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Where there's smoke, there's fire

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June 28, 2010 – Comments (11) | RELATED TICKERS: BP

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

http://www.bloomberg.com/news/2010-06-28/bp-s-corner-cutting-extends-to-its-finances-commentary-by-alice-schroeder.html

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 :).

Deej

 

11 Comments – Post Your Own

#1) On June 28, 2010 at 9:48 AM, Gemini846 (50.51) wrote:

I've had this discussion several times at fancy and not so fancy parties in the last month.

Would I buy BP? Yes. At this price? No.

There is no indication that the downward momentum of this company has shifted. When the relief well is drilled and finished, and the oil has stopped leaking, then we might be able to estimate the cost, but without a yield right now there is no incentive to pull the trigger early (like I did in my CAPS profile).

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#2) On June 28, 2010 at 2:23 PM, Tastylunch (29.22) wrote:

anyone who thinks they know the final cost of something that is clearly not even over yet is kidding themselves.

What if the relief wells fail?

what if there are other leaks?

what if an Oilcane kills crops?

What if Oil gets into some drinking water in the south?

Too many unknowable variables of great consequence remain for BP investors.

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#3) On June 28, 2010 at 4:15 PM, jesusfreakinco (28.83) wrote:

Deej,

I am there with you buddy... and am short to back up my convictions.  Not sure when/if I'll cover, but I'd rather be short than long.  There is lot more that can take this down quickly rather than good news to make it go up.  We'll see.  That why they say it is a market.

JFC

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#4) On June 28, 2010 at 4:21 PM, portefeuille (99.67) wrote:

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.

see for example here.

Where there's smoke, there's fire

I rest my case.

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#5) On June 28, 2010 at 4:27 PM, portefeuille (99.67) wrote:

how many assets will the company have to sell at fire sale prices?

and how many will it sell at great prices?

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#6) On June 28, 2010 at 4:45 PM, TMFDeej (99.43) wrote:

Probably none.  When everyone knows that you have to sell, you aren't exactly in the strongest bargaining position.

Deej

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#7) On June 28, 2010 at 9:16 PM, walt373 (99.79) wrote:

I think I'd be interested in the low-20s/upper-teens, assuming no more negative news... as for now, since you could buy RIG or NE for about as cheap, don't know why people would mess with BP.

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#8) On June 30, 2010 at 12:22 AM, alberta911 (75.87) wrote:

Before you go out thinking Anadarko is a safer bet ...I wrote this for the stock but they will not post it

Laughable Anadarko, CEO, and Goldman would try and claim ignorance as to BP's drill procedures and problems. Every morning Halliburton send the "Morning Driller's Report". If the well operator wants to change the drill program, it requires approval of the Joint Venture partners Mitsui and Anadarko must sign off...

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#9) On July 01, 2010 at 12:17 AM, rwebankrupt (78.37) wrote:

Not gross negligence. Standard operating procedure in a climate of lax regulations. Bringing a well to production on the cheap as fast as possible is the mantra of all Gulf platform drillers. APC was probably licking its chops over the reduced costs before it blew. They will have to pay when the facts come out. Being cheap and in a hurry is not gross negligence.
It's the way America does business.

 

This troll urges you to study financials like you did baseball.

Anadarko has a long stretch of bad acquisitions. For years Anadarko has grown bigger without really becoming more profitable. Added to the amount of debt they have accumulated, liability for the spill could be the tipping point for these guys. To bad The BP-Anadarko contract stipulates that any legal action must take place in arbitration, not public court

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#10) On July 05, 2010 at 11:53 AM, Dobbes (< 20) wrote:

I found a compelling argument for it as a value play here and green thumbed it way too early.  Since then, new evidence has been uncovered and their liabilities are continually increasing.  I still think they will bounce back.  I have a sector bet on a lot of the O&G sector from the whole debacle.  The corollary picks like RIG and NOV should be ok, as for BP, I'm not as confident.  The bad press and cleanup efforts will last years, and the administration will wring it for all its worth.

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#11) On July 20, 2010 at 5:27 PM, portefeuille (99.67) wrote:

#5,6 BP Signs North America and Egypt Asset Deals with Apache

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