If the BP (NYSE: BP) saga is a tale of three acts, Act One will soon be complete. The company’s leaking well is almost capped, new management is in place and a plan is emerging that will help cover recent costs and make sure the balance sheet doesn’t collapse.

Act Two, which will play out during the next 18 months, will involve implementing the turnaround plan. And Act Three, which we’ll likely see in 2012, will be a new, smaller, post-crisis BP that is once again valued on future profits and not simply a rough guess of assets and liabilities.

BP’s debt/cash flow balancing act
On its second-quarter conference call, BP management laid out plans to cover the spill’s costs by taking out a $32 billion charge. In our initial assessment back in early June, we assumed that costs would be less, in the $10 to $20 billion range. After our initial analysis, shares fell even further as concerns grew that liabilities would break the company.

Shares have recently rallied to slightly above where we wrote about the company in June, though much has changed since then. Estimates of the amount of oil leaking grew far higher, yet the leaking well also looks like it will be capped earlier than many had forecasted.

Now for Act Two. BP is looking to sell its Argentinean energy assets for about $9 billion, according to the Wall Street Journal. Assets in Alaska, Pakistan and Vietnam may also be on the block. The challenge for management is to raise enough cash to cover eventual costs, but to also keep that effort in check. The last thing the company wants is to sell off too many assets, imperiling future cash flow more deeply than necessary. As some of the spill-related costs will not need to be paid for several more years, BP could decide to limit asset sales and keep its dividend on hold, paying down debt through cash flow.

BP’s upside: separating fact from fiction
Once those actions are completed and the full scope of BP’s liabilities has been clarified, investors will be able to move on to Act Three. Prior to the spill, BP generated roughly $40 billion in annual EBITDA and $8 billion in free cash flow. Just before the spill, when shares traded hands in the low $60s, BP had a market value of around $195 billion and an enterprise value of about $220 billion — meaning the company was worth about 5.5 times EBITDA on an enterprise value basis. As the company sells off cash-producing energy fields, annual EBITDA will have to shrink.

BP just announced that it will sell another $23 billion in assets, in part to cover ongoing spill costs and in part to reduce debt by $10 to $15 billion. (The company recently sold $7 billion worth of Canadian oil fields to Apache (NYSE: APA). Roughly speaking, annual EBITDA could fall closer to $32 billion and annual free cash flow could move closer to $6.5 billion. (But take these forecasts with a very large grain of salt).

Accounting for expected asset sales and the planned debt reduction, the company’s pro forma balance sheet would translate into an enterprise value of about $125 billion, assuming shares stay near the current $38 level. Putting a multiple of five on projected EBITDA of $30 billion (which is slightly below the 5.5 times multiple garnered before the spill), then fair value looks to be around $150 billion. This implies roughly +20% upside in the projected enterprise value from current levels, and closer to +25% from a market value perspective.

But this is still a high-risk story. For example, what if the pile of lawsuits turns into massive unexpected payouts? What if the U.S. government decides that the initial $20 billion to cover clean up costs is insufficient? What if the company’s estimate of leaked oil turned out to be far too conservative, increasing the chances that it will be found of gross negligence? In that context, it’s not clear that it is worth investors’ money to take a chance on the moderate potential upside.

Action to Take –> I am contradicting my earlier assessment and no longer think that investors should take a risk on what no longer looks to be significant upside, especially after the +40% rebound since bottoming in late June. Investors can find ample opportunities in this market that offer similar upside, without that risk.