market folly

David Einhorn recently penned his Greenlight Capital year-end letter. In it, we learn that the manager started a brand new position in BP (BP) during the fourth quarter. Greenlight's average purchase price was $41.18 per share.

Of his new stake, Einhorn writes,

"The Deepwater oil spill in April 2010 caused a significant decline in BP's share price. BP reserved nearly $40 billion pre-tax to account for costs related to this accident and has thus far sold $22 billion of non-core assets (with a stated target of up to $30 billion in divestitures), leaving the balance sheet in excellent shape. Pro forma for these asset sales and after taking into account our estimate of BP's eventual oil spill related expenses, we expect BP will be able to earn nearly $20 billion per year from continuing operations. At less than 7x pro forma earnings, we purchased BP at a 25% discount to its peers."

Einhorn also feels that the company will be able to re-instate its dividend this year. His hedge fund is already up on its position as BP shares trade just north of $48 per share currently.

His new position is intriguing for a few reasons. First, this is his second subsequent oil-related purchase in 2010. As we've detailed previously, Einhorn bought Ensco (ESV), an offshore contract drilling company whose shares sold-off during the oil spill despite ESV having no involvement in the actual spill. We penned a previous investment analysis on ESV in our Hedge Fund Wisdom newsletter (free sample issue with ESV analysis here).

If anything, ESV was hurt by the near-term oil drilling moratorium that was enacted. Shares of ESV have appreciated significantly since Einhorn's original purchase and it is now one of Greenlight's top 5 positions.

Second, this investment is intriguing due to its timing. Many would argue that the time to buy BP was during the actual oil spill itself, as shares spiraled from $59 down to $27.50. After all, "buying when there's blood in the streets" is often a value investor's mantra. We already know of one such value investor that dove in head first, as Whitney Tilson's T2 Partners bought BP during the spill.

It's most likely that Einhorn waited to make his investment due to the large uncertainty surrounding BP, its financial condition, and the potential liability associated with the oil spill. For further analysis of the oil company, be sure to check out T2 Partners' presentation on BP. And for more recent commentary from David Einhorn, head to Greenlight Capital's year-end letter.