Should Investors Buy Seth Klarman's Biggest Position?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Seth Klarman, who runs The Baupost Group, is one of the famous value investors. His investment partnership has achieved an annualized return of nearly 20% since inception in 1983. Because of his respectable investment record, it is often wise for investors to follow his moves. As of June, the stock that he bets most of his fund in is BP (NYSE: BP). His fund currently owns more than 13.4 million shares of BP, with the total value of $545.52 million. BP accounts for 14.2% of his total portfolio. 

Actually, BP was a stock which gave me decent returns in the past. In the second quarter 2010, BP had a deep-water horizon oil spill crisis in the Gulf of Mexico. In the media, it was pictured as a disaster for BP and many people thought the company was going to be hit financially extremely hard. The stock price dropped significantly from $60 to $27 within just two months. At that time, I thought BP was quite a great buy as it generated huge free cash flows and a $40 billion claim payment (or even much less in reality) would be spread over several years. The crisis couldn’t bring down the company.

That is true. BP keeps moving forward. Recently, the company reported a strong Q3 earnings result. It had a $5.43 billion profit, 40% higher than the second quarter of $3.7 billion but lower than the third quarter 2011 of $5.5 billion. It had 27.16 cents per ordinary share in underlying replacement cost profit, or $1.63 per ADS. The underlying replacement cost profit is the replacement cost profit after the unfavorable impact of non-operating items and fair value accounting effects. The replacement cost profit in the third quarter was $4.69 billion, or $1.48 per ADS, beating analysts’ expectation of $1.29 by a high margin. This good result was due to higher oil and gas output. 

In addition, BP announced the quarterly dividend increase by 12.5% to 9 cents a share, which would be paid in the next quarter. BP’s total revenue experienced a 4.7% decrease to $93 billion, due to lower overall oil and gas prices. Furthermore, BP is restructuring its oil/gas portfolio globally by selling non-core upstream properties. The company would sell its 50% share in TNK-BP to Rosneft for $17.1 billion and a 12.84% stake in Rosneft. In addition, the company would use $4.8 billion to buy 5.66% in Rosneft from the Russian government. As of December 2011, BP reported to have 17.75 BOE equivalent.

Compared to its peers such as Chevron (NYSE: CVX), ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-A), BP seems to be the cheapest company with the lowest P/E valuation.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>BP</strong></p> </td> <td> <p><strong>XOM</strong></p> </td> <td> <p><strong>CVX</strong></p> </td> <td> <p><strong>RDS.A</strong></p> </td> </tr> <tr> <td> <p><strong>Oil reserves (billion BOE)</strong></p> </td> <td> <p>17.75</p> </td> <td> <p>24.9</p> </td> <td> <p>11.2</p> </td> <td> <p>14.2</p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>4.47</p> </td> <td> <p>9</p> </td> <td> <p>10.8</p> </td> <td> <p>5.4</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>11</p> </td> <td> <p>24.1</p> </td> <td> <p>19.9</p> </td> <td> <p>12.4</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0.4</p> </td> <td> <p>0.2</p> </td> <td> <p>0.1</p> </td> <td> <p>0.2</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>7.8</p> </td> <td> <p>9.5</p> </td> <td> <p>8.3</p> </td> <td> <p>8.1</p> </td> </tr> <tr> <td> <p><strong>Dividend yield (%)</strong></p> </td> <td> <p>4.5</p> </td> <td> <p>2.3</p> </td> <td> <p>3.1</p> </td> <td> <p>4.6</p> </td> </tr> </tbody> </table>

Big oil/gas companies don’t receive high earnings valuations in the stock market. All of them have single-digit P/E ratios. BP is the lowest with 7.8x P/E, and ExxonMobil is the most expensive with 9.5x P/E. However, it is the most leveraged company with 0.4x D/E. Among the four, ExxonMobil has the highest oil reserves with 24.9 billion BOE, BP ranks second with 17.75 billion BOE, and Chevron has the lowest reserves with 11.2 billion BOE. ExxonMobil ranks the top in terms of return on invested capital, with 24.1%. In terms of dividends, Royal Dutch Shell pays the highest yield of 4.6%, BP ranks the second with 4.5%.

My Foolish Take

All four big oil/gas companies are worth investors’ consideration. With double-digit returns on invested capital, consistent and high dividend yields, low leverage levels, and single-digit P/E valuations, all of them could fit well in investors’ income portfolios in the long run. Specifically for BP, in the long run, I think investors would be better off following Seth Klarman's move in this stock. 

 

 

 

 

 

 

 

 

 

 

 

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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