Apparently we should all be buying BP stock right now. At least that’s the recommendation of the people paid to know these things: financial analysts who follow the company. Of the 17 surveyed by Bloomberg this week, 12 recommended it as a “buy.” Five said hold. None said sell. Of course, analysts rarely label a stock as a sell, and a hold is often construed as nearly the same. Still, seriously? Two days after the stock tanked 15 percent, erasing $30 billion of BP’s market capitalization, and not one analyst thinks you should sell it?
While this may seem counterintuitive, it’s actually an age-old investment strategy of buying into a crisis. The theory goes like this: people tend to overreact to disasters like the gulf oil spill. So while the masses go all Chicken Little and run screaming from the stock of any company remotely near the accident, the smart money grits its teeth, rolls up its sleeves, and wades right into the mess, buying up shares on the cheap. Remember, buy the dip; sell the rally. And this is certainly a dip. BP stock is down nearly 40 percent since the Deepwater Horizon exploded on April 20, knocking its market capitalization from $183 billion down to about $115 billion. The supposed smart money is betting this drop is only temporary, and that the stock will bounce back once we’ve regained our sanity and realized that spilling an estimated 19,000 barrels of oil a day into the Gulf of Mexico is not, in fact, a company-crippling catastrophe.
In the words of Gerald E. Thunelius, managing director of Philadelphia’s TCP Global Investment Management, and one of the analysts Bloomberg surveyed, BP stock, at $38 a share, is “priced for absolute disaster, and anything less than total disaster will be good news.” True, anything less than total disaster will be good news, and not just for BP shareholders; for pelicans and fishermen and, well, mankind in general. But if BP’s stock is priced for absolute disaster, then shouldn’t it be a lot lower then $38? Shouldn’t it be, say, zero?
That depends on how you define absolute disaster. BP has already spent about $1 billion on cleanup costs. CEO Tony “I’d like my life back” Hayward says the eventual cost could be about $3 billion. Which is being roundly laughed at as the lowball of the year. “I’m pretty damn confident that the Street is not buying that,” says New Orleans–based oil analyst Blake Fernandez. A more accurate estimate seems to be in the realm of $10 billion and up, to maybe $30 billion.
As speculation roils over BP’s deteriorating finances, the consensus, it seems, is no longer if the oil giant gets taken over, but when. What exactly is BP’s financial situation? The positives: BP makes money, lots and lots of money, and it has tons of cash on hand. Last quarter alone, BP made $6 billion in profit—more than double what it did a year prior—and had $7 billion in free cash flow. According to Fernandez, as long as the price of a barrel of oil stays above $60, BP stays cash-flow-positive. With oil hovering around $70 for the last month, BP appears to be safe there. Its stock remains attractive, largely due to the healthy 9 percent dividend it pays out, costing it about $10 billion a year, though Sens. Chuck Schumer and Ron Wyden are now urging BP to suspend those dividend payments.
The bad news: BP is hugely exposed to the Gulf of Mexico. At 450,000 barrels a day, it’s the biggest producer of oil and natural gas there. The gulf accounts for 11 percent of its total worldwide production, and even more of its profits. Now that President Obama has suspended drilling in the gulf, the costs of operating there will surely go up. Also of concern is BP’s ability to partner with other companies going forward. Rarely do oil companies go it alone on a big deepwater project, and to partner with BP now would seem not only to invite imminent disaster, but to court huge amounts of bad publicity. And then there’s the specter of criminal charges.
BP’s ultimate fate is tied to its latest attempt to stop the leak. Should it work, and the diamond-saw-wielding robots successfully cut and cap the underwater pipe (which so far isn’t looking good), BP will likely weather this disaster and remain intact. Should it fail, and the oil keeps leaking, then BP’s future as an independent operator dims considerably. The question then becomes who will want to buy it? The latest speculation, from a Norwegian oil analyst, is that Royal Dutch Shell is the only company big enough to buy the British giant. Still, who would want to assume such unknown, and potentially massive, liabilities that BP will be stuck paying? For that even to be a consideration, BP’s assets would have to diminish considerably further. Which means its stock price would have to fall a lot farther than just to $37, to the point where it really is priced for absolute disaster.