This page has been archived and commenting is disabled.
Is it Time to Buy BP?
When I considered making an investment in a limited partnership in an offshore well to be sunk by Transocean (RIG) in the late nineties, I was scared off by a 1979 incident that my research turned up. An inexperienced PEMEX, Mexico’s state owned production company, suffered a blow out at their Ixtoc-1 well during a drill bit change in only 160 feet of water. The rig sank, 63 workers were injured, and the mother of all spills commenced. PEMEX was only able to plug the runaway well after drilling two adjacent relief wells in ten months, but not before 3.3 million barrels of oil poured into the Gulf.
While the environmental damage was widespread, the oil dissipated fairly quickly because of its location--south of the Tropic of Cancer. Since crude has a chemically volatile nature (that’s why it makes your car go), the rate of degradation doubles with every 10 degree centigrade rise in temperatures. With BP’s first relief well’s completion due in August, it looks like the total spill could match that seen in 1979.
Living in California, I admit to being a card carrying environmentalist, but even I can recognize when the impact of this disaster is being vastly exaggerated. This is all relevant for investors when it comes to considering an investment in BP or RIG.
The worst case estimates for the troubled oil major’s liability now stands at $40 billion, but with the shares now down from $60 to $29, it has lost $90 billion in market capitalization. Is that too much? Is the extra $50 billion purely the result of media hyped emotion? Count on a mega rally in the entire sector, and the market as a whole, the day they finally cap this thing. For a company that is now selling at a PE multiple of 4.5, which generates $30 billion a year in cash flow, there is a lot of room for error. BP is also a ripe takeover target at this valuation, presumable by another firm with a very big legal department.
The lower risk play here is to buy BP’s 5.25% 2013 notes, which this morning were yielding an enticing 8.5%, putting it well into junk territory. That way if the firm does go bankrupt, at least you are a senior creditor.
By the way, those who took my advice to buy Transocean (RIG) at $52 are now up 5% on the trade. But it’s probably the hardest 5% you ever made. The addition of the Swiss based company’s shares to that country’s stock index created a temporary boost as funds loaded up to track their benchmark.
You didn’t know that denizen of the Louisiana bayous ate cheese fondue for dinner? RIG was one of many US companies that fled overseas many years ago to escape US taxes. Of course, the way to make 5% is definitely not to lose 21% first. The entire BP story is generating more tape bombs than any other in recent history. So if the current is too strong for you and the pool too deep, here is your chance to bail out. Stock prices don’t have much to do with fundamentals these days, anyway. Of course, I still think the stock is a steal here. But for many it will be better to troll less troubled waters.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
- advertisements -
I'm sure CalPERS will be going long post haste. Honestly, BP is a horrendous company who is responsible for killing the coast lines of 5 states. Do we really need to reward that sort of thing? Gads, so much easier to trade oil futures rather than fret about whether one shaky equity will have a dead cat bounce.
Are you Long on Jonestown?
Psst...Treasurie Bonds.
We should include in this analysis how the Rothschild family may protect their investment.
You are nieve if you believe that $20b in the escrow fund is the "end" of the penalties. When its all said and done, I believe the penalties/fines/lawsuits will be closer to $150-200b, bankrupting the company, and wiping all common shareholders and even bondholders.
My reasoning? The internal BP docs show that the spill is at 100k barrels/day, multiply that by the $4300/barrel fine and as of today that means there is a ~$25b fine (not counting environmental/economic damages lawsuits). At the earliest, we have another 60 days before the rosiest of scenarios involve stopping the leak. Thats another $25b in fines. If there is a hurricane in the gulf this summer season, all bets are off. BP instantly goes to $0. If the well isn't capped by August, it continues to increase the legal costs at $25b every two months. Add on top the economic damages (lost wages/income for the entire gulf coast) and $100b is suddenly a low-ball figure.
Compare the Exxon Valdez costs to now. This spill is 30x the size of the Valdez spill and is growing by the day.
