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nealkwu
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  • BP and Oil Drilling Fears Overblown 0 comments
    Jun 9, 2010 4:45 PM | about stocks: BP, RIG, NE, DO
    The way I see it, this disaster creates the perfect situation to invoke excessive fear in the market. You have a disaster that keeps going for 3 months and estimates just keep getting worse and worse. You can clearly see some ridiculous fears in some people who quote the spill at 250k-1million bbl/day. Those are ridiculous numbers but I've seen them several times in the news. Fear just keeps building on itself and is causing some huge changes in prices. I agree that RIG, Noble are safer bets, as neither has any liability in the spill. RIG if it is grossly negligent would, but that is extremely unlikely (using fake parts lol, not likely), BP was in complete control of the RIG and takes all liability from RIG. Looking at other offshore drillers really emphasizes my point.

    Noble has ~15% of its rigs in the GULF the rest are international, around countries that care about money, Middle East, India, etc. These countries will not stop drilling because of US laws or environmental impact. Saddam opened his oil wells during the war (biggest spill ever by far) and other middle eastern countries would likely do the same. In addition, I doubt the US drilling ban will last longer than a year. Offshore drilling provides a huge amount of jobs for the gulf and is an important part of the US's oil production, even the gov of Louisiana (the state most effected) is against the drilling ban because it will damage the state's economy.

    BP is obviously the most risky bet in the group that had this decline, and until recently, RIG and NE were probably a better bet. But BP is becoming more and more attractively valued. Bankruptcy for the company all out is not going to happen, even if the US wanted to change laws retroactively so it seized all assets without a 10 year court battle (not gonna happen), BP is a British Company and would have a massive writeoff but recover, this is the absolute worst case scenario, and is already priced in. England would never bow to US demands for ownership over the company, impossible. BP makes up ~15% of British pensions doing so would be political suicide.

    That's the worst case situation, what is more likely to happen is everyone is really pissed off, but the courts take forever to go through everything and BP will probably pay 5-10 billion in cleanup with 5-15 billion in legal fees. For a max of 25 bil, but likely 15bil tho. The damages will be limited, the oil will not destroy a city, a la Katrina, and there is a 75 mil cap on liability, and a government fund of 1.2 billion for that liability. All this about BP being extremely unsafe is might have some merit but these documents also show the government approving these practices consistently. 

    As far as continuing damage the LMRP cap seems to be working quite well. 15k bbls a day is a lot and although it speaks to the size of the spill being higher than though, there is evidence that the majority is being captured. Looking at video you can occasionally see the yellow LMRP cap through the plume escaping out the bottom, this puts a finite limit on the amount escaping, as if it was more the escaping plume would be completely opaque. Improvements to the LRMP will continue and the spill will likely become less pronounced over the next 6 months.

    In conclusion, I believe that although this is a terrible disaster and BP should be liquidated for the victims and cleanup, however, that will not happen and BP will be an excellent long term investment, short term extremely volatile, but over time the costs will become finite and the market will value the company accordingly. As a bonus for investors any payments will be tax free, BP is taxed at 35%. Since the spill costs are already in the price, BP's profit is essentially increased by 50% (1/.66). Essentially making 10 billion a quarter, with a marketcap of 95 billion thats not bad. 

    As a note on ethics I think the way the oil industry handles safety is pathetic and stricter regulations are needed. The fact that none of the oil majors have a contingency for this situation is absolutely ridiculous. The BOP could easily be designed with access for a situation like this but they didn't bother. Unfortunately and unjustly it will be the residents and wildlife of the gulf coast and the will pay the price. However, morally buying into a company is not endorsing its practices, my purchase does not give any money to the company, as it is not an IPO, and if everyone decided not to buy it the stock price would go to zero the board could take complete control and reap 6 billion in profits a quarter (a hyperbole obviously).

    Oh, and take everything above and remember BP is only responsible for 65%. I have been slowly averaging money into these companies as they have dropped, and have lost a bit. I don't really have a problem with this tho, short term volatility and all. I do have limit to how much I will put into it tho as risk management, diversification are important.

    Also the mexican spill in the 80's was on par with this although not near the more delicate marshlands, total cost 150 million. Were damages more, of course, but legal safety nets protected the Mexican company. BP has an immense amount of legal protection about it, and although less that the mexican company will fair far better than the market is giving it credit for. As far as divided cuts, if they do so it will be for PR purposes only, and I don't believe they will, Tony quote "I pay taxes so I don't go to jail, i pay dividends so I don't get fired."

    Disclosure: Long BP, RIG, NE

    Disclosure: Long BP, RIG
    Themes: Fear, Oil, Drilling Stocks: BP, RIG, NE, DO
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