LONDON -- As you may already know, Berkshire Hathaway
Clearly he thinks there are bargains to be had within Britain's elite FTSE 100
So as you wait for the Dow Jones Industrial Average
The big picture here is of a company with great fundamentals being adversely affected by a triple combo of fearful markets, a temporary setback in earnings, and the hangover from the Deepwater Horizon oil spill.
Which means the ADRs look a very nice contrarian investment today.
I'd actually say BP has it all: a low P/E, a great dividend yield, a solid balance sheet, great cash flow, and "special situation" status courtesy of the Gulf of Mexico disaster of 2010.
However, the oil giant didn't have a great first quarter this year. The company said its replacement-cost profit (a figure that ignores gains or losses from non-operating items) dropped from $5.5 billion to $4.8 billion -- and below expectations. The news knocked the ADRs firmly into what I see as bargain territory -- around $41, valuing BP at $130 billion.
Essentially, BP didn't produce as much oil and gas as the previous year after it sold fields to help pay for the Gulf disaster.
But there was some good news.
The company expects to meet its Gulf trust-fund target of $20 billion one year earlier than anticipated. And operating cash flow was up on the previous year. Also, the company's continuing divestment program now totals $23 billion. BP plans to sell its smaller fields in the Gulf of Mexico as it focuses on larger opportunities there.
In the future, when the Gulf disaster becomes a distant memory, so too shall today's expected P/E of less than six and yield of 5.8% for 2013. That's because I expect the price to have rallied by 50% or so. But patience will be required, and for the moment the payout remains at $0.08 a quarter.
The Deepwater Horizon disaster still hangs over BP, and rightly so. BP has paid a total of $8.3 billion in claims and other payments relating to the incident, while the total expected charge for the spill remains at $37.2 billion. But this is an estimate, and although BP hasn't admitted liability, it still faces claims from the U.S. and state governments and drilling companies.
But the huge cash costs of the spill won't be paid out forever. We may even find that BP's eventual Gulf payout is lower than expected. Either way, BP's healthy cash flow should see it through while paying (increasing) dividends along the way.
On a long-term view, BP's ADRs look like a great value today at around $41.
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David Holding owns shares in BP. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.
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