BP – What’s Fair Value Now?
With BP (BP) apparantly agreeing to at least $10billion in asset sales (in addition) to the dividend omission, both acts we called for a month ago, it is again time to revisit the stock.
It is quite clear that unless the price of energy rises on the order of at least 10%, or if the market perceived the ultimate cleanup/litigation liability will be below $ 50billion, forcing us to raise the free cash flow estimates in the table (they are in per share), fair value is currently in the mid $30s for BP.
However, if investors perceive risk to be further reduced, its US stock could rise to the upper $30s, as currently indictated by our present value/cost of capital model. This is clearly a fluid situation with no obvious answer-unless you are a buyer of BP’s underlying assets-they are the obvious winners thus far.
Keep in mind we are also penalizing BP for our perceived underfunding of its pension plans, an issue they will need to address within the coming 12 months, a large general financial market rally aside. For now, BP is paying out a large multiple of what it is paying into its plans; we estimate such plans are at least $3billion underfunded at the end of June. This is a sensitive issue for BP having undergone costly strikes and threats of walkouts in the past resulting from pension issues.
