The daily spill estimate has been ratcheted up from 1,000 barrels a day to 35,000, and now 60,000! Fitch downgraded its debt a stunning six notches from AA to BBB. Obama’s oval office salvo was directly aimed at the firm. $20 billion has been forced into an escrow account to cover damages. And now lightning has struck their crude recovery ship! Is it possible that the capitulation sell off in BP stock is at hand? When I considered making an investment in a limited partnership in an offshore well to be sunk by Transocean (NYSE: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.