Where there's smoke, there's fire
I have received criticism from a few of my fellow CAPS players for convicting BP of gross negligence before there has been a complete investigation of the Horizon accident. It's fine to hold out hope that the recent accident happened through no fault of the company if you're a current shareholder, but you'd be better off spending your time looking for the Leprechaun's pot 'o gold at the end of the rainbow.
Where there's smoke, there's fire. BP has had horrible accidents happen under its watch numerous times in the past because it has a corporate culture of cutting corners. I highly doubt that the Horizon accident is any different.
Also, many people who are looking at the dramatic loss of market cap that the company has had and guessing (I call it guessing because that's all it really is) what the ultimate cost of the spill containment, clean-up, and resulting fines / litigation costs will be and believe that BP's stock is a bargain at this level. They may be right, but I'm certainly not willing to put MY money on the line in this situation. Yes, BP is a cash flow machine, but if the costs associated with this accident begin to mount quickly, how many assets will the company have to sell at fire sale prices? How much dilution will shareholders have to endure if the company has to issue stock? How much more expensive will it be for BP to raise money in the future than it was in the past?
Dilution, higher borrowing costs, asset sales, reduced profitability now that the company can't cut corners like it was...all of these things will hurt BP's cash flow going forward. One can't just look at the company's past cash flow and guess at how easy it will be for them to pay for the costs associated with this spill. Even if the company does survive, and I certainly can see merit in the argument that it might, how much will the shell of what once was a tremendous cash cow be worth?
Perhaps I'm just too conservative an investor to play this situation. To me, the much safer bet is to buy stock in companies in the oil sector that have been hammered by this accident, or even Anadarko Petroleum (APC) if you want to play the Horizon accident directly. They seem like better bets with significantly less downside and only slightly less upside than BP does at this point.
Here's a quote from a great Bloomberg article on BP:
It shouldn’t surprise investors that BP had so little flexibility. There is a link between a company’s way of doing business and its financial strength, and BP ignored it until shoddy practices finally brought the oil giant to its knees.
In 2006 Congress hauled in BP executives to accuse them of neglecting plant maintenance after the company pleaded guilty to a felony following an explosion at a Texas refinery that killed 15 people. Congress concluded that several oil spills in Prudhoe Bay, Alaska, happened after BP ignored warnings about maintenance and cut corners to achieve what a congressional committee called “draconian” cost savings. The BP Thunder Horse offshore platform in the Gulf of Mexico almost capsized because of an incorrectly installed valve.
BP's Corner-Cutting Extends to Its Finances
I have a lot more to say on this subject, but I've got to run for now. I'm sure that we can discuss this issue civilly in the comments section of this post :).