Gulf of Mexico Oil Spill

Two things stand out about the Gulf of Mexico oil spill: the government's fixation on spinning this event and the market's somewhat baffling response to the event.

Since the containment dome failed to work, the rhetoric from various White House officials has escalated with Ken Salazar recently stating that the government might take over the efforts to stop the leaking well. Nothing scares me more than this prospect. BP and the private sector have the best resources to complete the task, especially when compared to the U.S. government, and certainly have a powerful incentive due to the costs of cleanup and the loss of oil. Carol Browner, director of the White House Office Energy and Climate Change Policy, in one interview with CBS states "The government is in charge" then follows this up by stating the obvious, that only BP or the private sector has the technical know how to fix the situation. Thankfully Coast Guard Commandant Adm. Thad Allen has also said that he sees no need to take over BP's response. Though government involvement and leadership in the cleanup effort might be beneficial, we should all fervently pray that Ken Salazar doesn't decide to throw on a pair of swim trunks and fix the well with his fellow bureaucrats. The administration is clearly in campaign mode, but a rational observer realizes that this is not Venezuela and the President can not do whatever he would like to punish BP or any other private firm. The courts will ultimately decide the firms' liability, not the campaigning politician.

The CBS News Poll (same article as above) which finds that 70 percent of those polled disapprove of BP's handling of the oil spill is laughable. As compared to what? If you disapprove of something that implies that some better solution exists or the current process is wrong. I doubt that the 1,000 people CBS accosted during dinner have any clue as to what is happening or what a better solution is. This is about as newsworthy as reporting that most people find tornadoes unpopular.

The market seems to have overreacted with the share price of Transocean (down 39% since April 21) and BP (down 30%). While the price should certainly have fallen, this has wiped out $45 billion of BP's total market value and $11.2 billion of Transocean's. The oil spill, while devastating, seems unlikely to cost either company that much. In my opinion this represents a good opportunity to invest in either firm, especially BP with its 8% dividend yield. Transocean shares will likely recover faster since it bears limited liability in the oil spill and its rig was insured.

I won't bother readers with details but looking at the balance sheets and income statements for both companies leads me to believe that this represents a good opportunity. January 2012 $50.00 calls (for BP) can be purchased for $4.00. This allows you to purchase 1 share of BP for $50 in January 2012 for a cost today of $4. Not a bad deal in my book.