Energize Your Returns with BP p.l.c.
Dividend = $0.84 quarterly = 6.79% current yield
With crude prices down $4.50 bbl today, it’s a good time to be picking up some BP ADRs. I expect higher oil prices somewhere in the reasonable future and the generous 6.79% yield makes waiting for that day quite palatable.
Consensus estimates for 2009 and 2010 now run about $3.70 and $5.75 respectively making the P/E 13.4x this year’s depressed earnings and around 8.6x next year’s expectations. That compares with a 10-year median multiple of 13x.
BP gets Value Line’shighest ratings for both safety and financial strength. ‘Stock price stability’ and ‘earnings predictability’ also score well at the 90th and 80th percentiles (with 100th being best).
Unless you’re a real bear on oil prices BP looks to have very nice upside without a ton of risk. BP shares peaked at levels between $72.70 and $79.80 during each calendar year 2005-2006-2007-2008 and never got below $56.60 at any time during 2005-2006-2007.
Here’s a relatively conservative play for just under 1 ½ years that can generate very nice total return even if the shares don’t do much other than hang around current levels.
………………………………………………………..Cash Outlay ……….. Cash Inflow
Buy 1000 BP @ $49.45 ……………………….. $49,450
Sell 10 Jan. 2011 $50 calls @$4.80 ………………………………….. $4,800
Sell 10 Jan. 2011 $50 puts @$9.40 ………………………………….. $9,400
Net Cash Out-of-Pocket ………………………. $35,250
If BP finishes at $50 or better (up 1.1%) by the January 2011 expiration date:
• The $50 calls will be exercised.
• You will sell your shares for $50,000.
• The $50 puts will expire worthless.
• You will likely have collected $5,040 in dividends.
• You will have no further option obligations.
• You will hold no shares and $55,040 in cash.
That would represent a best-case scenario net profit of
$19,790 / $35,250 = 61.3%
achieved on shares that only needed to rise by at least 1.1% over the next 17.6 months.
What’s the risk?
If BP finishes below $50 on the January 2011 expiration date:
The $50 calls will expire worthless.
The $50 puts will be exercised.
You will be forced to buy another 1000 BP ADRs.
You will need to lay out an additional $50,000 in cash.
You will have no further option obligations.
You will likely have collected $5,040 in dividends.
What’s the break-even on the whole trade?
On the first 1000 shares it’s their $49.45 purchase price less
the $4.80 /share call premium = $44.65 /share.
On the ‘put’ shares it’s the $50 strike price less
The $9.40 /share put premium = $40.60 /share.
Your break-even would be $42.63 /share (excluding dividends)
And $40.11 /share (including yield).
BP ADRs could drop by up to 18.9% without causing a loss on this trade.
Summary:
BP represents a good play on an oil price recovery as well as a ‘weak dollar’ hedge. I think these high-yielding shares are likely to rise over the next 18 months. As long as they pass and hold the $50 mark on January 2011’s expiration date your total return should exceed 61% even though the shares only needed to rise by 1.1%.
In a worst-case scenario you’ll end up owning 2000 ADRs at an average price almost 19% below today’s already reasonable quote.
Disclosure: Author is long BP ADRs and short BP options.
BP was as low as 44.82 as recently as early July, 10.4% below Friday’s price. In March it touched 33.70, nearly a third below (too bad I didn’t buy it then!). I guess it depends on if/when you think the March lows will be re-tested?
Lots of stocks hit absurd lows in early March. If you wait to see those prices again you may never get to buy much of anything.
That’s the beauty of selling puts. I was able to get $9.40 for the BP Jan. 2011 $50 puts taking my break-even down to $40.60 even while the sharea were trading near $50. It lets you buy at prices you wish you’d bought at before, (or you get paid for not buying the shares). Either way it’s a good thing unless the shares really tank.
BP (BP): Q3 earnings of $4.67B vs. consensus of $3.25B. Sees 2009 costs down by $4B vs. a previous $3B. Total production +6.9%.
Shares +5% premarket to $58.55
BP was a good pick. The shares have risen by 24.57% (from $49.45 to $61.60) since my July 29, 2009 posting.
I had suggested writing the Jan. 2011 calls and puts at the 450 strike price.
It’s fine to just leave these alone until next year as I still like BP to do well.
Had you wanted tyo close out everything one year early these are the results you would have had at last Friday’s prices…
Intial cash out on 1000 shares …………………………… $35,250
Sell 1000 BP @ $61.60 /sh ……………………………….. $61,600
Buy to close 10 Jan. 2011 $50 calls @ $12.10 /sh ……………($12,100)
Buy to close 10 Jan. 2011 $50 puts @ $2.50 /sh …………….. ($2,500)
Dividends received ………………………………………… $840
Net Cash at Liquidation ………………………………….. $47,840
Net profit = $47,840 - $35,250 = $12,590
$12,590/$35,250 = + 35.7% for the 5.6 month holding period.
