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SockMarket (34.15)

An Identical Oil Spill Occurred in 1979--What Happened Then

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May 31, 2010 – Comments (16)

"A rig explodes and sinks, a blowout preventer fails and Gulf of Mexico states wait weeks with containment booms and crossed fingers for the devastation to wash ashore.

Substitute "Ixtoc I" for "Deepwater Horizon," and "PEMEX" for "BP," and the world's largest peacetime oil spill sounds eerily similar to the 2,500 square miles of Gulf surface now threatening Florida's shores."

Similarities

 

Accident

  • It was operated by Pemex, the Mexican giant as oppose to BP, the British giant
  • The break occured because hydrocarbons forced their way up the pipe and ruptured it along the way.
  • The rig burned uncontrollably and eventually sunk
  • The Blowout Preverter failed to work properly
  •  

    Attempted Fixes

    • They attempted to put a cone over the top, calling it operation Sombrero (as oppose to Top-Hat)
    • They attempted to plug up the leak by pumping rocks, mud and seawater into it
    •  

      The Fix

      After nine months of failed attempts Pemex finally got several relief wells drilled and was able to reduce the pressue enough to cap it. It doesn't appear that a whole lot of other options exist right now. The technology for fighting a renegade well just isn't that good (nor has it improved a whole lot since 1979). BP/Transocean are drilling two wells as we speak but it is not clear just how long this will take, or how many will ultimatly be needed.

      Could it take nine months to fix this? Easily, in fact it could take a whole lot longer due to the increased size of the spill and the depth at which it occured (5,000 feet down as oppose to 200 for Ixtoc).

       

      Possible Effects

       

      In 1979 they had two months to prepare for as much oil as this spill spews out in 3-10 days (depending on estimates). Clearly effects will be much worse. In a worst case scenario we could see

      • A loss of estuaries which are home 90% of the marine species during some portion of their lives
      • Large destruction of beaches and the subsequent reduction in tourism
      • The oil could, and probably will, kill a large amount of the aqatic life in the heavily effected areas, meaning that fishing in those areas would go downhill very quickly
      • Although no one has mentioned it (and I am no scientist so take this with a mountain of salt) I would not be surprised to see the oil wind up in the gulf stream, seeing as the gulf stream circulates right by the lower edge of Florida.
      • Now remember that BP says they will pay for all costs and not hide behind legal barriers to reduce risk. 

         

        Who wants to buy BP stock now?

        16 Comments – Post Your Own

        #1) On May 31, 2010 at 2:04 PM, SockMarket (34.15) wrote:

        sorry for the odd font sizes all, I am still learning how to work with them, I think they are created by a glitch in the CAPS Blog code so there is no set HTML that I can use to control it.

        By the way I hope to have a second edition of the CAPS Blogging for Dummies out before the end of the week.

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        #2) On May 31, 2010 at 5:07 PM, tomlongrpv (58.14) wrote:

        Who wants to buy BP now?  Maybe me, given the high dividend, long term repeat profits and one-time nature of the accident.  I suspect a number of shareholders will panic, particularly if the dividend is cut, and sell at any price.  Some will be there to buy.

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        #3) On May 31, 2010 at 5:08 PM, davejh23 (< 20) wrote:

        I'd say BP is worth zero.  Of course, I don't believe that they're going to get stuck with the actual bill.  How much will it cost to stop the spill, clean the gulf and our shores, and reimburse every gulf fisherman for a lifetime of lost wages?...assuming that the destruction is that severe... 

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        #4) On May 31, 2010 at 5:32 PM, SockMarket (34.15) wrote:

        tom,

        a little analysis: if they have to borrow $100B for covering costs asociated with this it would eat up about 2/3 of their profits simply in payments. I suspect they will never do this but until the well is capped and we have some idea of the damage I seriously doubt the stock will go up.

        I personally figure they are worth, given the current situation $30-35 and I would not be surprised to see it in the high 20's. Of course if they find a way to limit the damage it could return to $50 pretty quickly too. 

         

        dave,

        they have alot of other assets so they are probably worth something, however I wish they would go out of business :). They certainly deserve to.

        The oil, I believe, binds with the oxygen so it will form a giant hypoxic zone. So it could easily take half a decade (in the worst case scenario) for fish to return to some of these places. That's a heck of alot of damages to pay to fishermen & fishing guides. 

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        #5) On May 31, 2010 at 8:04 PM, russiangambit (28.90) wrote:

        >  Maybe me, given the high dividend, long term repeat profits and one-time nature of the accident.

        Who said they are not going to cut the dividend? If I was sure of it, I would've bought it. But I beleive they'll be forced to cut the dividend to cover the costs of the spill.

        Dividends are not safe as we learned so well in 2008.

