The BP Share Price Plunge – What Took So Long?
Justice Litle, Editorial Director, Taipan Publishing Group
Investors sold BP shares in a panic last week, as risks came to light that were obvious a long time ago.
British Petroleum (BP) shares plunged to a 14-year low last week on fears of political fallout.
With investors seemingly deciding to panic all at once, BP’s U.S. exchange-traded ADR (the company also trades in London) tumbled 16% in one day on Wednesday. That fall cut the share price almost exactly in half, as measured from pre-oil spill highs just under $60 per share.
For us there is just one question: What took so long?
As a quick refresher, here’s what we’ve written about the spill thus far:
So far, every one of those commonsense observations is proving out. But let’s just focus on the political risk angle for a moment. Why didn’t more investors see this coming?
This stuff is not rocket science. It’s not even high school chemistry class. It’s just paying attention.
Seeing what happened to BP (in respect to the mounting risks) took about as much effort as looking out the window, seeing an elephant standing in the front yard, and then saying “Hey! There’s an elephant out in the yard.”
But apparently that’s too much to ask of Wall Street…
I mean seriously. How could the White House not go after BP? How could there not be attempts to recoup a serious chunk of the catastrophe-level economic damages to the $2.2 trillion Gulf economy?
And we haven’t even gotten to criminal charges or class-action lawsuits yet! Are investors going to be gobsmacked yet again when Houston trial lawyer Tony Buzbee and his fellow crusaders try to turn a litany of oil spill damage claims into big tobacco times 10?
It makes you wonder how efficient markets can possibly be – hint, not that efficient – when risks that are plain as day get routinely ignored… until they become headlines. Then everyone panics.
Still Getting Worse
Unfortunately too, the situation in the Gulf is still getting worse… and BP’s claims are sounding less believable by the day.
Less than two weeks ago, BP CEO Tony Hayward categorically denied the presence of undersea crude oil plumes. “The oil is on the surface,” Hayward declared. “There aren’t any plumes.”
Now we have confirmation that there ARE plumes. “The government and university researchers confirmed Tuesday,” the NYT reports, “that plumes of dispersed oil were spreading far below the ocean surface from the leaking well in the Gulf of Mexico, raising fresh concern about the potential impact of the spill on sea life.”
Defenders of BP argue that the plumes could be “natural seepage,” i.e. not necessarily a byproduct of the Deepwater Horizon spill. Scientists want to do a test comparison to confirm or disconfirm the link… but BP won’t allow it.
BP has also made efforts to shut out the media and reduce on-site journalist coverage of the worst-hit spill areas. The name of the game is spin, deny and delay.
The actual gusher from the wellhead could be worse now too. Earlier this week, BP’s chief operating officer said the flow should fall to a “relative trickle” in the near future, with nearly all the oil being captured and contained. But Dr. Ira Leifer, a scientist working with the U.S. government, thinks the flow rate of oil may have increased dramatically as a result of cutting the pipe.
“The well pipe is clearly fluxing way more than it did before,” Dr. Leifer reported. “By way more, I don’t mean 20 percent, I mean multiple factors.”
At first the flow rate was supposed to be 5,000 barrels a day. Remember that quaint number? This week BP said it was capturing 11,000 barrels a day. Oh really! The latest government estimate is 12,000 to 19,000 barrels a day. But if Dr. Leifer is right, that could be another lowball, with the true rate closer to 100,000 barrels a day.
One of the reasons it’s so hard to be sure is because BP doesn’t want the information coming out, and they have no intention of trying to help clarify things. Just the opposite in fact.
“It’s apparent that BP is playing games with us, presumably under the advice of their legal team,” Dr. Leifer said. “It’s six weeks that it’s been dumping into the gulf, and still no measurements.”
An International Incident
Want more bad news? Okay, here you go: The whole thing is threatening to become an international incident. BP is one of the most prominent companies in Britain – hence its original name, British Petroleum – and as such BP’s dividend is a lifeline for British pensioners.
The U.K. Telegraph estimates that, as far as U.K. pension payouts go, an astonishing £1 out of every £6 comes from BP. Were the U.S. government to forcibly bankrupt BP, British retirees could see nearly 17% of their pension income disappear.
So it’s no wonder there was much agitation and anger across the pond when President Obama stated publicly that he would have fired BP’s CEO were it up to him… and that he is trying to figure out “whose ass to kick.” (It remains to be seen whether this is just more hot air and political theater for the cameras.)
It’s a no-win situation for U.S.-British relations… actually a no-win situation for everyone really. And the clumsy bad behavior of BP greatly increases the odds of further political backlash.
One possibility is further spin and delay from BP as the crude oil continues to gush and gush, until finally the U.S. Navy is called in. Another possibility is a hurricane coming in and, as energy expert Matt Simmons puts it, “painting the Gulf Coast black.”
Even in a best-case scenario of “capturing and containing” the massive flow before something truly bad happens, huge lawsuits still loom.
Black Box Risk
All in all, your humble editor marvels at those who declare BP shares to be “too cheap to pass up.” There is risk, and then there is black box risk. How do you invest in something that might be a zero, with clear and present dangers present that no one can get a handle on?
Buying BP now still feels like buying the money center banks in the fall of 2008. As Citigroup demonstrated all too well, a stock that looks “too cheap to pass up” at $30 could yet be on its way to $10… or even to $1.
Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader, and Managing Editor to the free investing and trading e-letter Taipan Daily. His articles have been featured in Futures magazine, he has been quoted in The Wall Street Journal and has even contributed regular market commentary to Reuters and Dow Jones.