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BP Stock Looks Cheap After Spill Leads to Panic Selling

The horrendous Deepwater Horizon oil spill in the Gulf of Mexico has made BP (BP) the corporate villain du jour.

Shares of the energy super-giant, which leased the rig that exploded on April 20 and then sank, fell nearly 22 percent over the course of nine trading days after the accident, knocking about $40 billion off BP's market value. The plunge unfolded in slow motion as it became clear that damage to the gulf and coastal areas was extensive and that the mile-deep water into which oil from the Deepwater Horizon project continues to seep would make plugging the leak extremely difficult.

Not that it's much consolation to shareholders of BP or indeed to the families of the 11 workers lost in the accident, but the stock of Transocean (RIG), the company that leased the rig to BP, did even worse. From peak to trough, its share price lost nearly 26 percent before recovering slightly, as BP has.

The panic selling seems like just that - an overreaction based on emotion and not an adjustment based on a reasonable estimate of the impact that the accident will have on BP's financial condition and reputation.

The financial harm is likely to be great. The amount spilled so far appears to be less than the 11 million gallons that poured out of the Exxon tanker Valdez in Alaska in 1989, the worst oil spill in U.S. waters, but the difficulty of capping the gulf leak means there is certainly more to come.

Here is a more recent post on the oil spill and BP stock.
BP has been accused of inadequately planning for such an accident. Even so, an accident is what it is, and other companies involved in Deepwater Horizon may share the blame, including Transocean and Halliburton (HAL), the oil service specialist that some have accused of improperly capping the well.

Whatever liability BP or others face is not open ended, moreover, unlike instances in which a drug or chemical is found to cause damage. This was a single, discrete event, and while there will be lawsuits and fines aplenty, the matter will be settled at some point before forever.

As for BP's reputation, well, it's the oil business so it matters less than for a company that sells branded consumer goods. The absence of safety issues regarding BP's products - the distribution of them, not the production - also makes public perceptions less critical.

Image is more important for a company like Toyota (TM). The car maker's stock took a dive similar to BP's after problems with its accelerators came to light earlier this year and then recovered.

All the same, BP seems to have handled the Deepwater Horizon incident about as well as can be expected. The company was at least as fast as U.S. authorities in recognizing the severity of the problem.

BP will have earned some goodwill, too, by opening its wallet in a hurry, contributing $25 million to the state of Louisiana to help protect its coastline, for instance. Contrast that with the lethargic, disorganized response of government bodies like the Federal Emergency Management Agency, FEMA, after Hurricane Katrina struck the same benighted part of the country.

BP seems to have learned a lesson from Exxon, now Exxon Mobil (XOM), in how not to handle a crisis. Exxon was criticized for the leisurely pace of its response after the Valdez ran aground, and BP is showing its determination not to be dragged kicking and screaming to clean up its mess.

Another comparison with the Valdez spill is appropriate. Exxon's stock suffered no discernible hit, certainly nothing like the shellacking that BP has taken. If you had bought Exxon then and held it ever since, your investment would have increased tenfold, while the broad stock market has merely tripled.

BP may not be a ten-bagger from here, but the company remains a leader in a vital sector of the economy, and the indiscriminate selling in response to the Deepwater Horizon accident leaves it trading at a bargain price, barely six times analysts' estimates of 2011 earnings. That's far cheaper than the other three super-majors, Exxon Mobil, Chevron (CVX) and Royal Dutch/Shell Group (RDS-B).

BP will continue to play the villain as the cleanup continues and the drama moves to the courts and maybe Congress. But in investing, as in the movies, villains often make the most compelling characters.

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