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        #6) On May 31, 2010 at 8:22 PM, starbucks4ever (88.00) wrote:

        I just looked at their balance sheet and it looks like a bankrupt company even before you account for the oil spill. With the spill, and if they pay all the fines, it's Ch 11 in the next 3 years, or, at best, a massive dilution. And of course you can kiss goodbye to that dividend. Believe it or not, GM is a much better bet now than BP.

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        #7) On May 31, 2010 at 9:58 PM, SockMarket (34.15) wrote:

        zloj,

        I don't see where you are getting that from. they are wc positive, have long term debt about equal to recievables (to say nothing of cash, inventory and assets) and their debt is about 1/3 of retained earnings. None of this includes the possability that they could sell assets to pay for the debt or the fact that they churn out about $6Billion in net income a quarter

        So why do you think they will be bankrupt?

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        #8) On May 31, 2010 at 10:14 PM, ChrisGraley (28.64) wrote:

        I'll be buying eventually, but it will be a while.

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        #9) On May 31, 2010 at 10:56 PM, starbucks4ever (88.00) wrote:

         danielthebear,

        It's simplicity itself. Their liabilities far exceed their assets, unless you think their Property, Plant, & Equipment have any value. 

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        #10) On May 31, 2010 at 11:15 PM, Momentum22 (28.81) wrote:

        When you look at potential downside vs the upside on BP it is my least favorite play of all the headline contrarian  plays...the possibility of a downward spiral from these levels seems very likely. What would be the upside if the well were to seal shut and stop spewing tomorrow? 

        I like my odds with a Santander or even ATPG. All 3 still face an "uncertain environment" but the variables for BP here are rising exponentially.

        The relief well is their next best chance and after that the litigation could be endless. The political pressure to punish these guys will be huge as well...

        I love playing the out of favor picks but I don't see any reason to buy here in RL. The last thing I would be thinking about is their dividend...

         

         

         

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        #11) On May 31, 2010 at 11:33 PM, SockMarket (34.15) wrote:

        zloj,

        three issues:

        1) just because they had one leak doesn't mean all their properties are worthless. I am not sure why you would assume that. Even if the US & Russia seized all their properties I think they would have more than $11B left (see below).

        2) total liabilities exceed total assets-PP&E by $11B. They make that much every 6 months

        3) total liabilities vs. total assets don't actually matter. All that matters is whether they can keep making payments--at least as far as bankruptcy is concerned.

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        #12) On June 01, 2010 at 1:22 AM, starbucks4ever (88.00) wrote:

        #11,

        There are some things that are a matter of judgement. I value all these processing plants, licences, and intangibles at zero dollars and zero cents. I may be wrong, it's just my personal opinion. You are entitled to put your own value on these things. They may be worth more to some people than to others. As the saying goes, beauty is in the eyes of the beholder. 

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        #13) On June 01, 2010 at 1:54 AM, bullnada (< 20) wrote:

        Im no tree hugger but do you realy need to buy stock in this company.  It kinda says something about you. Its kinda sick isnt it.

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        #14) On June 01, 2010 at 8:59 AM, russiangambit (28.90) wrote:

        > Im no tree hugger but do you realy need to buy stock in this company.  It kinda says something about you. Its kinda sick isnt it.

        Good point. I guess, I am not as principled as I 'd like to beleive -)). The same argument can be made about C, GS, BAC, WFC, JPM and yet I bought each one of them as a trade  at some point. However, BP I would only consider for the income stream at this point, it is not a trade (YET). And now thinking about what you said I think it is another reason not to do it. If it gets to $20, I'll buy it for a trade and that is about it.

        However, I also don't believe that BP is more "evil" than any other oil company . They just seem the most incompetent. I know pelnty of people who worked for Exxon or Shell, and these companies don't sound much better,

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        #15) On June 01, 2010 at 12:51 PM, SockMarket (34.15) wrote:

        zloj,

        it is true that there is a difference of opinion. I generally value intangibles for commoditiy selling companies at 0 since anyone could do exactly what they are doing and make money. 

        For the same reason I ascribe full value to PP&E. I figure that anyone could operate those facilities and would almost certainly pay full, or nearly full, price to do so. 

         

        bull,

        I think that it is a question of: are you willing to profit because they are profiting? Honestly I don't have a good answer

         

        russian,

        I also don't believe that BP is more "evil" than any other oil company . They just seem the most incompetent.

        lol.

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        #16) On June 01, 2010 at 1:05 PM, dargus (82.64) wrote:

        Something no one has mentioned is BP moved from a DRIP to a SCRIP dividend plan. My understanding is now dividends will be paid in stock (automatic dilution) and not cash. If I understand the change correctly, it may be easier for the board to maintain the payout. However, the dilution could ultimately hurt as much as a dividend cut.

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