If you have read past articles, you probably know that I hardly ever comment on a single name stock. Today I wanted to take an even more contrarian view as pessimism is currently prevailing. British Petroleum has been in the gunsites for weeks as oil has been gushing into the Gulf. I believe that the correction is highly warranted as there is a considerable under water oil spout that has yet to be plugged, much less cleaned up. On the flip side, I doubt that the cost will be taking down BP anytime soon. The current $75M cap on liabilities will most likely be lifted by our governing powers, but at a conservative estimate let’s just say that BP has to pay $20B as its own liability. BP had pretax income of $25B in 2009, but BP will not have to cover the cost of this cleanup and the liabilities associated with it over the course of 1 year. Most likely BP will be battling this in the court for the next 20 years as Exxon did after the Valdez spill which directly cost them about $7B. Bottom line, even a massive cleanup cost would be easily digested by this big oil behemoth BP.
What is even more attractive to me is that British Petroleum showed surprising strength today when the S&P 500 corrected 3.9%. BP was down only 69 cents or 1.5% today while oil was down 2.66%.
The current dividend payout is 7.53% which reduces the risk of an investment with every dividend paid. I do not suggest selling puts on the name outright, because I would prefer upside if the market recovers and if the oil leak is fully contained. Why take event risk on a name without getting the upside benefit?