Buy BP Shares At 2009 Lows
- The biggest market in the world = oil
- BP shares fall to $36
- Exxon shares rose +800% after Valdez
- Buy the dip on BP shares
Crude oil is arguably the most important commodity in the world. It’s easily the most traded commodity. Every other sector, business and commodity in the world depends on oil. Simply put – the market is huge.
So when you get the chance to buy oil companies at cheap valuations, you should pounce early, often and with unwavering decisiveness. Oil’s not going anywhere – it’s going everywhere.
That’s why it’s important to get your portfolio in front of the long, inevitable trend of higher oil prices. It’s the biggest and most important market. That’s why I sincerely hope you think about buying today’s cheapest oil company in the stock market.
But before I tell you about this company whose shares are currently selling close to its 2009 lows, I’d like to answer the question: Exactly how huge is oil?
These platitudes about oil’s importance and size frequently get passed around by members of the popular media like bottles of Gallo Rosé wine at a Grateful Dead concert – so indulge me to show you the exact numbers to help you wrap your head around the sheer magnitude of the situation.
Back in April of this year, a new daily volume record was set on the Intercontinental Exchange (ICE) for West Texas Intermediate Crude (WTIC) contracts – with an astounding mark of 464,381 contracts traded in just that one day. Each contract trades 1,000 barrels of oil.
With oil prices around $84 that day, each contract was worth about $84,000. So, it means that over $38 billion worth of oil contracts traded hands in that one day alone.
Granted, that was the daily record, but the WTIC futures regularly bypass the $30 billion mark on an average day. To put it in perspective, $38 billion is more than the annual earnings of Wal-Mart (NYSE: WMT), the world’s largest corporation.
Furthermore, WTIC is just one type of crude oil, traded on just one futures market. There are at least a half-dozen other crude oil contracts in a handful of different futures exchanges.
And as I said earlier, when you get the chance to buy an oil company on the cheap, you have to act quickly and decisively. Oil is the biggest game in town, so if you’re not buying the best companies in the sector then they’re cheap, then you’re missing out on some of the most reliable gains in the whole stock market.
If you’ve been a Resource Prospector reader for very long you’ve probably heard me talk about this company.
I mentioned this company yesterday, but I also put in a target price almost one month ago.
I’m talking about BP Plc (NYSE: BP).
Here’s what I wrote on May 3, 2010:
“Not to compare the 1989 Exxon (NYSE: XOM) Valdez disaster to the current Louisiana tragedy – but in terms of creating a buy opportunity, I think it’s a fair comparison.
Investors who bought Exxon one month after the Valdez tanker ran aground have seen their shares appreciate nearly 800% in the ensuing 21 years. That’s the kind of gain you can only get by buying when something is cheap and hated.
Right now there’s no question that BP is hated. Our popular President is leading the charge against BP. President Obama has since changed his mind about Gulf drilling, and has shut down all new exploration and drilling in the Gulf. Despite how you feel about oil companies, and BP in particular, it’s hard to imagine a scenario where oil prices will fall given the current climate.
My point is: BP isn’t going anywhere. They’ll likely get sued, possibly for billions of dollars. They’re on the hook for at least $3 billion in clean up costs. But they have so much income from so many other locations outside of the Gulf of Mexico, and they’re sitting on over $10 billion in cash, that there’s a stellar buying opportunity in the near future for BP.
If BP stock approaches 2009 lows of $35 a share, I think it would be foolish not to buy. Maybe it’s icky, but there’s nothing icky about potential 800% gains.”
Today, BP is approaching that $35 mark, closing yesterday’s trading session at $36.52.
The 2009 low for BP shares was just below $32.50. And prior to that, the last time this stock traded in the mid-$30s was back in 2003. That’s an important psychological level for this stock.
But consider this: when BP sold for $32.50, oil was $35 a barrel. That meant much lower profits for BP – so it’s understandable that the stock was so cheap. Today, oil is cruising above $70 a barrel.
I’m sure that the Gulf leak will hit the bottom line for BP – but I don’t see how it could be as disastrous as $35 oil. The point is, BP is way oversold right now, and it’s largely due to negative investor sentiment, not based on the long-term fundamentals and earnings power of this oil giant.
Right now, I’m trying to convince my wife to let me buy shares of BP in our brokerage account if it hits $35, but she is staunchly resistant. If I can convince her, I’ll gladly buy in tranches all the way down to $32.50, and then back up the truck at that price if it bounces.
If not, I’ll be satisfied with the near 10% dividend BP currently pays. Even if they cut their dividend, I wouldn’t mind owning the third largest oil company in the world at barely 6 times earnings. It’s an unbelievable price for this blue chip company, and I sincerely hope that some of you are able to convince your spouses or yourselves that despite this horrendous spill – BP is a great company to own today.
Remember, being a contrarian investor sometimes means holding your nose and doing the opposite of what seems right. BP fits the bill. I know my colleague and Energy World Profits editor Ian Wyatt has been “long” BP shares for a couple months now, and is adding to his position in the stock right now. Ian just released a full report on another group of oil companies that are currently drilling in an American oil resource known as the Bakken. Some estimates put this oil reserve at over 400 billion barrels of oil, which dwarfs any oil find in the past 30 years. Click here for the full write-up on this opportunity.
Good Investing,
Kevin McElroy
Editor
Resource Prospector
