Investing in Bp after the Oil Spill

Buying BP was an easy decision

At my target price BP shares would pay a 9.5% dividend, with a great price to book, price to sales, and P/E to name a few stats. They are undoubtedly a solid company with great assets and leadership that has performed well in the past. Even if the dividend was cut in half I would still be content to hold this as a long term investment.
The media has made light of the ‘we are going to nail BP to the wall’ attitude that the Obama administration has adopted over the last few weeks, but lets look at the facts. The sinking of the Exxon Valdez in 1989 took 20 years to reach the final court settlement of a paltry $500M, plus the estimated $2B that Exxon spent on cleanup and legal costs. While times have certainly changed in the last 20 years the corporate laws haven’t. Don’t get me wrong I am quite certain BP will have to pay but there are many factors to the case:

There are three other companies involved with the rig that will likely be forced to carry some degree of responsibility.

BP has already come forward with $1B to start the cleanup so isn’t cash strapped.

It will likely take another 5 years at minimum before BP has to pay a dime so they have plenty of time to put aside a settlement fund.

To summarize, despite the media’s spin it isn’t too likely BP is going to go bankrupt, that their market is going to disappear, or that they are going to be the target of a hostile takeover. Based on this reality and the strong company that is standing here buying BP was an easy decision.

Buying BP was a hard decision

I don’t have a ton of moral rules when it comes to investing but there are certain stocks I simply am not interested in owning at any price- such as those directly involved with tobacco, or the production of weapons. I just don’t feel comfortable becoming directly involved and profiting from these businesses. BP is an oil based business, this product has been central to wars, genocide, supporting despots, a whole lithergy of negativity. This and, of course, they are the company who’s employees appear by early accounts to be primarily responsible for the current destruction occurring in the Gulf of Mexico. This all leaves me feeling a bit uncomfortable with the whole prospect of direct investment in BP.

I have commented before that investing is often a battle been the investor’s rational and irrational sides. My hope is that BP continues to be a strong and profitable company, I also hope though that BP takes the task of cleaning up the mess it has made and undoing the harm it has caused just as seriously. How did you feel about investing in BP?

4 responses to “Investing in Bp after the Oil Spill”

	Ankit Gupta June 14th, 2010 at 08:51 Why would investing in something like cigarettes be bad? Kant’s view on deontology (ethics) is to maximize free and rational decisions – if both parties have the same information and are being allowed to make their own independent decision, then that is good. You can go down a slippery slope if you start with avoiding cigarettes, because you can justify avoiding anything at all like that – an investment in car manufacturers could be bad because they lead to car accidents. They don’t make every car with 5 star crash test ratings simply because customers aren’t going to pay for it – they know the car isn’t as safe as it could be, but what should they do? Sell something at a loss? We do not live in an evil world, there is a truth. Atlas Shrugged might be a good place to start. Regarding BP – it’s shed $100B from the market cap. The question is how much the damage is and if you value the company higher than this or not. So long as the compensation for damages isn’t immediate and they are reasonable (short of becoming nationalized), even a $50-75B total cost over 10 years isn’t going to hit earnings all that bad relative to where the stock price is now.
	value investor June 14th, 2010 at 22:24 Ah a philosophy grad- right on. You are most certainly correct, it “can be” a slippery slope to exclude certain investments based on the potential association with evil or wrongdoing. One might equally make the absurd argument that investing in a pencil company is flawed as a pencil can be used to write a letter that insights others to violence. But let me offer you this, perhaps a utilitarian perspective of the overall good is a more appropriate in these circumstances. A pencil company produces a product who’s primary use differs substantially from the primary use of a missile company or a tobacco company. This is were the slipper slope can end. Now determining the primary use is something of a personal matter, we cannot create a Leibniz like equation to determine the primary use of a product. An investor must weigh the merits of what the company produces and decide on a personal ground. Kant’s foundation is to ask that we act according to that axiom that you wish others would act according to, would you like others to produce a product who’s primary purpose is to kill you? If not then why would you invest in it? Let’s see if that sticks to the wall As for BP- as long as they have lawyers the amount they pay and how quickly is somewhat under their own control. They could easily drag this out over 20 years if they want. I think where the media is going wrong is the assumption that on August 1st BP is going to have to write a check for all of this- preposterous.
	Ankit Gupta June 14th, 2010 at 23:19 Primary goal – couldn’t one say that the primary goal of smoking a cigarette is happiness, a moment of pleasure in your day, relaxation and separation from the world rushing around you all day long? Paraphrasing Rand – a cigarette represents mankind’s ability to tame fire inches away from his lips. If you ask me, that is very noble and a great primary goal – providing happiness. At the same time, it represents the power of mankind and what can be accomplished if you let his mind be free. Chocolate producers could make a very similar argument, and I fully agree with them. Sure, there’s a downside of the sugar and other ingredients making you fatter, increased sugar leading to diabetes, etc., but the fact is that it’s up to the person. People know that being fat isn’t healthy and that it will lead to health problems, but it’s their choice. You don’t need chocolate to survive nor do you need cigarettes to survive, but they both sure do make life a lot better. Okay – life. How do we define it? I say we don’t – leave that up to the consumer. You know the risks of smoking (cancer) and chocolate (diabetes, fat, etc.) and can make your own decision. Regarding missiles (and thus war), this is what I would refer you to: http://en.wikipedia.org/wiki/Just_War
	Shannon Kawane July 4th, 2010 at 20:22 I think that you should leave morality out of the investment decision. I believe, however, that no matter how good the CURRENT fundamental ratios and metrics look you need to look at what the rest of the investment world thinks about the company. The only way to do it really is by looking at price strength. In the case of BP the collective investment world was voting for more serious consequences even though there were articles on both sides of the argument (the spill will not affect BP viability vs. the spill will destroy BP). I have an article that specifically talks about BP (drill down through the “trend following” link and the “unfortunate example” link. You can link to it if you want.