BP was on Roids
June 23, 2010
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Obviously there has been a lot of talk about BP lately. Many people, including myself at first, looked at this situation as being black or white...either the company will bankrupt or it will survive and yield incredible returns for investors because it is such a tremendously profitable cash cow. As I flipped on CNBC this morning and once again saw the live feed of the disgusting leak in the bottom corner of the screen I thought of another less talked about possibility.
BP is one of the most inept organizations that I have seen in a long time. Despite this company's obvious ineptitude, its margins haven't been that bad. At 6.81 for the most recent year, the company's net profit margin was better than Chevron's 6.15, Exxon's 6.33, ConocoPhillips' 3.23, Total's 6.23, Royal Dutch Shell's 4.57...you get the idea.
How can this be?
Obviously BP has been cutting corners. How much of this outperformance is because BP has been cutting corners left and right to get projects done earlier than they would have been? If the Company doesn't file for bankruptcy, one would assume that the days of massive corner cutting are gone. In turn, BP's margins will be significantly less impressive in the future. It is difficult to quantify how much worse its profit margins will be, but I suspect that additional regulation and less corner cutting will have a material impact upon the company. Heck, the U.S. could even ultimately ban BP from drilling in the U.S.
I guess that my point is that people seem to be betting that once this disaster is past us (and I wouldn't be surprised if they aren't able to stop the gushing well until some time this winter) the company will slowly return to business as normal, like what happened with Exxon and the Valdez. Well this isn't an isolated incident that happened because a Joseph Hazlewood-like tanker captain got drunk on the job through little fault of the company. The Horizon incident is one of a string of problems that BP has had, including the Texas refinery and the Alaska pipeline, that show without a shadow of a doubt that the company cuts corners and ignores saftey in the name of profit.
I liken BP's recent annual results to Mark McGwire, Sammy Sosa, or any other roid-monger's steroid, HGH, and amphetamine fueled power surge in major league baseball several years ago. Look at what has happened to scoring in MLB this year now that full testing for many performance enhancing drugs has been implemented...pitching is dominating. We've already seen more perfect games thrown this year than in any other and we aren't even at the All Star break yet.
BP is the corporate equivalent of baseball's Gary Matthews Jr. Mathews unexpectedly put up a career year in 2006, with 19 HRs, 79 RBIs, and 194 hits. Impressed by his statistics, the Anaheim Angeles signed Matthews to a 5-year, $50 million contract. The following season, rumors surfaced that Matthews had been cheating by using Human Growth Hormone. Once he stopped taking it (allegedly), his numbers fall off a cliff. Matthews batted only .242 with 8 home runs during the 2008 season. He has been mediocre ever since.
I strongly suspect that the "old" steriod-fueled BP is long gone. The new company will probably be significantly less profitable going forward. There is still a lot of upside here if BP survives, but not nearly as much as some people think.
Deej
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