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Why Does Billionaire Value Investor Seth Klarman Own This Supermajor?

Thursday - 5/23/2013, 5:30pm  ET

Billionaire Seth Klarman, the "Oracle of Boston," disclosed in his latest 13F filing that he has added to his position in BP . Baupost Group started buying BP in the second quarter of 2011 with an initial 5.5 million share purchase. The fund now owns more than 17 million shares of BP, making it Klarman's single-largest holding worth over $725 million (check out Klarman's cheap stocks).

Who Is Seth Klarman?

Seth Klarman started the Baupost Group in 1982 with an emphasis on value investing. Assets under management have grown from $30 million in 1982 to $29.2 billion at the end of last year. Seth Klarman has achieved cult-like status among value investors for his book, “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor,” which was published in 1991. He keeps a low profile and has a very large following among value investors. The book currently sells for $2,199 new and $999 used on Amazon.com. Since inception the firm has achieved an average annual return of 19%, one of the best performances in the industry.

A Closer Look At BP

BP is one of the world's six Supermajors, or largest publicly owned oil and gas companies. BP really cemented its status as one of the world's leading oil and gas companies with its acquisitions of Amoco in 1998 and ARCO in 2000. Today BP operates in over 80 countries and has over 17 billion barrels of oil equivalent in proven reserves. The company operates over 20,000 retail sites and has interests in 16 refineries. BP also owns Castrol motor oil.

BP's biggest problem occurred in 2010 with the oil spill in the Gulf of Mexico. BP's stock price dropped over 50% in the weeks after the spill and cost shareholders $100 billion in market value. The stock reached a low of just under $27 per share before rebounding. This is when many of the smart value investors like Seth Klarman began to buy BP shares.

After this accident BP initiated a corporate divestiture program to raise $38 billion to offset liabilities from the oil spill. By selling these non-core assets, BP shrunk from the world's second-largest publicly traded oil and gas company to the fourth. Even though the sales shrunk BP, in my opinion the divestitures re-focused BP and made the company into a much leaner and better-run organization. 

BP Is In The Best Position To Capitalize In Russia

BP is the second-largest shareholder in Russian oil giant Rosneft, after the Russian government. BP owns 19.75% of the largest Russian oil company after Rosneft bought BP's stake in TNK-BP. BP has long had a contentious relationship with its Russian partners in TNK-BP, but now that it is aligned with Rosneft, BP's future in Russia looks much brighter. Rosneft produces 4.5 million barrels a day. BP hopes to increase that output further with its technological expertise and management know-how.

First on BP's agenda with Rosneft will be to explore the Arctic. The Barents Sea has enormous potential for hydrocarbon development and BP has been working to explore the region for years. Rosneft CEO Igor Sechin has said:

We intend in the near future to draft documents and will offer our partners at BP to look at blocks in the Barents Sea. I believe that the Barents Sea is the most prospective zone for work with BP.

Competitors

In looking at two other Supermajors, ExxonMobil  and Chevron , we see how they stack up against BP.

  BP  Chevron ExxonMobil
Market cap $137B $239B $408B
Revenue (TTM) $374B $217B $413B
P/E 6.05 9.33 9.33
PEG ratio 1.73 6.28 6.23
Price to sales 0.37 1.10 0.99

In comparing these three Supermajors, we see that BP is undervalued compared to Chevron and ExxonMobil. BP has a lower P/E, PEG Ratio and is cheap on a P/S basis. Chevron has one of the top project pipelines in the industry, targeting volume growth of 20% by 2017, which is more than the rate of growth from 2003 to 2010.

Management has been making key strides in re-balancing Chevron's asset portfolio by divesting non-core and high-cost assets, this includes its decision to sell its marketing businesses in Kenya, Nigeria, Uganda, Western Africa and Brazil. Chevron also has plans to concentrate on the higher-margin discovery of oil and gas business. Billionaire Ken Fisher of Fisher Asset Management was the top hedge fund owner by shares going into 2013 (check out Fisher's top picks).

Exxon is the world's largest publicly traded oil company. What's more is that over 83% of Exxon's earnings come from its operations outside the U.S. The company operates on all sides of the oil business, with three segments:  upstream, downstream, and chemicals.

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