Is David Einhorn’s Thesis on BP Playing Out?


BP (NYSE:BP) reported a significant slide in fourth-quarter profits. Europe’s second largest oil company struggled with weaker refining margins and write-offs as it brought new projects online and increased its investment in exploration. The energy sector has raised some concerns this earnings season, but investors may find comfort in David Einhorn’s latest investment letter.

On Tuesday, BP announced adjusted profits of $2.8 billion for the recent quarter, down from $3.9 billion a year earlier, but slightly better than expectations. Full-year profit came in at $13.4 billion for 2013, compared to $17.1 billion for 2012. BP experienced strong growth from regions such as the North Sea, Angola, and the Gulf of Mexico.

“BP delivered strong operating performance throughout 2013, with increased asset reliability and major project delivery in both our Upstream and Downstream businesses,” said BP CEO Bob Dudley, in a press release. “These achievements underpin our financial targets for 2014 and lay the foundation for continued growth in sustainable free cash flow.”

Dudley also reminded investors that BP is remaining disciplined in its capital allocation choices, and is in pursuit of long-term value. This plays into Einhorn’s investment thesis on BP. The founder of Greenlight Capital recently announced a “medium-sized” position in BP at an average price of $47.39. He believes investors are not paying attention to the company’s core business and value. In fact, he explains that the company’s net asset value is nearly $70 per share, which represents 48 percent upside from his average purchase price.

“The Deepwater Horizon oil spill was nearly four years ago. Since then, investors have focused on the ensuing legal cases regarding clean-up and restitution efforts, while overlooking BP’s improved return on capital in its core businesses,” said Einhorn, in his quarterly investment letter. “Allowing for more negative legal outcomes than BP has currently provisioned, we believe the company’s net asset value is nearly $70 per share.”

Einhorn added that, “It can therefore create substantial value by selling assets at or above NAV and using the income to repurchase stock at a significant discount. This is exactly what BP has been doing. Further, BP has restricted capital expenditures and increased dividends — all evidence of a more shareholder-friendly approach. As the legal issues subside, we expect the market to appreciate BP’s portfolio value and its improved capital allocation. In the meantime, we own an industry leader at 9x earnings with a 5 percent dividend yield.”

Despite the decline in earnings, shares of BP found buying support on Tuesday and traded nearly 1 percent higher after the results. BP will offer investors more details on future capital plans on March 4.

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At the end of October, BP announced that it was hiking its dividend 5.6 percent to 9.5 cents per share and that it would be selling off another $10 billion in assets before the end of 2015, with most of the proceeds going toward share repurchases. BP previously announced an $8 billion share repurchase program — largely funded by the $12 billion sale of BP’s stake in TNK-BP.

BP’s Gulf of Mexico disaster was the worst offshore spill in U.S. history. It began on April 20, 2010 when an undersea well exploded 50 miles off the Louisiana coast, killing 11 workers and spewing millions of barrels of crude oil into the ocean. Marshes, fisheries, and beaches stretching from Louisiana to Florida were polluted, harming local tourism and fishing. The oil producer has acknowledge responsibility for the oil spill, spending more than $25 billion on cleaning up the marshes, fisheries, and beaches along the coast and compensating victims. Furthermore, that spending is just the tip of the company’s spill-bill iceberg; $42.7 billion has been spent or earmarked for spending on clean-up, compensation, fines, and other costs.

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