Time to Buy BP, Transocean, or Halliburton?

The Motley Fool recently penned an article touting BP as buying opportunity. In a nutshell, the author reasons that BP’s recent stock price hit (down 40 percent) as well as its massive 9 percent dividend (on a trailing basis) justifies the risk. He then goes on to say that BP is in a reasonably good cash position to cover claims and to borrow if necessary. (Keep in mind that the author owns BP.)

Here’s an interesting excerpt:

Estimates on how much the spill will cost vary greatly, ranging from lowball numbers in the $3 billion range all the way up to $25 billion or even $30 billion. When considering these hefty tabs, though, investors need to remember that BP has only a 65% interest in the oil field, with Anadarko Petroleum (NYSE: APC) and Mitsui owning the rest. Driller Transocean (NYSE: RIG), services provider Halliburton (NYSE: HAL), and blowout-preventer manufacturer Cameron International (NYSE: CAM) may also end up on the hook for part of the costs.

That’s a good point. Even so, the risks are real. How do you evaluate liability and its consequences for one of the biggest oil catastrophes in history and the upcoming criminal investigation?

The Crime

If history is any example, it is unlikely that the criminal investigation will result in criminal charges. First of all, intent is hard to prove, and it will be extremely hard to claim that BP intended an environmental holocaust. A finding of negligence is quite possible; however, the quiet mumblings coming out of Washington with words like “blunder” suggest the investigation is just another dog-and-pony show to keep the masses at bay and even a finding of negligence will have no significant results. And then there’s the whole Marx brothers finger-pointing by the big three (BP, HAL, and RIG), virtually guaranteeing an entertaining, but inconclusive and toothless hearing.

The Cap

Although the cap for environmental remains at $75 million, Congress may move to raise the limit to $10 billion. This is a real risk for BP and cohorts. The most compelling reasons for raising the cap are claims that the cap itself contributed to the disaster. It’s easy to shrug off risky behavior when your cost of failure is only a small portion of the potential total damages, which typically run in the billions. Looking at raising the cap, however, is not the same as doing it, and we can expect Congress to drag their feet unless some politician desperate to win an election takes the lead.

The Copout

BP is currently “volunteering” to compensate victims for their “all legitimate claims,” but this is not a guarantee. Plus there is the “legitimate” wording for lawyers to haggle over ad infinitum so that BP can move its losses forward in to future years. At the same time, they are running PR ads to wear down the anger with that soft-spoken CEO (how could we possibly be mad at that guy, even if he is killing turtles?). You may not agree with the strategy, but I bet it works.

In the meantime, what is likely to happen is a takeover or merger, so that BP as an entity will go away and their liability claims can be circumscribed. A similar practice occurs in bankruptcies when companies act to protect assets by screwing the employees (with no severance, for example). It’s far easier shifting responsibility and accountability through some external event, leaving the victimized at a loss (except for those ingenious Nortel employees in France who engineered a bomb threat and got their severance). So except for those pained Gulf Coast dwellers, people will forget about BP over time and begin to be thankful they can still fill their tanks even at $100 a barrel.

Aside from the ethics issues, it looks like a buy for Big Oil — unless you are squeamish about bailing out more bad behavior with your investment. Then again, with its safety record, BP is the equivalent of a serial killer, and you may be unpleasantly surprised in a year or so.

Here are the charts for the Big Three:


Comments: The stock is oversold but still trending down. BP needs a good news day. When it comes, expect high volume on an up day for a good day trade. The stock got slammed and gapped down at the beginning of June. BP has room to fall further, so bottom fish with caution.


Comments: With a controversial dividend payout from insurance profits on the leaking rig (under government investigation) and a recent negative earnings report (before the disaster), Transocean presents greater risk. On the plus side, RIG is currently selling at about 75 percent of book value.

Halliburton (NYSE: HAL)

Comments: The sell off in Halliburton looks to be tapering off and it may be close to a bottom. Despite a fall in earnings and the Gulf spill, the stock is not cheap even at current levels. Still, the stock is rated as a buy or strong buy by analysts.

Disclaimer: No positions

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