Four months ago, I mused on the question of whether investors should take a chance on BP (NYSE: BP). It was a particularly hot topic at the time since the company -- and the entire Gulf coast -- was dealing with the awful gusher at BP's deep-sea Macondo well.

My conclusion at the time was that due to the likelihood of an overreaction to the spill coupled with the company's considerable resources, BP's stock was buyable. But a lot has happened since then. In brief:

  • After plummeting another 25% from the date of the article, the stock is now up 10%.
  • The company ousted its then-CEO, Tony Hayward.
  • The government and the company agreed on a $20 billion fund to pay for claims arising from the spill.
  • BP cut its dividend, then started hinting at its potential reinstatement.
  • The gusher was finally permanently capped.
  • BP released its long-awaited report on the cause of the Macondo blowout.

Simply put, a lot has changed since I last called BP a buy. So after all of that, is it still a buy today?

In a word: Yes
The primary reason I still like BP as an investment is that the overhang from the Gulf spill is still nowhere near gone. As soon as the magnitude of the event started to reveal itself, BP's stock started dropping. And as public sentiment grew against the company as a result of the spill, the free-fall picked up speed.

The stock has since recovered significantly, but as the clean-up pushes forward, time ticks on, and the memory fades, the equity-price recovery should only continue. No longer is the company's logo on the front page of every newspaper. Gone are the daily headlines. No longer are people forgoing Hulu in favor of the undersea spill cameras. And, most importantly, with nationwide furor cooling, the U.S. government is less likely to feel compelled to do something rash and heavy-handed simply to appease a pitchfork-wielding populace.

While it's hard to put all of that into numbers, the disappearance of those fears and anxieties should continue to show up in the company's stock price.

But is there value?
If you had asked me about BP prior to the spill, I would have told you that I thought the stock was meaningfully undervalued. At this point, the stock is roughly a third below that already-discounted level.

Certainly there are real costs to the spill and so logically BP should be worth less today. However, I don't believe that the eventual cost -- particularly when you discount it due to the period of time over which the costs will be realized and account for potential tax credits -- will be nearly the $60-some billion implied by the stock's discount.

Of course we can also look at how BP is trading versus its peers.

Company

Total Enterprise Value / LTM Revenue

Price / NTM Earnings Per Share

Total Enterprise Value / NTM EBITDA

BP

0.5

5.8

3.1

ExxonMobil (NYSE: XOM)

1.1

10.6

4.7

Royal Dutch Shell

0.6

7.6

3.9

Chevron (NYSE: CVX)

0.9

9.1

3.7

ConocoPhillips (NYSE: COP)

0.7

9.2

4.2

Source: Capital IQ, a Standard & Poor's company.

Profits for BP will come under pressure as the company sells assets and makes other moves to meet the spill costs, but I'm not convinced that the result will justify the discount that investors have put on BP versus the rest of the group. And this is a group that I believe is largely underpriced to begin with.

The good, the bad, and the unknown
If there's a word that investors hate above all others "uncertainty" may be it. But while investors tend to focus on the downside of uncertainty, there are usually potential upside scenarios as well. Here are some of the unknowns -- good, bad, and other -- that investors need to look out for as BP moves forward.

The good

  • Thus far BP has been shouldering the bad headlines as well as the cost of the spill. But while BP does own the controlling stake in Macondo, its 65% stake is rounded out by ownership positions from Anadarko Petroleum (NYSE: APC) and Mitsui. As far as I can tell, investors don't seem to be giving BP any credit for the possibility that either of these "partners" come through to pay their part. If they come through at all, then, it would likely be seen as pure upside.

The bad

  • Among the downside scenarios that BP faces, the potential for the company to be found grossly negligent in the spill is one of the worst. This would significantly increase how much BP would be liable for under the Clean Water Act and it would sink the possibility that the company could lean on its partners for part of the spill costs. When the company released its internal investigation report, it pushed a lot of the blame for the spill onto Macondo's contractors -- Transocean (NYSE: RIG) and Halliburton -- undoubtedly as a preemptive attack against gross negligence claims.

Could go either way

  • BP's shares are under pressure at a time when many of the biggest oil companies have very sound balance sheets. Could an Exxon or Shell make a pass at BP? I wouldn't say it's highly likely, but the potential is there. This would give investors a quick pop, but there's no guarantee they'd be paid what the company is actually worth.
  • BP has to actually come up with the cash to pay for the escrow fund and other costs arising from the spill, and ideally do it in a way that doesn't further imperil the business. The company seemed pretty happy with its $7 billion asset sale to Apache (NYSE: APA) and though debt is currently pricier for the company, the debt markets have certainly been open for it. However, the process is still young and there are no guarantees that buyers will be ready to pay fair prices for assets or that lenders will want to finance the company at reasonable rates.

A buy among buys
There is currently at least a handful of big oil stocks that I think could be compelling buys. So why, then, should investors take the plunge on BP? Not only is it even further discounted versus the rest of the group, the gradual dissipation of uncertainty, as well as the pending return of the dividend next year give the stock concrete, relatively near-term catalysts.

Do you agree that BP is prime for the picking? Head down to the comments section and share your thoughts.

The worst may be over for BP, but Warren Buffett doesn't think we've got an all-clear on the economy quite yet.

Chevron is a Motley Fool Income Investor selection. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of BP, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.

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