Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

BP Eventual Bankruptcy Certain

Companies / Oil Companies Jun 25, 2010 - 10:26 AM GMT

By: Midas_Letter

Companies

Best Financial Markets Analysis ArticleThere is no doubt that BP will not emerge from this oil spill disaster intact. Make no mistake – this is the fatal black swan event in BP's life that is going to take investors by the hundreds down with the ship. Its not going to happen immediately. Much like the slow initial fall and eventual breakneck pace of collapse of a giant tree, the giant oil leak is the event that will catalyze the fall of this far flung and storied company.


Here's some food for thought in support of my prediction. I also caveat that statement with the possibility that a 'merger' or 'buyout' will be forced and negotiated out of public view to offset political carnage. Either way, shareholders and taxpayers alike will burn.

What they're still touting as the 'worst environmental disaster in U.S. history' is quickly growing up into the worst environmental disaster in the history of humanity. With the unprecedented scale and scope of this astonishing catastrophe, BP will likely not survive. There are reasons for this which are not currently part of the mainstream analysis. But the mainstream is reactive, and to some degree compromised by conflicted cross ownership of shares in both big oil and big media.

When will the actual rate of flow be known? At this point, it yet grows weekly.

What will be the long term effect of such a severe and unprecedented change in ocean chemistry within the Gulf? Might this trigger some sort of domino effect that can spread to the rest of the world's oceans? Will the Gulf become a pelagic desert?

These are questions that lurk along the outer reaches of a lot of minds of late. With BP now acknowledging that it will likely be at least August before the leak is brought under control, its share price is plummeting, and that makes the 100 year old company both a takeover target and a bankruptcy concern.

Never mind any semblance of moral imperative – this disaster has already upset the entire offshore drilling industry, and with the clamor growing around the world, you can bet that serious – and expensive – legislation curbing the industry's growth is inevitable. Besides banning offshore drilling off Alaska and the entire eastern seaboard (which has already happened), the new rules governing the procedures of exploration and extraction of offshore hydrocarbon resources are going to make the commodity and the final product more expensive. We are obviously going to see new safety requirements and probably requirements for substantial contingency funds.

But it's the legal and financial exposure that BP is going to be desperately seeking ways to avoid. Its safe to say a good portion of the days of BP CEO Tony Hayward are devoted to ducking responsibility for the event. BP's history is rife with incidents involving collusion, perjury, political interference, and other chicanery. As the price plummets further and further downward in a self-perpetuating cycle that only increases downward momentum, the company might soon cease to exist.

What does that mean for the Gulf coastline and the years of damaged economy and ecology?

Well first of all, any takeover/rescue deal of BP involving another major oil company is going to involve a negotiation with the United States government to cap the financial exposure and legal responsibility for the cleanup. The acquiring company will argue that the assets and earning power of the acquired BP assets must be unencumbered by any unknowns such as where the limit might be on the actual cost of damages. They will furthermore argue, at precisely the right moment, that the alternative is let the company go completely bankrupt, and stick the American taxpayer with the bill.

The Great Unknown
BP's scientific team responsible for evaluating and reporting the flow rate of oil escaping from the leak has been schizophrenic to date. Its gone from 5,000 barrels per day at the onset of the disaster to somewhere between 50,000 and 85,000 barrels of oil per day. (Though they now claim to be firm in their assessment of a rate of 60,000 barrels of oil per day!) That's a tremendous amount of oil. The implications for such a huge and continuing disaster are as yet unknown, and there is surely a point in the forward accounting math exercise on going at BP where two lines cross and financial insolvency results.

There will be many secret meetings among governments of the United States and the United Kingdom and BP executives. This is an unprecedented catastrophe. The future reverberations will penetrate distant markets, economies, and ecosystems, and will potentially become an economic and then political time bomb.

If BP were to fail, its contribution to the decades of ecological relief efforts that will be required will suddenly cease, and the United States government will be forced to pony up year after year after year, and that won't be an easy situation to diminish in the eyes of voters. Obama, while doing all he possibly can and setting precedents of his own, will nonetheless be remembered as the president who stuck the American taxpayer with the clean-up bill when BP collapsed. His advisors are acutely aware of this, and BP's voluntary commitment to cancel dividend payments and put up US$20 billion are designed to assuage the anxiety of shareholders dumping BP stock like an Exxon Valdez.

It is important to consider too that maybe 60,000 barrels a day is yet wrong. Maybe its more like 200,000 barrels of oil per day. At a mile beneath the sea, how do they know? What was the production flow rate of the Discovery platform before the disaster? Was it choked or open?

The Smokescreen
Disinformation, whether inadvertent or intentional, has the same effect. The public is lulled into a complacency that soon morphs into apathy. Just as roadside bombs killing civilians and soldiers alike has become such a ubiquitous news item that the horror and tragedy are now lost in the message, we grow a resignation and finally an indifference to the ongoing calamity. We can't help it…its called 'news' for a reason. Our collective attention span has a limit, and it is this limitation that thwarts us from genuinely responsible environmental stewardship.

