The Mexican Gulf disaster of 2010 was a huge blow to BP, costing them $41bn in lost income and liabilities. The company is left with an $11bn liability, which does not include the possible civil penalties that the company might incur, apart from the Clean Water Act penalties. Therefore, BP remains a risky stock, but is it worth trading?

Using a basic Enterprise Value/EBIT model, we can see that BP is not particularly cheap. However, this model only values the company as it is currently, and doesn't take into account the company's potential.

The true value of an oil company lies in its ability to find oil reserves and extract them. Much of the reserves that BP own have been too heavily discounted by the market, as BP is way below the group's average of $14 per BOE of reserves. If you compare price/earnings and net profit against the dollars per BOE of reserves, you will observe a similar relationship, as BP's potential appears undervalued relative to its peers.

This undervaluing indicates that the market expects a higher liability from the oil spill. If you are more of a momentum trader than a value investor, then BP would seem to be a very attractive investment, with share values having increased by 70% since the spill. If a legal settlement for the total cost of the spill is arrived at around the $50-60bn mark, it could send BP stock through the roof. 

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