HEARD ON THE STREET: BP Hit With 'Safety Discount'

17th Jun 2010 21:01

By Liam Denning A DOW JONES COLUMN It is a measure of how intense political pressure was on BP that the suspension of dividends and agreements to place $20.1 billion in legally questionable claims funds sparked a rally in its share price in London on Thursday. The optimistic reading is that BP has negotiated a truce with the White House at a manageable cost. But the Macondo well is still leaking and the $20 billion fund doesn't constitute a cap on liability. It is becoming clearer that BP may require radical change to realize the value of its underlying assets. Before disaster-related costs, Citigroup values BP's assets at $234 billion, almost double the company's current enterprise value, including net debt and minority investments, of $125 billion. Besides estimated disaster-related liabilities, two things weigh on BP's stock price. Both were reaffirmed during Chief Executive Tony Hayward's often hostile grilling by members of Congress Thursday. First, any perceived political truce is fragile. Should efforts to stop the leak be delayed, the risk of BP coming under renewed pressure in the lead-up to November elections rises. Second, while Hayward predictably deflected questions regarding the exact nature of events on the Deepwater Horizon rig, there is clearly a tension between repeated assertions that safety is BP's priority and the company's track record. The risk of a "safety discount" becoming embedded in the company's valuation is real. Deutsche Bank analyst Paul Sankey points out that following Royal Dutch Shell's reserves accounting scandal in 2004, the company's stock lost its premium multiple compared to its peers and hasn't recovered it since. Ultimately, BP's assets look worth much more than the current price in the stock market. But closing that gap remains some way off. (Liam Denning joined The Wall Street Journal from the Financial Times, where he wrote for the Lex column. Previously, he was an investment banker at Goldman Sachs. He can be reached at 212-416-3618 or by email at [email protected]) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires June 17, 2010 16:01 ET (20:01 GMT)