BP and the United States government know and count on this. When BP came out with the misinformation that they thought their 'top kill' technique had been successful, shares in the stricken stock briefly rallied before news of its actual complete failure induced the resumption of hemorrhaging value.

Getting What You Pay For
BP's recent earnings proudly proclaimed a huge reduction in operating and replacement costs as it boosted profits amid flat production growth. Stories are emerging by the dozen of a cost-cutting managerial mindset that, at the end of the day, will be deemed criminally negligent. Shareholders are bearing the brunt of this eventuality now, as opposed to later.

Since the shares of BP are half owned by Americans, this is a fitting outcome. Investment in corporations as massive and far flung as BP comes with a certain exposure to financial liability that can only be mitigated by due diligence. If you look at the track record of BP's poor judgment and absence of integrity since the company's founding, you should be able to deduce that while the company has been paying fat dividends for a long time, it has also demonstrated a willingness to disregards the law and ethical conduct.

As evidence emerges suggesting shortcuts in the interest of cost reductions despite awareness of increased risk of mechanical failure, the potential for criminal charges grows. Obviously, the increase in financial exposure should this possibility become reality could be exponential. If you bought shares of BP thanks to its impressive history of dividends without performing such due diligence, you have nobody but yourself to blame.

$20 Billion is a Drop in the Bucket
Although it seems like a lot of money, the $20 billion fund pledged by BP CEO Tony Hayward as result of Obama's demand will prove wholly insufficient in the big picture. But beyond that, both Hayward and Obama have stipulated unequivocally that this is no cap. That's a horribly dangerous precedent for Big Oil, whose legal and financial obligation was heretofore limited by the Oil Exploration Act of 1991's ceiling of $75 million for oil spills.

That law has been effectively erased as a result of the statements by Hayward and Obama, though the Act's existence will likely play big time into BP's defense of civil and criminal charges.

BP's Other Woes
Besides the as yet unquantifiable exposure from civil, criminal, punitive and compensatory outcomes from the Discovery spill, there are other factors on the BP landscape that, while puny in comparison with the oil spill, still incrementally weaken the company's financial firepower. When a major foe such as BP is suddenly wounded by this black swan event, wolves circle mercilessly waiting for an opportunity to go for the throat.

The Russian – BP natural gas joint venture, TNK-BP Ltd, has been forced into bankruptcy by the Russian side, who seek to kick BP out of the deal altogether. BP has no choice at this point but to bend over and take one for the team.

The lawsuits from the New York State pension fund has just been announced. The State of Florida pension funds, who have already pegged losses on investment in BP to $65 million, is certainly observing the situation with great interest, and 5 will get you twenty that they follow suit (pun intended). What about the thousands of other investors who hold (or held) billions of dollars worth of increasingly worthless BP scrip?

The End of BP
BP's earnings in 2009 were over US$6 billion, up from $2 billion the previous year. But very tellingly, there was no growth in production over the previous year. If BP has already committed to a $20 billion fund for this year, of which over $2 billion has already been consumed in immediate cleanup and containment costs, then what's to stop the company from continuing to hemorrhage cash even as the leak gushes at 60,000 barrels of oil per day? Who can say with any credibility when the flow will be stopped? And certainly no one but no one can authoritatively predict the immense and possibly irreparable damage to ecosystems both local and far flung from the site of the disaster. The collapse of BP might not be imminent, but its eventual demise is, in my opinion, without doubt.

SOURCE: http://www.midasletter.com/..

By James West

www.MidasLetter.com

James West writes the MidasLetter at MidasLetter.com where subscribers learn about emerging companies in the junior resource sector.

© 2010 Copyright Midas Letter - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Midas Letter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

truthurtsss
25 Jun 10, 20:54
BP's oblivion? - Technical perspective

BP's long term chart is showing a huge head and shoulders top and the neckline (at about USD33.50 on the NYSE ADS) has been breached on a weekly basis for two weeks now. That, to me, is enough warning that this HSH pattern will eventuate fully.

The rush down on the right shoulder seems to be completed in a great hurry, thanks or no thanks to their Gulf woe.

In the best case scenario it seems that the price may hover here or lower and then retest the neckline of about $33.50(no guarantee, could fall short under this very dire cirumstance!) before spilling down again. The monthly chart is very ugly. My monthly slow stochastics is hovering in the mid 50s and that means there is potentially a lot of room for price spillage(pun intended).

Daily chart is of course very oversold, but that may not be of any comfort. Just ask Prechter and his boys about their frequent use(or misuse?) of the sentiment index and COT figures!

As for the price target? I didn't bother calculating as a quick eyeballing tells me it looks like oblivion..... How do you reconcile with a negative price? I don't have a clue.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in