@ Cyan Lite:
I can't refute your back-of-the-envelope estimates, but your comments should be taken seriously, since BP is hiding a substantial amount of data, including "mudlogs", as I mentioned in my post below (I didn't see your commentary; otherwise, I would have included my post within this reply!).
I too plan to buy BP, but not until it is coming out of bankruptcy. This spill did not occur in a third world country, but right next to the television capital of the world. Wait until the dead whales and dead manatees show up on TV.
If you think this is a good place to catch a falling knife, go ahead.
I'm just trying to figure out how many dead dinosaurs and whales it took to make 100,000 barrels a day of fossil fuel 5000 feet under the ocean to begin with.
If you have a hard time getting your head around that, try abiotic oil.
Are you telling me the school textbooks were wrong?
Actually I must confess that I just ran into an article about abiotic oil last night for the first time. I hadn't thought about how oil was created since school and I was a little thrown off. I'm feeling kinda foolish for not ever questioning WTF.
Hard to believe dinosaur bones are 20,000 feet beneath the ocean where ocean depth is 5000 feet. Old wells that have been not been drilled for years are now replenishing. Might be something to abiotic oil.
That chart is just hanging there with a lot of empty air underneath it.
Go ahead, You first. LOL
We wish you well in your BP endeavors...
http://www.cnbc.com//id/37814415
Those that take money from the 20Billion Fund, give up the right to sue.......Sweeeet.
Yup!
And if you researched who administered the 9/11 fund, you might observe a pattern!
Cooter
Are you trying to pump BP?
That is like those idiots 2 years ago trying to pump CITI when it was down to 20$!
BP is going to be toast within a year. It's not because a company makes 1 billion loss that market cap goes down 1 billion. BP is a 5% div. stock, so any loss will subtrackt 20X of the market cap. This 20 billion fine is their tombstone. Markt my words.
I live on the Gulf coast 120 miles as the crow flies from the well. We have been hearing for two months now, the "oil is coming, the oil is coming." Saturday the local media screamed "Its here, its here." So, I head to the beach to see for myself. I walked a half mile looking for a spot of oil and found not the tinyest drop.
I laugh my ass off at this George Washington character who serves as mouthpiece for all the university professors drooling to get Federal research grants. It is the professors who propagate all these phony doomsday storiesby feeding them to the drooling media. I suggest that before you buy BP stock, come here and see for yourself "the worst environmental disaster in history." You will be amazed at how little you see, even at the expicenter Miss delta. If anything, this is the most hyped and overblow "disaster" in history.
So far they have counted 1,243 dead birds. How many birds are killed in hurricanes? Millions.
MFT is correct that the intense subtropical sun and very warm waters will evaporate away the VOCs and reduce the liquid oil to tar balls which, over fairly short time becomes like asphalt as it gets mixed with sand on shorelines. All this is in contrast to cold water spills where the oil never evaporates and remains nearly forever, i.e., Alaska. Therefore, I submit that the damage caused by this spill is being grossly, grossly overstated and I seriously doubt that BPs liabilities will exceed the $20 billion.
Noah, maybe your fat ass can't see the oil from your lazy boy as you sit there waiting for your next unemployment check from the savior, but the damage is real and the well is still not capped. Maybe the MSM is bored with showing oil all over the marshes but the oil is as thick as your skull.
I was in Houma for work. "Work" was with one of the larger contractors on the job. And guess what? They are/were only cleaning the surface.
So that might be why you don't see anything. The equipment is called skimmers. Couple that with dispersants and guess what? Surface is clean.
At least "cleaner." :p
So you're buying December BP calls with all the money you can beg, borrow or steal, right?
Yes i think he is. Like he tried to pump RIG - which would have given anyone an immediate 20% drawdown and yet here he is patting himself on the back for a 5% gain which as we speak is evaporating (all due to an index shuffle and the market bounce as a whole)You could have made a much easier 4% buying the broad market instead of a VERY risky punt - who sits through 20% drawdowns in days on a stock that could also be wiped out due to the mother of all black swans. Quite incredulous advice.
Im still at a loss as to why he is allowed to pump his nonsense here.