YES, says Richard Nolan
We simply don't know if the worst is over, but we're sceptical. The market likes a degree of clarity in its investments, but lack of clarity is putting BP's entire future at risk. One day we will know the leak's flow rate, instead of just guessing today. One day we will know about fines and lawsuits. Each is quantifiable and costs can be paid off over years. Investors will fixate on these announcements and may even take comfort from them. But until they're made, we're left to make investment decisions by watching seabed TV. This is risky; the more so during hurricane season.
The real risk for "British Petroleum", as President Obama is wont to call the company, is that it has become the target of an administration that is increasingly populist, punitive and running a streak of corporate xenophobia. Congressional rhetoric suggests it is thinking of ways to punish BP while protecting US companies. The US administration could argue that BP is not a good steward of its US assets. Citing safety (Texas City) or other leaks (Alaska), it could begin a process to strip BP of some of its operating licenses, or failing to renew them.
The Department of the Interior has already announced a safety initiative focusing on other aspects that may have contributed to the accident and were carried out by US companies. The changes by the Interior Secretary tacitly acknowledge that the conduct of a US company may have contributed to the spill. However, there are enough laws in the US for BP to have fallen foul of at least one or two. Congress will no doubt seize upon these and beat BP.
BP is still sound, but Macondo has become the "unknown unknown". The leak and the politics surrounding it are creating a massive, open-ended liability that could potentially see the BP we knew a couple of months ago significantly altered or even cease to exist.
Richard Nolan is oil and gas analyst at broker Daniel Stewart. The views and opinions expressed in this article are those of the author and do not necessarily represent the views of Daniel Stewart.
NO, says Christine Tiscareno
We have a hold recommendation on BP due to 1) uncertainty regarding the dividend payment, which in our opinion is financially affordable if not politically expedient; 2) uncertainty over whether the impact of the accident will get worse; and 3) uncertainty over whether BP can regain its public footing. We have therefore increased our risk assessment on the stock to our highest risk rating.
We do not believe the share warrants a sell stance, however, as the company has the cash and cash flow generation capacity to meet its obligations, operations to guarantee solid future cash flows and because we think the worst-case scenario, and more, is already reflected in the share price at these levels.
The stock has been in freefall on several occasions since the accident and may well fall further for a variety of reasons, but these, in our view, are linked to sentiment. Focusing instead on long-term fundamentals, BP is more than just its US assets. These account for roughly a third of total operations, but a lot of its medium-term growth is also going to come from Algeria, Angola, Azerbaijan, Egypt, Iraq and Libya.
Examining various possible scenarios of different levels of monetary and regulatory damages and their impact on the company's net worth excluding and including its Gulf of Mexico and US assets, we suggest BP could be worth around 640p if final costs amount to $10bn, or 590p with a $20bn bill. The company’s current $6.8bn cash position and cash generation capacity imply it can cover such figures, as well as its 2010 dividend (should it be allowed to do so). Should President Obama seize BP's Gulf of Mexico or US assets with no compensation (as we believe is possibly being reflected in current share levels), we think BP could be worth between 550p and 400p.
We acknowledge that this is a long-term and currently certainly very risky investment. BP is not for the faint-hearted. But for those investors prepared to look through the current maelstrom, we believe its value will eventually resurface.
Christine Tiscareno is an equity analyst at Standard & Poor Equity Research.
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