BP is a Buy; if you’re tough enough

10th June 2010

Nobody said it was going to be easy to placate an outraged American nation that's suffering the worst maritime environmental disaster in its history, but BP's leadership has made quite a success of messing it up.

In the process it's managed to escalate a case of industrial misadventure to something very like a culture war, in which the whole of Britain has found itself being tarred with the same angry brush by an indignant American people.

And the question now is not whether the US will exact punitive revenge from the flagship oil enterprise, but how much?

Okay, it was a bad hand of cards to start with, but was there really such a need for BP to play it so ineptly?

Chief executive Tony Hayward opened the bidding back in May, by insisting that the leakage from the Deepwater Horizon spill was ‘minor'.

Then, when it started to look worse, he rashly told Fox News: ‘I'd like my life back'. (Loosely translatable as ‘Get me out of this mess, somebody, I've got better things to do.')

Next, Chairman Carl-Henric Svanberg added to the outrage by assuring the near-bankrupted fishermen and hotel owners that BP did indeed care "about the small people" – thus reminding everyone of Leona Helmsley's infamous declaration that "only little people pay taxes".

Just how much worse could this PR operation get?

Political revenge was predictably swift.

President Barack Obama has a mid-term election to fight in November, and he'd already been taking a lot of personal flak from the US media for looking too distant and aloof about the Deepwater oil spill.

So the BP duo's Laurel and Hardy act gave him just the cartoon villains he needed to make himself look really determined and decisive.

He started with a series of personal attacks on the annoyingly fresh-faced Mr Hayward – declaring that "he wouldn't [still] be working for me after any of those statements".

And that he wanted to know "whose ass to kick". Prime Minister David Cameron tried to weigh in with a few moderating comments to the President about not interfering in other countries' personnel issues – not that that would count for much when US investors owned 40% of the company, exactly the same as the UK.

Moves Toward a Compensation Plan

So far, so personal. But then came the heavy attacks.

First, BP found itself forced into accepting that it should pay a preliminary $20 billion into a victims' fund, without any proper judicial decision on whether liability should really rest with it or its two US-owned subcontractors – Transocean, who supplied and manned the Deepwater rig , or Halliburton, which fatally botched the cement cap on the ruptured well.

That doesn't seem so unreasonable, on the face of it, because Louisiana needs help right now, and BP is big enough (just) to be able to bear the cost while the legal disputes continue.

The $20 billion isn't a ring-fence, by the way – just a down-payment.

The second attack is on rather dodgier ground.

US Interior Secretary Ken Salazar has been threatening that BP will be forced to carry the salary costs of every US oil worker who gets laid off because of the President's own decision to suspend of all deep-water drilling, initially for six months, in the aftermath of Deepwater.

Now that's not necessarily going to stand up in court. Obama's drilling ban is Obama's own presidential decision, at the end of the day, and it's hard to see how a British company can properly be held responsible for its wider consequences.

But hey, these aren't rational times

Frankly, the US is dissembling quite disgracefully here.

As far as we can tell, the Deepwater tragedy would not have happened if only BP had been using the enhanced fail-safe drilling technologies that are mandatory in just about every part of the world except America.

Indeed, the US maritime drilling authorities themselves had been thinking about making remote shut-off valves compulsory on all US oil rigs for at least ten years, but under George W Bush's presidency the unpopular and costly issue had been quietly shelved.

Given enough time, President Obama would probably have acted to enforce the safety upgrades, but the issue presumably hadn't made it to the top of his agenda when the Deepwater tragedy struck.

The drilling moratorium, then, looks a lot like buying time to settle a domestic legislative issue, but at BP's expense.

Predictable share price chaos

Either way, the financial threats to BP – both real and perceived – have been enough to plunge the company's shares into crisis.

By the time of President Obama's pretty overt attacks on Mr Hayward, the ongoing crisis had pretty well halved BP's share price, from 655p to 345p – the lowest level since 1997.

In round figures, the market capitalisation had been reduced by £60 billion from £127 billion to £67 billion.

Even after a short bounce-back to 375p by 18th June they were still £54 billion down – or 43%. Fitch, meanwhile, has chopped BP's credit rating from A to BBB, which is only a notch above junk. 

But whoah, surely that's overdone?

If you believe that the whole of this mess, including the loss of future goodwill, is likely to cost £54 billion, then BP is trading at fair value.

If you don't think it'll cost as much as that – and if you don't mind the loss of this year's planned dividend – you're surely looking at a unique bargain?

You are, of course, gambling on the unknowable cost of BP's threatened liability for the entire US drilling moratorium.

And, to that extent, you don't have all the information you need to make a proper decision.

But, for those investors of a hard-headed persuasion – and they don't come much harder than oil investors – it does look like a unique buying opportunity.

 More information and commentary on the excellent Oil Drum blog.

 

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