Is it the right time to buy British Petroleum (BP) or the end of a British Empire?

By: ispeculatornew
Date posted: 06.02.2010 (3:36 am) | Write a Comment  (12 Comments)

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While some have predicted that Britain might go bankrupt, it seems to be one or perhaps the most known British company that could not survive the current crisis. The company founded in 1909 was until recently regarded as one of the very best in its field and the third largest energy company in the world. But the very public oil spill that took place in the Gulf of Mexico is turning for the worse and at this point, some are predicting that a very different BP will come out of this crisis. The spill is already the worst oil spill in US history and as of yet, there are no known solutions to end

Public relations nightmare

From BP website: “Our values, the code of conduct under which we operate and the BP brand define what we stand for and how we run our business

How many of you would believe such a message now? BP used to be among the most respected and admired companies in the energy field and had spent a lot of money trying to safeguard its image as a conscious and clean energy company. Needless to say that the money spent is now lost as BP will forever be remembered for the current events.

Severe financial consequences

It is very difficult to put a fair value on the cost of this disaster because there are so many different components.

-Direct Costs: Obviously, BP currently has thousands of employees around the world working on a solution as well as extremely expensive material being purchased, rented, etc. The costs are incredibly high, even for a company that made over $16 billion in revenue.

-Legislation: It is currently unclear how much this will cost BP. The US government has laws in place that limit the cost to $75 million. But many are discussing changing the laws retroactively in order to charge the full cost of the operations to BP. Needless to say that would hike the fees very quickly. As well, there will be numerous lawsuits made by private industries and citizens over the next few months & years.

-Lost revenues: This will impact the entire oil industry but it’s safe to say that major changes will be made to the offshore oil industry in terms of requirements, possibilities, etc. This will certainly have a long term impact on BP.

As if it could not get worse…

Things turned even worse for BP today as the US Coast guard announced BP’s “Top Kill” operation was officially over, and that BP would need to find another way. Then, the US government confirmed that a criminal investigation was under way in this affair.

However…

I know that I’ve just gone on and on about everything that has been going wrong with BP but there two important aspects to include in the analysis:
BP operates in over 30 countries, had sales of $239 billion in 2009 and employs over 80,000. Is this disaster? Of course. But BP has lost 40% of its market value since the start of the year and that certainly seems a bit exaggerated
-Honestly, what could possibly go worse for BP now? Sure there are some things… but I’d the worst (at least for the stock and the company is probably behind it! If you think a company cannot survive a major disaster like this, try reading about the Exxon Valdez

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12 Comments

  1. Comment by The Financial Blogger — June 2, 2010 @ 10:50 am

    I think their problem right now is that they have no clue how to solve their problem. If they take too long, this error could be fatal for the company.

    I guess I would be more confident knowing their level of liquid assets at the moment. If they have to contract huge loans to solve the breach, it may be the end for BP!

  2. Comment by Craig — June 2, 2010 @ 12:23 pm

    IS, there is something I don’t understand; if the oil is leaking like there is no tomorrow, how come it is not reflected on the current price of oil on the market?

  3. Comment by The Passive Income Earner — June 2, 2010 @ 2:25 pm

    I wouldn’t touch it until the damages are contained and there is a plan to deal with long term damages. Analysts are stipulating the damage on the company stock is a little too much but then the damage to the environment is significant and it’s unknown what the government may do and what cost may come out of it. Are the pockets that deep to bounce back fast?

    I have not really researched the company but there is a lot of unknowns at the moment. Too much for my taste.

  4. Comment by IS — June 2, 2010 @ 8:08 pm

    @TheFinancialBlogger – True but it is also the opportunity because there is no doubt that once they do find a solution, the stock will jump up.

    And they have tons of assets, the last time they reported they had $70 billion of current assets…

    @Craig – Well I would say that in general the long term consequences are fairly small. There is so much oil that even losing the entire shipment is not that bad

    @The Passive Income Earner – Yes true, lots of unknowns, I have to admit it is a bit of a gamble but like I said earlier, I think that once costs are known and situation is “resolved”, it will be a bit too late to buy the stock.

  5. Comment by Craig — June 3, 2010 @ 3:30 am

    @ IS,

    this is quite funny that right now the impact of losing 19,000 barrels a day is not that bad but the price of oil used to jump by $5 every time we hear there was a potential conflict in Russia or another oil country back in 2007 and early 2008 😉

  6. Comment by IS — June 3, 2010 @ 3:37 am

    @ Craig – Well in the case of Russia, it is 1st or 2nd in terms of oil production and also a major link to Europe for all energy needs:

    http://en.wikipedia.org/wiki/File:Top_Oil_Producing_Counties.png

    So I would say it’s fairly different:)

  7. Comment by Zavi — June 3, 2010 @ 11:15 am

    Same than TPIE, I don’t think I would buy the stock for now. Costs and consequences for BP are still unknown to assess the total bill! What will be the clean-up cost? The government may pursue civil and criminal charges against BP. How much this legal procedures and expenses will cost? What’s the impact for fish/bird/victims? Nobody’s certain….

  8. Comment by Doctor Stock — June 3, 2010 @ 8:37 pm

    I made some money shorting it on the way down; however, I do suspect any good news will give this stock some rise.

  9. Comment by IS — June 4, 2010 @ 3:53 am

    @Zavi – we’ll see I guess:)

    @Doctor Stock – Are you still short or it was covered?

  10. Comment by John — June 17, 2010 @ 8:56 am

    ouhhh BP is going down… BP cancels first-quarter dividend. BP also suspends second and third quarter payouts!

  11. Comment by IS — June 18, 2010 @ 6:14 am

    yep…not sure if it will keep up… but canceling a few dividends does not seem to have done great damage to the stock, it was anticipated I guess.

  12. […] delays and simply seeing BP go ahead with the operation was seen as great news.  We had discussed buying BP a few weeks ago with the stock a bit lower at $36.50. Today’s trading will be interesting as we should see […]

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