Saturday, June 19, 2010

Speculating on the Future of BP after the Gusher

It has been two months after the accident on the Deepwater Horizon rig in the Gulf of Mexico.

This week, BP's top executives got pilloried in Congress. They had it coming even if it wasn't entirely fair. And BP agreed to establish a $20 billion compensation fund for damages caused by the oil gushing into the Gulf from BP's damaged well.

So what does the stock market think? BP's stock price has been on a downward slide as each successive attenpt to cap or stem the flow have failed. But this week it showed signs of stabilizing.

There are several publicly-owned companies involved in the disaster:

BP P.L.C. (BP) - owns 65% of the well. Says Standard and Poor's Analyst Christine Tiscareno: "Despite BP's shares being technically undervalued, in our view, we believe uncertainty will remain until the escaping Gulf of Mexico oil flow is capped." BP is down 48%, a loss to shareholders of $92 billion.

Anadarko Petroleum Corporation (APC) - owns a 25% non-operating interest in the well. Says Standard and Poor's: "the maximum insurance APC can collect is $162.5 million. Given the ongoing severity of the event, we believe APC's financial liabilities could be much higher." APC is down 42%, a loss to shareholders of $15 billion.

Mitsui & Company (MITSY) - owns a 10% non-operating interest in the well through its subsidiary Mitsui Oil Exploration Co. and MOEX Offshore 2007 (MITSY's share is 7%). Says Mizuho Asset Management VP Takashi Aoki: "The impact of the liability cost has been more than compensated for in the current share price." MITSY is down 25%, a loss to shareholders of $7.5 billion.

Transocean, Ltd (RIG) - operated the Deepwater Horizon drilling rig. Says Standard and Poor's Analyst Stewart Glickman: "We think RIG still bears legal risk for crew members killed or injured, and potentially could see indemnities voided if the courts make a finding of gross negligence against RIG for its role in the accident." RIG is down 39%, a loss to shareholders of $11 billion.

Halliburton (HAL) - provided oil field services for the well. It seems to have been largely exonerated, at least by the stock market, although its oilfield services business will undoubtedly be affected. HAL is down 15%, a loss to shareholders of $4.5 billion.

And what about the stock market itself? It's down 8% since the disaster. How much of that 8% can be atrributed to the disaster verus other factors cannot be known. The energy industry as a whole is also down by that same percentage, so clearly nothing that has happened in the Gulf has changed the relative profit equation in our economy's need for energy.

So the total loss to shareholders of the companies involved is $130 billion. Even assuming $16 bilion of that is due to the general market decline, that leaves $114 billion. Why is that so much more than the $20 billion BP compensation fund?

Certainly, shareholders have to shoulder the costs and damages of the accident, and also the damage to the company business which can both be financial and reputational. Still, it appears the collective opinion of the stock market thinks it knows something that the rest of us don't.

It could be that the stock market thinks there is a 50% chance that BP stock will largely recover its value, and a 50% chance it will go to $0. Of course, the stock market doesn't itself think. The market's individual participants do the thinking and their collective opinion, which could be right or wrong, is what makes the market.

Or the stock market may figure that with the shares beaten down to 52 cents on the dollar, there's a 90% chance someone will come along and offer 60 cents to buy the whole company. If the underlying values then recover to 90 cents, that's a 30 cent profit for a cool $57 billion, just not for the current shareholders.

Care to speculate? You can see from the trading volume numbers that there has been a gusher of trading in BP stock these past few weeks after several weeks of lower volume.

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