Monday, May 3, 2010

Questionable logic in the "market value wiped out" argument in defense of BP

A lot of folks have been defending BP's stock price using the argument that the amount of market value wiped out far exceeds the monetary damages the company likely will face in the Gulf of Mexico oil spill.  I too, thought that maybe the wipe-out of $26billion in equity value was far more than the cash damages the company will face, even if it turns out to be as high as $15billion (the higher of the estimates I've heard thrown around).

Over the weekend, Barron's made the same point I mentioned above:
This, indeed, is a fluid and highly unfortunate situation for everyone. However, a $24 billion drop in market value seems to more than reflect the attendant cost and fallout from this tragic oil spill.
But what if the spill had happened back on February 8th, with the stock at $52.68 instead of the levels above $60 it hit before the spill?  Would the stock then be appropriately valued at a more mild "equity-hit" of $5billion?  That would have valued the stock at about the same level it's at now.  

The point is that the "hit to market value versus expected legal costs" argument changes a lot depending on where the stock traded before the incident...and I'd rather a more meaningful valuation metric.  To that effect, BP's dividend yield is a fat 6.4% right now, way above other integrated oils.  The problem with that of course is that the average BP dividend yield over the past decade is 6.3%.

Copyright 2010 AlphaNinja

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