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Don't Buy BP, Buy This InsteadBy Frank Curzio, editor, Small Stock SpecialistFriday, July 30, 2010 BP has taken investors on a wild ride.
The integrated energy giant was largely responsible for the massive oil spill in the Gulf of Mexico. It's considered one of the worst environmental disasters in history. I'm sure you know all the details by now.
In a two-month period following the spill, BP lost more than half its value. But now the company is in an uptrend. As you can see below, BP is up over 30% since July 1.
 The stock is moving higher for several reasons.
First, BP plugged the well. Government reports suggest 60,000 barrels of oil per day were gushing into the Gulf. Now that the well is plugged, BP can assess the damage.
Next, the company fired CEO Tony Hayward. Newly appointed CEO Richard Dudley is a fresh face. Also, he's been saying the right things like... The well is plugged forever... BP will reinstate the dividend... BP will be a different company going forward...
The "different company" statement has me worried. You see, BP estimates it will have to pay $32 billion in clean-up costs for the oil spill. The company only has $6 billion in cash on its balance sheet, so it will have to sell some of its assets. In other words, BP will sacrifice growth at least over the next few years.
Looking at the numbers, BP is expected to earn $6.35 a share in 2011. That is the average estimate of nine institutional analysts, according to Thomson Reuters. Based on this number, shares are trading for six times 2011 earnings. But six times earnings is too expensive if you take into account the huge asset sales that will take place in areas like Pakistan, Columbia, Canada's oil sands region, and Alaska.
Given this risk, I can't figure out why some of the top hedge-fund managers are buying BP at these levels. I think the much better option is to buy Chevron.
Chevron is also a major integrated energy company with assets all over the world. The company has $11 billion in cash on its balance sheet and no clean-up costs to worry about. Shares are trading for seven times 2011 earnings estimates, comparable to BP. Plus, Chevron pays a 4% dividend. (BP suspended its dividend on June 16.)
So, Chevron is trading at about the same multiple as BP. It has a stronger balance sheet, more growth potential (since it's not selling assets), and less than half the risk of BP.
If you were fortunate enough to buy BP at its July low, I'd take the profits and roll them into Chevron. The risk-reward setup is much more favorable.
Good investing,
Frank
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Japanese yen up more than 8% in three months... dollar trades flat, euro down 1%.
"Safe-haven" stock Colgate-Palmolive drops 7% on weak results.
Greek crisis out of the headlines… National Bank of Greece up over 35% in a month.
Earnings today... Chevron (Big Oil), Total (Big Oil), Merck (Big Pharma).
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