Exploiting BP's Weakness

 | Oct 09, 2012 | 10:00 AM EDT
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I have had a varied career. I spent two decades in technology before launching a hedge fund in 2008. Prior to that, and just out of college, I spent 18 months as a professional poker player in the late 1980s. I even managed to win a few minor tournaments. Those months were a great training ground for a future career as a professional trader. Poker teaches you many skills, such as being able to calculate probabilities, being aggressive when the odds on your side and knowing how to recognize special situations.

One of the situations I loved playing during tournaments was going up against a player that was "shortstacked." Because of the individual's poor financial position, the player would have to make moves that otherwise they would not prudently make, and it gave me an advantage. This same scenario can play out in the market if a company needs to raise funds by divesting assets. One such situation exists currently with BP (BP), which has been unloading oil and gas properties in order to raise $38 billion to fund the aftermath (litigation, fines) of the Gulf oil spill. Here are two companies that recently picked up strategic assets from BP that will accelerate their growth prospects.

Marathon Petroleum (MPC) operates six refineries in the Gulf Coast and the Midwest.

Pickup from BP: MPC will purchase BP's 451,000 barrel-a-day Texas City refinery for $598 million, less than a quarter of the $2.85 billion BP said it hoped to receive for the plant. Marathon will also pay an additional $1.2 billion for inventories of oil and other products and $700 million during the next six years if certain conditions are met. The purchase will immediately add to MPC's earnings.

Four reasons MPC is a solid buy at $57 a share:

  • The stock is cheap at less than 8x forward earnings and just 7x operating cash flow.
  • MPC is selling near the bottom of its historical valuation range based on price/book, price/earnings, price/cash flow and price/sales ratios.
  • The stock yields 2.6% and has raised its dividend payout 25% in 14 months.
  • Consensus earnings estimates had already moved up some 20% for 2012 and 2013 over the last three months. This new purchase should garner more increases in estimates for 2013 and beyond.

Plains Exploration & Production (PXP) is an independent oil and gas company and develops oil and gas properties in the U.S.

Pickup from BP: Plains acquired BP's interest in three deepwater fields. The $6.1 billion deal nets Plains 67,000 barrels of oil equivalent (BOE) per day of production and 127 million barrels of oil equivalent (MMBOE) of proved reserves. It also provides significant new exploration opportunities in the Gulf.

Four reasons PXP is a good growth play at $36 a share:

  • Although Plains paid a decent price for BP's deepwater Gulf assets, it should be able to use the cash flow from the additional production to pay off the acquisition debt in the medium term provided oil prices remain at these levels. The 67,000 BOE per day of production significantly adds to the company's current 105,000 BOE/D, as well as to its oil reserves. It also substantially raises the oil & liquids ratio of production, which will also increase when the company is able to sell $1 billion to $2 billion of its onshore gas assets to reduce its acquisition debt.
  • The 13 analysts that cover the stock have a median price target of $52 a share, approximately 45% above the current stock price.
  • Prior to this acquisition, PXP was selling near the bottom of its five-year valuation range based on price/book, price/earnings and price/cash flow ratios.
  • Even though Credit Suisse has a Neutral rating on the stock, it says Plains will increase revenues 160% from 2012 through 2014. More importantly, modeling the new acquisition, the analysts expects more than $7.50 earnings per share in 2014.

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