Time to Buy BP?

By Brad Thomason, CPA

 

BP’s stock price slide has finally taken a break, and shares have bounced nicely off of recent lows.  Is it time to buy it yet?

The news coverage has died down a bit.  All parties involved seem resigned to the fact that it’s going to take as long as it takes.  Public outrage has settled to a simmer.  The government has been able to display a tough stance (most notably in forcing the creation of the escrow fund for claims).  The negative impact of these items has been priced in, and at least some of the question marks seem to have dissipated.

As mentioned, the stock price is (possibly) beginning to show some signs of making a bottom.  The relief wells seem to be ahead of schedule.  Over the weekend they are planning to install a new containment unit which some say will effectively shut off the spill.  All good news.  The other stocks that were involved have already shown some base building in their price behavior and they didn’t fall as far (in percentage terms) to begin with anyway.  Further (indirect) support for the possibility that the market is about through beating everyone up over this.

If you are a gambler, now might be the time to slide some chips in.  Or at least we can say that sliding them at this point certainly seems like a safer move than at any point up to now.  The pot odds seem to have improved.

But if you are looking for a sure-thing, you might want to take note of a couple items before pulling the trigger (actually, if you’re looking for a sure-thing you ought not be looking at the stock market in the first place; but that’s another topic).  Consider:

1.     The still-low price may make BP vulnerable to a takeover bid.  True, every dollar that the shares tick higher makes the prospect less attractive for a would-be buyer.  But it is enough of a concern that BP’s CEO is talking to sovereign wealth funds about the prospect of injecting capital to stem an unwanted bid.  This is an important consideration for anyone planning to buy in with the intention of riding the wave back up to previous levels.  A takeover bid could cut that ride short.  It might still be a profitable trade, but not as profitable.  And if some new news item came zinging in out of left field, something no one was paying much attention to, the price could start dropping again, making takeover more probable with each tick lower.
2.    How about some news from left field?  Have you been watching the developing story about declines in property values being part of the clean-up tab?  First it was talk about coastal property (roughly 600 miles worth).  A few weeks ago it came to light that Florida was considering a special legislative session to let people pay property taxes on current property values vs pre-spill levels.  The tab for the reduction in tax collections would then go to BP.  We heard this week that at least 2 local revenue collectors had opened talks with their state officials for an ACROSS THE BOARD reduction in property assessments for their entire state.  (As a result of our practice in the area of municipal tax liens, dealing with more than 100 jurisdictions in a dozen states, suffice it to say we know a good many more tax and revenue officials than the average Joe.  We often hear bits of “chatter” from that world.)  I would classify this piece of data as an unverified report at this stage, but give your imagination a bit of free reign for a minute.  An across the board reassessment to lower values.  Let that sink in for a minute.  Cleaning up hundreds of miles of oily beaches is one thing.  But paying for declines in property values for entire states – not just coastal property, but everything?  That’s an order of magnitude different than anything currently in the equation.  It could be a doomsday scenario for BP.

It’s still pretty early in the game in terms of how this will ultimately shake out, what the final tab will be.  I noted in an earlier piece that hard costs were one thing, but government piling-on was quite another.  This is a unique situation, and it would not be surprising if new legal territory was explored as a result.  No one knows how far the concept of liability is going to stretch with respect to this one.

Let me be clear: I am not predicting that they are going to be held liable at this scale.  But it does appear that talks of this nature are taking place, and you have enough furious local officials along the coast that an idea like this could light a PR fire and cause a lot of uncertainty (which, as we know, the market hates), even if nothing ever comes of it.  Real problem or imagined problem, both events probably have the same effect on the stock price if the idea gains any traction.

Something to keep in mind before you hit the send button on your buy order.

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