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Penguin Capital Markets
Penguin Capital Markets
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Why Is Seth Klarman Loading Up on BP Shares?

September 07, 2011 | About:
Seth Klarman is the manager of The Baupost Group, a $2.4 billion hedge fund which has historically chased value investments and has generated 20% annualized returns since the its inception in 1983. At the end of the second quarter, he added a huge position of 5.5 million shares of BP (NYSE:BP) — a $244 million position. We can only assume that this guru saw value in BP that other investors apparently haven't. It's worth noting that he chose BP specifically, neglecting the strong position that other integrated oil companies like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) have.

Lately, BP has had some interesting news. It had its Moscow offices raided, as anger over its refusal to make a deal with Russian energy company OAO Rosneft sparked a huge debate from TNK-BP because they were essentially left out of the loop on this news. In addition, Hurricane Irene caused a lull in production from the Gulf of Mexico which may have a small impact on next quarter's profits. BP has also had to dish out up to USD $10 billion to pay for the Gulf spill last year and the cleanup. This has damaged the stock's reputation and finances, despite what was otherwise a strong handling of the situation.

Despite this, BP is a very cheap stock for a variety of reasons. It's trading at an incredibly low P/E of 5.75 right now, with a dividend yield of 4.62%. Finding numbers like that on a mega-cap stock is rare, especially considering that BP has been experiencing relatively stable earnings growth since the Gulf of Mexico incident in 2010. Compare that to rival XOM trading at a P/E of 9.4 and a yield of 2.64%. Then another, CVX, which is trading at a P/E of 8.35 and a yield of 3.26%. BP is the better pick in terms of both valuation and yield, and should only be trading at this level if there is significant reason to believe that revenues will decline for the company.

As bearish as many money managers and individual investors have become on the stock, analysts have price targets from their empirically based models so high that it's time to begin considering the risk to reward ratio. On one hand we have the risk, where BP suffers from drops in the price of crude oil due to the continuation of weak data from China and Libyan resupply of oil. On the reward side, we have an implied 47% upside for the shares based on average analyst ratings, and huge benefits to BP shareholders if numbers improve and we avoid a second recession. Compared to analyst expectations of ExxonMobil/XOM (with an implied upside of 32%) and Chevron/CVX (27%), BP could be an incredibly profitable long-term trade.

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GuruFocus has detected 5 Warning Signs with BP PLC $BP.
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