While BP engineers evaluate whether the plug will hold, enabling them to further restrain the leakage from the blown-out well, investors get a respite to consider whether BP’s collapsed stock price presents a buying opportunity.
Crude oil that has accumulated from leakage of an estimated 19,000 barrels a day, since the blowout April 20, has already reached the Louisiana outer islands. Even assuming the plug holds, the well must be cemented and sealed, in order to stop leakage into the ocean permanently.
Hurricane Season Could Make BP Disaster a Perfect Storm
There remain many uncertainties about how to shut down the flow, in order to begin the disaster recovery. With the announcement by the National Oceanic and Atmospheric Administration (NOAA) that this year’s hurricane season could be extremely active, a new complication threatens. More and more, this disaster is taking on aspects of a perfect storm.
The blowout occurred when the Transocean, Ltd. $350-million drilling rig, Deepwater Horizon, exploded and caught fire. It happened before BP’s 18,000-ft. well could be completed. The well pressure blew crude oil through a defective blowout preventer at the wellhead, manufactured by Cameron International.
The burning rig sank two days later, 45 miles from the Louisiana shore. Eleven workers lost their lives in the accident.
Well Leaked Over Half Million Barrels from April 20 to May 27
Maurice McNutt, Director of the US Geological Survey, speaking for the federal advisory commission appointed by President Obama to investigate the disaster, reported on May 27 that 12,000 to 19,000 barrels of oil and condensates per day had leaked into the sea. This is a much higher than earlier estimates, and there are some above 20,000 barrels per day.
The drifting crude oil and condensates are a threat to harm sea and associated land life in the entire GOM, as well as contaminate shorelines and marshes of the five states contiguous to the Gulf of Mexico – Texas, Mississippi, Louisiana, Alabama, and Florida.
Floating Oil Slick in Ocean Is Size of Island of Jamaica
Crews are working to skim, burn, recover and disburse as much of the hydrocarbons as possible, before a preponderance of the oil muck – covering a water surface as large as the West Indies island of Jamaica (4,413 sq. miles) – drifts to shore.
As the oil geyser on the floor of the ocean comes under control, however long that takes, cleanup and assessments of damages will begin. That will lead to finding who is responsible for paying for them. Already BP has paid $36 million in penalties for damages and has spent $700 million in cleaning up and controlling the disaster. But that is peanuts, in all probability.
In response to the calamity, President Obama has ordered a moratorium on offshore drilling for new oil and gas wells. In addition, the President ordered that regulatory agencies take more time in approving drilling plans, in the future.
Now that BP has possibly narrowed the guessing game of how long the spewing contamination will last, investors can look at BP’s stock with more of the future in view.
Prediction Stock Market Assesses BP Liability at $26.6 Billion
BP’s stock market cap has declined $53.2 billion or 28.3 percent, since the Deepwater Horizon rig exploded April 20. (Judging from the public’s adverse reaction to the disaster and the President suspending of new offshore drilling, maybe the rig should have been christened the “Deepwater Sunset.”)
Since the average stock market cap of the company’s major oil peer group has declined approximately half that amount, or 12.5 percent, the “prediction market” - the wisdom of the betting crowd - indicates BP’s oil spill loss exposure is one half its market loss.
That amounts to $26.6 billion or $8.58 per share, a figure that will go up and down as legal financial responsibilities are sorted out and assessed.
BP cash flow per share in fiscal 2009 was $8.94 a share, suggesting the company’s bigness could manage to pay an $8.58 liability per share, arising from the disaster; but the outlays could hamper its capital plans significantly.
Investors Should Consider Stocks Not Tied to GOM Drilling
Most analysts following BP rate it a “buy,” according to FINWIZ.com, probably because the shares have already been marked down so drastically, and they don’t see much downside exposure.
However, for investors who want a position in oil and gas companies, it might make more sense to select from among those companies not so dependent on offshore exploration and development in the US. Those with drilling plans in the GOM are definitely under a cloud, with no clear vista of how long public acrimony or the non-drilling moratorium will last.
*The writer is a Chartered Financial Analyst (CFA).
Howard Bryan Bonham - Howard Bryan Bonham is a former daily newspaper editor and award-winning financial writer.
