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Whitney Tilson's Long Presentation on BP

June 21, 2010 | About:
I have posted several articles on British Petroleum(NYSE:BP) since the spill began. To avoid overkill this will hopefully be the last one for a while.

Two interesting articles about BP came out yesterday. In a startling statement, Ken Feinberg who is in charge of the $20 billion BP compensation fund, stated that the fund would reduce BP's liabilites. Many observers thought that BP was foolish for agreeing to the escrow fund as it would make BP liable for at least $20 billion without even a fight in court.

Feinberg stated:

"those people who accept final settlements from the fund, will likely be required to give up their right to sue BP. “You’ll waive your right to sue,” Feinberg said. “That’s only fair.” “It’s a way for BP to avoid lawsuits in the end,” Feinberg said. “And it’s a way for a claimant voluntarily to get a check now. You don’t have to litigate for years – with some uncertainty about whether you’d win – and you don’t have to pay a lawyer thirty percent.”

This is very good news for BP, as their liability could be far higher than $20 billion for gulf coast residents.

Another interesting article was Whitney Tilson's full bullish case on BP finally presented. I think this is a gutsy move by Tilson, but I think he is making the right call. While his main points differ from mine, I am overall bullish on the stock. That being said there is no margin of safety here, and BP represents less than 2% of my equity holdings.

Tilson deals with the follow questions:

Question 1: How big is the spill today and how bad could it get? How much could the clean-up cost, and what might legal liabilities be – and, critically, over what time period might BP have to pay? Are there any relevant precedents?

Question 2: How profitable is BP? What do its balance sheet and free cash flows look like? Does BP have the liquidity to handle this crisis?

Question 3: How much might future profits be impacted? What would be the impact of a permanent ban on offshore drilling in the Gulf of Mexico? How tarnished are BP’s brand and reputation, and what might be the impact of this?

Question 4: What if BP cuts its dividend? If need be, could it raise cash in other ways?

Question 5: Regardless of how cheap BP’s stock is, is it immoral to try to profit from owning it, in light of the company’s bad behavior?

I have embeded the full twelve page document in scribd. For best viewing click on full screen and the zoomin button.

Why We’re Long BP


Disclosure: Long BP

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 2.9/5 (20 votes)

Comments

PHILCIR
PHILCIR - 3 years ago
The points you raise are fine. But the problem w/ tilson's argument is that everyone knows this. This ain't 1962 and this ain't the salad oil scandal. The rules keep changeing with the 24/7 media coverage and the politicians feel the need to do something. Remeber this spill dwarfs the Exxon Valdiz which is hard to believe. If you aren't old enough to remember the Valid that was a big f***ing spill that did huge damage. The world has changed a lot. Back in 1962, or whatever, the so called smart money would buy a broken stock - everyone else was too afraid. Now anyone who has a few years experience and read a few value investing books -- assumes that the market has over reacted. That the market has it wrong. The guy w/ a few value books under his belt says ha, ha -- this thing is cheap and I can support it w/ solid analysis based on the facts. Tilson's analysis is too slippery and if it is like viagra he's probably way too early. The way to go long is take a feeler and get out if it breaks down. If it snaps back, get out w/ a short term profit (and maybe even short it) This is the sort of thing that can end up in the portfolio for a decade and Tilson will keep blabing about how cheap it is while it settles for years in the $9 - $14 area, and pays a nice dividend similar to another broken stock due to a hair brained merger - TWX.

I'm short -- If it closes below that $29.2 low close the next stop is $19 - $24 area.
batalha
Batalha - 3 years ago
$75 is the highest this stock has ever been at the peak of the oil price. With the stock currently trading at $31 it seems the downside risk (which is getting wiped out IMO) is way too much for a upside of having your investment double in value if everything goes flawlessly from now.
munger
Munger - 3 years ago
I think there is a chance BP does a strategic BK similar to USG. Litigation died down & was capped eventually, USG emerged & they also caught the headwinds of the real estate boom. If you bought while in Chap 11, you made a killing (assuming you took some profits). Chap 11 is typically when all the institutions have to liquidate as it is often against policy to hold a BK stock. I'm kind of hoping a similar situation presents itself - litigation dies down, oil jumps in price, BP doesn't wipe out equity holders & they emerge eventually in a strong financial position.

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