Welcome to the Energy and Capital’s Weekend Edition — our insights from the week in investing and links to our most-read Energy and Capital and sister publication articles.
This past week, I was surprised to hear a few investors were buying BP shares hand over fist.
I recently asked my colleague, Adam Sharp, for his thoughts on BP’s latest troubles, and whether or not their 36% decline (since the April 20th spill) has become a bargain for investors.
His response was a sobering reminder that the BP oil spill could easily bring the major oil company to its knees.
So before you start your own buying frenzy, take a moment and let him weigh in on the matter…
Will BP Go Bust?
By, Adam Sharp
Three weeks ago I wrote an article titled, “Hold Your Nose and Buy BP Stock.” That made writing this piece a bit… awkward.
But I’m not one to shy away from mistakes. It was a bad call.
That said, I sold my BP shares for an 8% loss a few days later (and posted a comment to notify readers). That was around the time when it became apparent that BP and reality were out of touch.
Officials from BP were still saying the leak was only gushing 5,000 barrels of oil per day. But good ol’ fashioned journalism by Richard Harris and others at NPR said otherwise… They went out and interviewed scientists who are experts in the science of flow-rate analysis to get estimates on how much oil is really leaking out. (Curious that BP or the EPA hadn’t thought of this… )
When those estimates indicated 5 to 20 times higher levels than BP was estimating, I got worried and sold. It helped me avoid a bigger loss on my BP shares, but the broader implications are what really disturbed me.
Now that we know the top-kill effort appear to have failed, I am seriously starting to think that BP may not survive this event. And I’m not being hyperbolic here; if I had to hazard a guess, I’d say there’s at least a 40% chance BP will not find their way through this mess.
When I had the bright idea to buy BP, it really did look like a bargain. It was a $170b company that lost 20% of its market cap (around $30b) due to a disaster that might result in up to a one-time charge of $6b(?!)… $6b is chump-change to a company with an average daily profit of $43 million (in 2009).
The dividend yield on BP was also tempting (another reminder where the term “dividend trap” comes from). But that was before we knew just how bad the disaster would become… and how poorly efforts to plug the leak would go.
Compared to Valdez
The Valdez grounding dumped 11 million gallons of crude into the ocean. Using the most conservative estimates, the Gulf disaster has already released 18 million gallons, and that number may be much higher — 100 million or more.
The Gulf Coast is also a much more important (environmentally and economically) area than Prince William Sound, where the Valdez went aground.
In inflation-adjusted terms, Exxon’s Valdez disaster cost around $7b all told. This is going to be much, much bigger than that.
Nobody knows exactly how much the spill will end up costing BP. Early estimates ranged from $500m to $3b. Those estimates have been steadily rising.
I’d be shocked if the total bill came in at less than $50b; $50b is the low end of my range, which goes up to around $200b.
Could BP raise $200b if they needed to? Maybe, but I doubt it… Such a huge capital raise would be unprecedented, as far as I know.
One of the other majors may step in at some point and buy BP, but that would be taking a huge risk (and may not even pass scrutiny over monopoly concerns).
At least two more months of oil gushing into the Gulf
With the top kill effort having failed, experts say we’re looking at at least two more months of oil gushing into the Gulf of Mexico. That’s how long it is estimated that the relief well will take to complete.
And we don’t know for sure that the relief well will work. It’s a mess.
The more I learn about this debacle and BP’s disastrous management of it, the less confidence I have in their survival. Their safety and environmental record is simply atrocious, as shown by this shocking report by the Center for Public Integrity.
I honestly don’t see how BP can survive in its current form. Maybe they can, but I’m starting to think they’re destined for a date with bankruptcy.
Enjoy your weekend,
Editor, Energy and Capital
P.S. In case you missed any of this week’s top stories from Energy and Capital and our sister publications, feel free to catch up below:
Challenging OPEC’s Oil Dominance: The North American Oil Comeback
Thanks to advanced drilling techniques, North America is re-emerging as a powerful oil producer. Keith Kohl has witnessed these technological breakthroughs firsthand, and my readers stand to make a small fortune from these new shale plays. He’s prepared this free report that could score you 1239% gains over the next few years.
Steel, Coke, and Iron Ore Prices are Rising: The Commodity Super-Cycle Continues
Editor Christian DeHaemer points the way to the next commodity super-cycle.
Foreclosure Fortunes: One Real Estate Mogul’s Wealth-Building Secret
One fact that has remained constant throughout this financial crisis is that Energy and Capital readers are still raking in huge gains. And they’re about to do it again… Things could get much worse as a second round of foreclosures sweeps across the United States. Continue reading to learn how you can flip the tables on the upcoming foreclosure crisis.
Avoid Today’s Oil Stock Flops: How to Stay Away from this Oil Trap
Editor Keith Kohl warns readers about an oil investment trap that could make you lose a fortune.
The Option ARM Crisis 2010-2012: Here’s Two Ways to Profit
Energy and Capital Editor Ian Cooper takes a look at two ways to profit in the throes of the coming Option ARM resets.
China’s Switch from Dollar Reserves to Gold: China Loses Taste for the Dollar
As the status of the U.S. dollar comes into question as a reserve currency, contributing Editor Jim Amrhein speculates what China’s reaction will be.
Stock Market Investment Advice: 15 Can’t-Miss Rules for Winning Stock Picks
Wealth Daily Editor Steve Christ offers up his best investment advice along with 15 rules for winning stock picks.
The Coming LED Boom: Changing Tides Stoke Profits in Efficiency Technology
Green Chip Editor Nick Hodge recalls what he noticed during a recent fishing foray, and how it could make you big bucks in the lighting game.
Investing in Uncertain Markets: Divided, Leaderless, Lost: Where’s the Bull Market Now?
Energy and Capital Editor Christian DeHaemer gives readers advice on finding bull markets, even in uncertain times, and a simple system for knowing when to buy, when to sell, and when to go golfing.