Barack Obama is no stock picker but when it comes to BP shares, his analysis is the only one that matters. About two weeks ago, this author suggested . If it was true then, it must be a lot truer today because it's down 20 per cent.
As much as I'd like to blame it on a faulty blowout preventer, the truth is that I failed to appreciate how political this story would get and the extent to which political rhetoric could panic investors.
Time to buy BP stock?
BP is siphoning more than 15,000 barrels of oil from the damaged well. Given its string of failures, that success should have been very good news for investors. Instead they reacted with a yawn, which quickly turned to more silent screams and panic selling.
What else has happened in the interim? Mr. Obama cranked up the tough talk. He'd fire BP's CEO. His administration is keeping its "boot on their neck." He's going to find out "whose ass to kick." The President missed his calling as a pro wrestler, much to the chagrin of investors.
The next thing you know BP is supposedly a bankruptcy candidate. The bonds are yielding 8 per cent. The cost of insuring that debt is through the roof. Matthew Simmons, a leading oil industry expert, gives the hundred-year-old company a month before it opens the book to Chapter 11. And the market value drops to about $100-billion - half what it was before the accident - until it recovers a little bit.
The political gamesmanship goes beyond tough talk though. The administration has banned deep water drilling for six months. It did so based on the conclusions of a report it commissioned, which was signed by seven industry experts. They were, according to the report, in favour of this ban.
But in fact the drilling ban recommendation was added to the report after these experts issued their recommendations - by the West Wing. And the experts were none too happy about it, but the damage is done.
Now BP is told it's on the hook for economic damages suffered by energy industry workers and companies who will be hurt by the ban, even though there is no legal basis for such punishment in the Oil Pollution Act.
Clearly the administration has an agenda, as they always do. Mr. Obama is being criticized for a lack of backbone. Worse, he has an oil slick on his face because the accident happened shortly after he embraced deep water production in the Gulf.
BP is paying dearly. The President accuses the company of "nickel and diming" locals whose livelihood has been hurt. BP isn't acting fast enough, the White House says, even though it's paid out more than 20,000 claims in the few short weeks since the accident.
And let's face it: the more BP pays, the more of an economic stimulus package the spill becomes.
BP shares are statistically cheap, notwithstanding the lasting horrors this catastrophe will inflict. As things stand, analysts peg the costs at between $30 and $50-billion (U.S.). Keep in mind that these sums will not be paid out immediately; some will take years. And the company has access to $15-billion of cash now, outside of its prodigious cash flow.
Companies going bankrupt don't have market caps of $100-billion. Their bonds do not yield 8 per cent, they yield 18 per cent.
Yes, the news could get worse. All else equal though, most analysts think the stock is a value, strictly by the numbers. But as I said earlier, politics matter.
So what do the politicians want or need? I'm no expert in these matters, but it's worth pointing out that 80 per cent of oil and 45 per cent of natural gas production in the Gulf is from deep waters. And the Gulf provides an important and growing part of the U.S.'s domestic supply. Its strategic importance was growing.
So clearly the ban is temporary. And you have to wonder if the government really wants to see one of its most enthusiastic Gulf of Mexico partners destroyed by this disaster - a partner that is also the biggest supplier of fuel to the Pentagon, for what it's worth.
Then again, not much is going to make this stock go up in the near term.
Special to The Globe and Mail