As a news geek, investing wonk, political junkie and business nerd, I’ve followed the BP (BP) oil spill story with a mixture of revulsion and fascination. There seems no end to the gush of oil and invective and tragedy and intrigue.
There's also plenty of investment opinion, including from experienced value hunters and brave bottom callers who look at BP fundamentals and see a bargain. These analyses often compare estimated spill liabilities to BP’s past revenue and cash flow, current valuation or market cap, indicated yield if the dividend were reinstated, and similar factors.
But I’m not buying the analyses or the stock. Because here’s what my news geek voice is whispering in my investing wonk ear:
Ignore BP valuation numbers, cash flow forecasts and the rest of it. BP is trading on developing news stories. Unless you can predict that news, you can’t have confidence in BP as an investment.
Think my news geek voice is kidding around? Predict these …
Will a ‘relief well’ succeed in August or later or never?
The current plan to stop the leak, not just collect spilled oil, rests on two relief wells now being drilled. BP and the government anticipate an August completion.
And that’s what the stock market expects, but what nobody can predict.
Because industry experts and BP technicians say relief wells are tricky business. Last year’s spill off the Australian coast required five relief well attempts before one succeeded. And it took nine months before relief wells plugged the large 1979 spill off Mexico’s coast.
Worse, BP’s relief wells might not work at all, due to damage and leaks detected beneath the sea floor. According to former Shell Oil (RDS.A) President John Hofmeister, the failure of relief well efforts would require attempting the “drastic step” of imploding the well on top of itself.
Watch BP’s stock sink deeper than the well if August ushers bad news - or soar if the news breaks favorably.
Will the U.S. government restrict BP’s drilling rights?
BP, among the largest operators in the Gulf, rings up a good deal of its revenue from federal oil leases. Optimistic forecasts see that continuing.
And while President Obama proclaimed “it is in all our interests” for BP to remain a strong, viable company, that doesn’t mean BP is the government’s new best friend in the politics of regulation.
So Reuters called it “somewhat likely” the feds will temporarily suspend some of BP’s oil leases or refuse to grant them permits. Reuters deemed more drastic restrictions, such as barring BP outright or permanently canceling their leases, “not likely,” at least in the short term. Some industry and political insiders interviewed by Bloomberg-BusinessWeek, however, saw a “good chance” of BP getting hit with harsher restrictions on federal leases.
And though the feds recently accepted bids BP made at the government’s March lease auction, the August auction, like new exploratory drilling, was put on hold due to the Gulf spill. More news waiting to happen: where will BP stand when the feds re-open these lease auctions?
What might BP cut besides the dividend?
BP isn’t just cutting its dividend and opening credit lines to fund its liability obligations. According to a Wall Street Journal interview, BP’s asset sales and capital expenditure cuts could “materially erode BP’s competitive advantage versus peers for the foreseeable future.”
What will hurricane season bring?
This hurricane season, forecasters expect fourteen to twenty-three named storms, including Alex, with eight to fourteen of them likely developing into hurricanes.
Everything’s been reckoned from forcing a stop in cleanup and relief wells to pushing the oil further inland to spreading it to different coastlines to dispersing it at sea.
Which will happen and what might the damage be? Nobody knows.
How much will BP collect from partners and subcontractors?
Other companies involved in the spill, and some that are not, have clear incentives to throw BP under the bus. If they do, BP’s costs will rise while its competitive position declines. Not a great formula for the stock’s future value.
Take Anadarko Petroleum (APC), which owns a 25% stake in the project. (BP owns 65%, another partner 10%.)
Anadarko’s contract indemnifies them against liability if they show BP acted with negligence. So in a move to get off the hook, Anadarko blasted BP, accusing them “gross negligence or willful misconduct.”
Anadarko’s 25% share of the damages would pile billions more in liability onto BP. And Bloomberg-BusinessWeek reports growing signs that BP may indeed get stuck beyond their 65% contractual share. Of course, regardless of BP’s final share, the total amount of damages against them could soar compared to current estimates.
Other players in this sorry drama, including rig owner Transocean (RIG) and contractor Halliburton (HAL), say BP contractually indemnified them against liability from the get-go. BP disagrees, saying they share responsibility.
Meanwhile, competitors and Congressional testifiers Exxon-Mobil (XOM), Chevron (CVX) and others need to position this mess as a BP problem, not an industry problem. That way, they can restart lucrative deepwater drilling while BP takes the fall.
Will the damaged well structure fail, creating a billion barrel blowout?
Here’s the ultimate black swan event, the really scary one. Industry veterans, like Robert Cavnar and others, now wonder whether damage and leaking under the sea floor might be severe enough to collapse the remaining well structure. The sea floor then opens, and a massive, “doomsday” blowout gushes much of the entire oil reservoir, at least a billion barrels, relentlessly into the Gulf.
Godzilla meets The Blob.
Asked whether such severe damage to the well and sea floor might have happened, former Shell President Hofmeister said it “is what some people fear has occurred. It is also why the ‘top kill’ process was halted.”
Apparently among the fearful, an experienced industry blogger wrote 4,000 chilling words of detailed technical evaluation, reference material, links and logic, sadly concluding that such a blowout seems likely before the leak can be plugged.
And so …
So my investing wonk judgment defers to my news geek voice. And my business nerd and political junkie curiosities still puzzle that all this could happen to begin with.
Finally, investors without the audacity to hope for a BP dividend reinstatement might check out the 5% yields from some good but beaten down dividend growers.
Click the following links to see my Seeking Alpha articles on Microchip Technology (MCHP) and Dividend Achiever Mercury General (MCY). Perennial optimists might also look at the dividend discussion in the latest Paychex (PAYX) earnings transcript on SA and my article on the company.
Disclosure: Long CVX