Sunday, June 6, 2010

The Lynching Mob and BP

After the failure of the top-kill, the mob otherwise known as the American public has been whipped into a frenzy by media, politicians, and various misguided citizens. Though I am not an apologist for BP's actions prior to the accident (mostly because there is no clear information if negligence was a factor), I have a perverse delight in monitoring the ridiculous behavior that it has caused. So here's a compilation of some of the more irrational positions taken in recent days.

1. Boycott BP convenience stations - First, many if not most BP gas stations are franchisees, meaning they are not owned by BP but by small business owners. I was trying to find specific data from BP's 10K on the numbers of BP branded gas stations, but I gave up after 10 minutes. If I find the numbers I'll post them later. In Minnesota, Ohio and Wisconsin, BP owns none of the stations with its name on the front and that trend is likely similar across the country. Finally, while these franchises are required to purchase BP products, the actual gas is usually a mix of product from various companies (Exxon, Chevron, Shell, and so on) based on the area of the country you live in. The Department of Energy handily explains this on its website, and it makes sense. Refineries, storage stations, and pipelines are far too expensive for a firm to build exclusive yet redundant capacity. Think about how many of each would be needed if each brand of station required their own infrastructure from the well head to the customer.

2. "There are reports that BP will be paying $10.5 billion – that’s billion, with a B – in dividend payments this quarter” - President Obama on 4 June 2010
I like the way he said this statement but have yet to decide that whether its dumb or brilliantly calculating. BP does pay dividends to shareholders, currently $0.84 per share every quarter (May 5th is the most recent ex-dividend date), but it's $10.5 billion for the year, not the quarter. Since he has a number of bright economic advisors who presumably are aware of what dividends are and how they are paid, I am not convinced that this is an innocent mistake of quadrupling reality. "There are reports" seems to me a way to say something which can immediately be "clarified" at a later date while simultaneously whipping up the emotions of citizens. I also would like to point out that the NY Times ran this without clarification. Whether BP continues to pay out its dividend doesn't matter. It has a legal obligation to pay for the cleanup and all legitimate claims which it has publicly stated it will do. BP made $6B in net income during the quarter that ended on March 31st and had $12B in cash or short term investments. Though the reports of large fines and cleanup costs probably awe most people, it is actually not deadly to a company of BP's size. The bulk of the fines and cleanup costs will be paid over a long period of time, leaving BP plenty of time to save for the eventual expenses.

3. Seize BP - Robert Reich started this bizarre movement. It has since blossomed into a movement of fellow knee jerkers, including the Rev. Jesse Jackson. Beyond the insignificant matter of such a move being potentially illegal, the President already has the authority to do what Reich wants. Reich's stated reasons for temporary receivership range from "getting the truth" to making sure that sufficient resources are being used to combat the spill. As previously discussed, BP's interests are aligned with that of the government due to financial penalties so the likelihood of BP hiding some secret well stopping device seems remote. As for "getting the truth" what happened to subpoenas and the legal system that makes our country not a banana republic? Furthermore, if the US government did exercise temporary receivership, it seems likely to face the potential of getting stuck with the bill. BP would be able to argue that the government's erroneous decisions during receivership lead to increased damages.

It is probably not surprising to readers that I think BP's current share price, $37.16 as of Friday's NYSE close, is too low. I expect that given the success this weekend in containing the spill it will rise sharply tomorrow in trading. Full disclosure, this is profitable for me personally so I suppose I should continue to hope for more moments of hysteria in the coming months.

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