Is BP’s stock a buy?

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It’s a long held mantra on Wall Street to buy straw hats in winter. The notion is that you should buy the shares of a company when no body wants them, or when things look their worst. Buy at the low. So based on that logic here’s the question: Is BP’s stock a buy? That’s the case that Felix Salmon makes on his Reuters blog:

Did the markets really think the top kill was going to work? Evidently so — BP shares fell 15% today, to $36.52. But before we declare this the end of BP, let’s put this in perspective: the shares traded as low as $34.06 in March 2009. And over the last three years, BP is down 46%, compared to 30% for the S&P 500 (and Exxon Mobil) and 93% for Citigroup.

The most likely fate for BP at this point isn’t death but rather takeover. There’s been a lot of speculation along those lines, and with BP’s leadership looking even weaker than its stock price, the rest of Big Oil is surely salivating at the prospect of picking BP up without much difficulty.

I don’t think the acquirer would be Exxon. Other than that I do think another oil company could come in and pick up BP assets effectively erasing the reputational risk and making those assets worth a lot more.

UPDATE: The New York Post has more today on why analysts think BP is a buy:

A number of top oil analysts see BP as a summer bargain, and predict cash flows could jump as much as 30 percent next year.

Analysts said that once engineers get a grasp on their new plan to tame the gushing oil, investors could see a quick pop in the share prices of all three oil companies involved in the mess.

If the latest fix shows signs of working, “we believe it’s likely that the shares of BP will see a near term move higher,” analyst Pavel Molchanov of Raymond James said in his bullish report yesterday on BP.

Also, I missed this earlier, but JP Morgan’s analyst also weighed in on BP pointing to the size of what they think the stock buying opportunity could be:

Struggle to rationalize BP’s extreme share price reaction – JPM says they had originally assumed a total containment cost of $7.2bn (100%, based on 120 days at $60m per day). So far, the costs have averaged $24m per day given 42 days since the tragic loss of well control occurred. BP’s 65% share of their original cost estimate is approximately $5bn including the cost of the two relief wells. The difference between this figure and the relative loss of market value ($37bn) is around $32bn. The firm struggles to believe that litigation settlements, claims payments and punitive damages will rise anywhere close to rationalize the difference ($32bn).

—How low will the yield on Treasury bonds go? The new consensus is that yields could continue to drop throughout the summer. I have a story up today on about the bull market in Treasury bonds. The Wall Street Journal is also on Treasury bonds this morning with a round up of where the different investment banks believe yields are headed. And there is another interesting move in the Treasury market today. For the past few weeks, Treasuries have been moving in the opposite direction of stocks. So the assumption has been that when stocks rebound, Treasury prices will fall. Not today. Stocks are up, and bonds are up. Long live the Treasury rally.

—Buffett is set to testify about the ratings agencies to Elizabeth Warren‘s Congressional Oversight Panel Phil Angelides’s Financial Crisis Inquiry Commission. I haven’t fact checked this, but by I believe Buffett is the only person so far to be subpoena to testify about the financial crisis. Is Buffett really the guy that knows were the bodies are buried? I doubt it.

UPDATE: Got an e-mail from the FCIC doing some fact checking for me. Got to love blogs. Here’s what it said:

11 subpoenas issued by the Commission to date (Clarkson, Buffett, Kolchinsky and Michalek all required subpoenas to appear yesterday – though the latter two were for different reasons than the other two).

So I was wrong. Not only is Buffett not the only one to be subpoenaed by the FCIC, but he wasn’t the only one yesterday. Does anyone know if Elizabeth Warren has had to submit subpoenas?

—New York Time Deal book has a round-up today of what’s missing in the financial reform bill.

We would like to see a limited definition of eligible Tier 1 capital set at 15 to 18 percent of total capitalization for banks with assets in excess of $50 billion. The larger the institution, the higher the capital requirement.

At the heart of this issue is the continuing conflict between two competing interests:

those of the government, which charters and provides liquidity and deposit insurance to banks (and the taxpayers to whom government answers).
those of financial companies in being as profitable as possible for their shareholders (which invariably means seeking more leverage and holding less equity capital).

This, in our opinion, is the single most salient issue in determining whether the reregulation of the financial sector is ultimately successful in preventing a recurrence of what we have just lived through.

I agree that a main problem with the bill is that it leaves too much up to regulator discretion. Regulators could have come up with a way to reign in Citigroup before it became a problem. They just didn’t. As I have reported, just giving regulators the ability to break up banks, doesn’t mean they will do it. What we need is a set bar that defines when a bank becomes a problem for the economy. But that would probably mean reigning in Jamie Dimon’s JP Morgan, as well as the troubled banks, and that doesn’t look like that is going to happen right now.