income tax provisioning, the after-tax cost to shareholders will be less than this.

Also you can be sure that other, less performing projects will be thrown under the bus – this is always something to be aware of when companies make massive charge-outs. Tech companies doing mergers back in the internet boom were infamous for doing this, and was a reason why such financial statements looked better – if you keep on taking “one time charges”, your continuing operations will look great!

Since predicting the price of BP has been much more of a political game than financial, I believe being able to compile both sectors into a blended decision is one of my competitive strengths in the marketplace. Upon retrospection, I believe my initial price estimate for BP was high, and will now lower my exit parameters to “$42 to $47” per share. I would hazard a guess that it will get into this range by year’s end as the public consciousness fades onto other issues – such as the impending war in the Middle East (due before Obama’s exit in 2012) and how the US Congress will end up making themselves look like even bigger fools in a mis-guided attempt to save their collective skins in the November mid-term elections. The collateral damage that both events will leave should erase the BP oil spill from our short-term memories.

Since the price target is not materially above BP’s existing share price, the risk/reward ratio is not tremendously good. Obviously back a couple months ago when oil was still gushing in the Gulf, the risk was much higher. The “emotional” feel of this story is a fairly good lesson on the rule of the stock market – you don’t see low prices without risk. If you see what you think is a low price, but can’t see what the risk is, then chances are there is a hidden risk out there you are not aware of. Find out what it is before buying.

Finally, on the issue of collateral damage, Anadarko (NYSE: APC) and Transocean (NYSE: RIG) which had a 25% residual interest in the project and the drilling contractor, respectively, have both gotten killed in this crisis. They both look like better risk/reward ratios than BP is at the moment.