BP, Chance Of A Good Trade?

Chance of a lifetime? In a crisis, sentiment will crowd out sensibilities. Has BP fallen enough? Many analysts are trying to calculate the damages from the oil spill. My verdict is investors should carve out their intended exposure into 3 parts, and start buying one third now around $33-$35. Only buy the second parcel if it hits $29 or $37. The last parcel should only be bought when it tries to breach $40. If it continues to fall below $29, wait for $25. I could be writing a long essay on that strategy, but if you sit and think, you should come to why that strategy is sound.

BP has said that it will cover all legitimate claims resulting from the spill. But can it handle a worst case scenario? BP is already spending millions to control the spill, but reparations for economic damage could run into many billions of dollars.

On the income side, BP certainly has the resources to handle a sizable number of claims. The oil company had income last year of $63.4 billion. The total market value of the company currently sits at $142 billion.

Now let's look at the liability risk, starting with just one county. In Harrison county, MS, due north of the spill, the total economic activity at risk is in excess of $1.4 billion. In the just the six counties closest to the oil spill the potential economic activity imperiled by the spill comes to $4.9 billion.

But there are more than 50 counties potentially in harm's way, from the Florida Keys to the coast of Texas - and that's not counting the exposure BP would incur if the oil flows around the Keys and up the East Coast by way of Gulf stream currents. With tar balls showing up now on the Florida keys, that's a possibility that can't be discounted.

Wall Street analysts continue to believe that BP can pay for its mess in the Gulf, although their confidence level has been dinged by the company's inability to stem the spill - and the political fallout. But at $32.20, the shares are still trading at levels last seen 14 years ago.

Spurred by pressure in the U.S. to fully compensate economic victims of the Gulf spill - and by Wednesday's nearly 16 percent stock plunge - BP officials early Thursday reiterated that the company has enough cash to cover the costs of the Gulf spill.

Analysts agree, saying that BP will have around $5 billion this year to pay damages and clean-up costs once dividends and capital expenditures are covered. BP has already spent more than $1.4 billion trying to contain and clean up the oil and pay claims to Gulf coast businesses.

To date, almost 42,000 claims related to the spill have been submitted and more than 20,000 payments already have been made, totaling over $53 million.

Because of BP's strong cash flow, analysts currently doubt that the costs of cleaning up the mess will push the company into bankruptcy. A worst-case scenario for financial damages and penalties is more than $60 billion, which would be paid out over several years.

I suspect in terms of liability, a lot of it can be recovered from insurance and limited liability claims. What the company cannot recover from may be " company standing and reputation" going forward. Once the liability component has been ascertained, I strongly feel that the board will have no choice but to sell to probably Petrochina, the only one with the resources to claim that asset. A combined PetroChina-BP would have oil and gas reserves that were 73 percent and 187 percent larger, respectively, than ExxonMobil Corp and Royal Dutch Shell Plc.



The sale to Petrochina has to go through as BP tries to distance itself from the negative press and claims going forward. By selling, it will give BP a fighting chance to re-emerge from the disaster. A lot of pension funds, especially in UK will be putting a lot of pressure on the board to sell, and they will probably get the quickest deal at the best price with Petrochina.

Looking at the possibility of a $60 billion worst case scenario by Oppenheimer, the assets of BP is still more than doubled that easily. Its income per year would cover that. Stanchart see a worst case scenario costing BP $40 billion.