BP, Transocean Priced for Disaster
By ANDREW BARY - Barrons
After the Gulf disaster. Wall Street was too hard on BP and Transocean.
WALL STREET MAY BE applying overly severe punishment to BP, Transocean, Anadarko Petroleum and other companies involved in the potentially disastrous recent oil spill in the Gulf of Mexico.
The market values of the affected companies have declined by a total of more than $40 billion since the spill on April 20. That seems very high relative to the potential cost of the cleanup, economic damages and fines.
In a note on BP (ticker: BP) Friday, Bernstein analyst Neil McMahon wrote that the recent loss of $25 billion in BP’s market cap is “extreme” relative to a potential worse-case cost of $12.5 billion for the spill, of which BP’s share is roughly $8 billion before tax benefits. Other analysts have put lower cost estimates on the spill. BP has a 65% interest in the field with Anadarko Petroleum (APC) holding a 25% stake and Japan’s Mitsui, 10%. Transocean (RIG) owned the deep-water Horizon rig that was destroyed in a gas-related explosion, killing 11 workers.
For comparison, the Exxon Valdez spill in Alaska in 1989 cost Exxon about $4 billion. The Gulf spill could be less damaging environmentally because the oil is more widely dispersed than in the confined Alaskan waters and much of the oil could evaporate in the warm Gulf waters. A worst-case scenario has the oil hitting Florida’s Gulf Coast beaches and potentially getting carried by currents onto the state’s Atlantic shoreline.
The stock-market losses deepened last week after the disclosure that 5,000 barrels of oil daily may be seeping into the Gulf, five times the prior estimate, and that it could take two to three months to stop the flow.
Fire boat response crews battle the blazing remnants of the off shore oil rig Deepwater Horizon, off Louisiana.
BP’s U.S.-listed shares, at 52, are off eight points since the spill, with nearly all the drop last week. Transocean was off 16 points to 72.32 last week, slicing $5 billion from its market value, while Anadarko dropped 12 points in the five sessions, to 62, cutting more than $6 billion from its market cap.
BP now trades for a very reasonable eight times projected 2010 profits of $6.55 a share and carries a juicy dividend yield of 6.4%, the highest yield among the group of super-major energy companies. BP trades for two multiple points below Royal Dutch Shell and Chevron, which historically have had similar P/Es to BP.
Until the spill, BP, under the leadership of CEO Tony Hayward, had been regaining favor in the investment community — a revival punctuated by the release of strong first-quarter profit in April. Citigroup analyst Mark Fletcher Friday reiterated a Buy rating and a price target equivalent to about $67 a share, writing that the share-price drop “seems disproportionate” to the likely costs to the company. BP is self-insured.
The Bottom Line:
BP and Transocean stocks have more than discounted the possible financial costs they could face. Opportunity knocks.
Transocean initially showed little reaction to the disaster because BP, as the operator of the rig, takes prime responsibility for the costs of the spill and because Transocean has insurance for the rig, which has an estimated value of about $500 million, plus $700 million of environmental liability insurance. Investors then began to worry that the explosion and spill could have been caused by errors by Transocean, as well as equipment failure.
The largest operator of deepwater rigs, Transocean also is trading for just eight times projected 2010 profits. That’s a discount to its closest rival, Diamond Offshore Drilling, which, at 79, trades for about 9.5 times estimated 2010 profit. The two usually have similar multiples. Diamond Offshore (DO) could be a better bet because it doesn’t have Transocean’s liability problem and it carries an ample dividend yield of 7%.
While both BP and Transocean look appealing, there may be less risk in BP, despite its liability, because of its huge size. “BP can just write a check,” one investor says.
The Obama administration may move to stop new drilling in the Gulf, where Transocean runs about a dozen lucrative deepwater rigs that rent for about $500,000 a day. There could be onerous new regulations that affect the demand for deepwater rigs, despite their exemplary safety record until now. Anadarko has said little about potential exposure and insurance coverage.
Cameron International (CAM), the maker of a blowout preventer that may not have operated as designed, saw its shares fall almost eight points to 39.46 last week, cutting about $2 billion from its capitalization. Halliburton (HAL), which was involved in cementing the well, also got hit, dropping four points to 30.62 and losing more than $3 billion from its value. Cameron and Halliburton are down but they aren’t cheap stocks, trading for 17 and 20 times estimated 2010 profits, respectively.
While there could be damaging political and financial repercussions from the spill, Wall Street may have overreacted, and that could mean opportunity in shares of BP, Transocean and other affected companies.
we’re just beginning to see the beginning of this.. Not the middle, and certainly not the end.
This will go on for a long time. Worse for BP will be the P.R. nightmare set to begin this week as dolphins and whales begin to wash up on shore. BP will continue to fall. unfortunately moreso still the fact that BP’s woes are inconsequential to the damage to our dear planet.
See my latest BP write-up dated today for my response.