BP plc (ADR) (BP), Eni SpA (ADR) (E): Don’t Be Fooled By The Market Hype

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Over-Hyped Losses

For the last couple of years, BP has been dragged down due to oil spill related penalties and the loss of goodwill. And rightly so, as it has spent around $14 billion on the clean-up work. Apart from that, BP is also being sued for economic losses. The good news is that there’s around 38 weeks left remaining for the deadline for settlement filings against BP. And the not so good news is that several reports are suggesting that its settlement claims could rise as the deadline approaches.

As of May, the total number claims filed was just shy of a massive 170,000. But only around 41,000 claims were found eligible for payments, with an eligibility ratio of 24%. The total value of these claims has aggregated to $3.2 billion, out of which around $2 billion has already been paid.

According to Patrick Juneau (an attorney in Louisiana), these claims could surge to the 200,000 marks before the deadline approaches. It’s only natural that people who would have incurred genuine economic losses would have filed for settlements by now. Still, if we go with an optimistic 25% eligibility rate, of the potential 30,000 claims (as estimated by Mr. Juneau), BP could be looking at around 7,500 genuine claims for an estimated remaining settlement of $700 million.

That accounts for nearly 21% of BP’s pending settlements and might absorb a fraction of shareholder value. However, it would be unwise to think that BP, which has a market cap of $131 billion, will be affected by an added settlement of just $700 million. In my opinion, BP’s pending settlement claims are being over-hyped, and the pros clearly outweigh its cons.

Final words

With that said, I think BP can come out of this mess unscathed. Its gross margins have already grown by 62% over the last 2 years, and will most likely continue to improve as BP continues to venture in high margin territories. At the current price, its shares appear to be undervalued with a forward P/E of 7.15x, while its modest payout ratio of 29.1% generates a lucrative yield of 5.25%. I believe that BP deserves a Buy rating.

The article Don’t Be Fooled By The Market Hype originally appeared on Fool.com and is written by Piyush Arora.

Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Chevron. Piyush is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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