I don’t know if you kids have been paying attention, but there’s a bit of an oil leak in the Gulf of Mexico.
Oh, you’re aware of it? Great. I don’t have to spend so much time on the preamble.
Obviously, the situation down there is dire. While the efforts put forth by BP have slowed the flow of oil from the well, there is still a lot of work ahead of everyone to stop the leak, and that’s not even taking into effect the cleanup. This is an absolutely massive problem that isn’t going away any time soon.
On the flip side, BP is a massive company that makes a ton of money. They are sitting on over 12 billion in cash, and analysts are expecting the company to earn over $6 a share this year, although earnings estimates are all over the map. They have operations all over the world that will remain profitable during this crisis. It’s a high dividend paying stock that is owned by a bunch of British institutional investors, and I think sentiment has to get pretty bad before those funds are going to sell their positions.
The other thing is that BP isn’t alone in their responsibility of this crisis. Like every driller in the gulf, BP has insurance against items just like this. Thanks to the world of reinsurance, many different insurance companies will help bear the cost of this disaster. The rig that sunk was leased from Transocean Ltd. There are also rumblings that Halliburton is really responsible for the disaster, since they didn’t perform the cementing process properly.
There are all sorts of reports out there about who will be responsible for the cost of cleanup. Some are putting BP entirely responsible for the cleanup, while others are claiming that insurance will cover some or that Transocean and Halliburton will bear some of the cost. I have no idea what to believe.
That’s the crux of the reason why I’m not ready to invest in BP. There are just too many uncertainties about the stock. I don’t know whether the dividend will get cut. I don’t know who is responsible for the cleanup. I don’t know just how much longer this will go on for. Heck, I don’t even know how soon they’ll stop the damn leak. While there are always uncertainties about investing in equities, this one has all sorts of potential land mines.
And then there’s the dividend. If I was in charge of BP, I would suspend it yesterday. There’s a couple reasons for this. First of all, the company has to send a message to the world that they are completely serious about cleaning up this mess. By continuing to send money back to investors every quarter, they are essentially giving the middle finger to all the people who feel strongly about this issue. The other reason is that with all the uncertainty surrounding the cost of clean up, wouldn’t accumulating cash be a prudent move? We all know that the lawsuits are coming, it’s only a matter of when.
I’ve learned that there is usually plenty of time for buying a contrarian name. BP will continue to be judged in the court of public opinion for months, and volatility in their share price is certain. There is still plenty of room for the stock to fall and plenty of money that needs to be spent on cleanup. Until the picture becomes less cloudy, I’ll be avoiding BP. If it’s around $20 a year from now, I’ll be taking a good hard look.