Gulf Oil Spill Continues

By Brad Thomason, CPA

 

Noah got rained upon for 40 days and 40 nights, the Good Book tells us.  BP has now more or less endured the same in figurative terms, to the effect of losing 1/3 of its value, or $54B in market cap (the share price just a second ago was $43.20, down from about $61 prior to the rig blowing).

In the past couple of days, the story has taken on new life due to government posturing and the attempt at the “top kill,” but even more so the fact that live video of the “plume” is now streaming 24/7 on more than 3,000 websites.  Media experts are alternately chiming in that the feed is a good thing (since they are disclosing information) and a bad thing (since the information they are disclosing makes an abstract problem into a visible monster).  Any way you slice it, this has become a very complex situation.

There’s also the legal angle.  In Birmingham, AL – 300 miles inland – there are law firm billboards inquiring as to ones status as an injured party, and providing the obligatory toll-free number and web address.  Meanwhile, down on the beach, BP officials have been handing out checks left and right to anyone with a claim, and if my local information is correct, doing so without requiring any releases from litigation.  Supposedly the payments will be deducted from any later settlements, if such arise.  Obviously I don’t know what’s going on inside the BP war room, but it seems to me that this may be a very clever move.  If they figure there is no way to avoid paying anyway, it appears they favor going ahead and paying some of it now.  Why?  Perhaps because some percent of the local population is going to see it as a gesture of goodwill and good citizenship.  Which frankly, I believe it is – even if it comes with a potential business benefit.

The benefit of taking this stance is that it will be much harder to cast BP as a faceless corporate villain.  Eroding the villain image could lead to fewer lawsuits being filed in the first place, and decreased indignation on the part of any future jurors on suits that do make it to trial.  With as many potential plaintiffs as they are facing, and the relatively small claim that each would have, the cost of defense could very easily exceed the damages ON JUST ABOUT EVERY CASE.  Every case they can avoid is a cost savings, and one less thing that their managers and executives will have to be distracted by as the next couple of years play out.  It’s also very scalable given this set of facts.

But back to the stock story, a $54B loss for an event which has so far cost BP about $800M out of pocket certainly seems asymmetrical.  The analysis has gotten harder, because in the time since this started, the stock market in general has fallen, ditto the price of oil.  So it is no longer possible to say definitively how much of the loss is attributable to the spill.  But it seems hard to conclude that BP is now worth $54B less than it was a month and a half ago.

There are however, plenty of question marks still out there, so I won’t be placing my buy order just yet.  When things finally do settle out and begin to climb again I suspect it will take awhile to recover.  There should be plenty of time to hop on the train and catch a piece of the ride back up.  And remember, a loss of 33% is a gain of 50% just waiting to happen if it retraces back to the earlier level.

(Later…The guys on the MSNBC show Options Action are explaining what to do to get out of their losing, bullish RIG call from 4/30.  They’ve taken it in the head as a result of jumping in too soon.  Poor guy was rattling off all of the things that have come to light which have weighed on the stock, things he says he failed to anticipate.  I didn’t anticipate them either, not specifically.  But it certainly seemed probable that it would be something.  My suggestion to avoid getting in yet – issued, it turns out the Sunday after he made his call on Friday (click here for a link to that entry) – was to allow time for the uncertainty to clear and a bottom to start developing.  The TV guys pulled the trigger too soon; presumably they should have known better, though strictly speaking I don’t actually know how one goes about qualifying for a talking-head gig.  So I could be mistaken on that point.)

You can leave a response, or trackback from your own site.

Leave a Reply