Monday, May 3, 2010

BP Says Crews Make Progress Stemming Oil Leaks - NYTimes.com

At this writing there seems to be at least a glimmer of good news from the Gulf of Mexico - let's hope it continues.

In this morning's New York Times there was a long article about the disaster. For investors,there is a key paragraph for investors towards the end of this article that may not get much attention:

He (President Obama) stopped to speak to several fishermen, assuring them that BP would reimburse them for lost earnings. But reimbursement may be one of the largest battles to come, given that federal law sets a limit of $75 million on BP’s liability for damages, apart from the cleanup costs.

“It’s going to be extremely tricky” to reimburse fishermen and others if economic damages tally above $75 million, said Stuart Smith, a New Orleans-based lawyer who is pushing for Congressional action to amend the law. “They may not be obligated to pay more than that unless they agree to do it.”

There is a federal fund, generated from a tax on oil, that may cover as much as $1 billion in damages.

Now, if this is true, this means that the financial liability to BP is not nearly as great as the stock market drop would indicate.

In the last few days, since the news of the explosion hit the press, the market cap loss of BP stock has been over $25 billion. However, if the legal liability is $75 million, and the clean-up costs are running at $6 million a day or so (at least what I have read), then the market must be anticipating a significant change in the law.

And while that might happen, it was only last month that the President reaffirmed his administration's commitment to offshore drilling. If the President and/or Congress were to try to overturn the cap, what would this mean for future exploration activities? And would the Republicans really allow this to happen (remember "Drill, Baby, Drill" at the 2008 Republican convention?).

When the Valdez sunk off the coast of Alaska in 1989, Exxon was embroiled in countless lawsuits and legal actions for years. However, if memory serves, they did not start paying until 2005, and the total cost was less than $5 billion - not a big issue for Exxon.

Finally, BP earned more than $5.6 billion in the first quarter of 2010, up 119% from the same quarter in 2009. If the total cost of the GOM debacle runs around $300 to $500 million, it will only hit full year earnings by around 2%.

This is not to diminish the scope of this problem. BP (and Transocean, which was actually running the rig) has taken a huge hit to their reputation - deserved so, in my opinion. However, I would guess that the stock market has overreacted, and the chance to buy one of the major multinational oil companies with a 6.5% dividend yield and a P/E less than 8x will probably be eventually viewed as a buying opportunity.


BP Says Crews Make Progress Stemming Oil Leaks - NYTimes.com