More Cowbell

So another post on BP. I was actually going to write this last night which would have been more timely but instead I inflicted my thoughts on my wife during a car ride. I think she'd prefer me to use this venue.

This past week brought to mind the SNL skit "More Cowbell." You probably have seen it numerous times but for me Christopher Walken is the media, demanding more cowbell, aka anger, from Will Ferrell, the President. Probably not a great analogy, but since I just spent 15 minutes watching SNL skits on Youtube, it works for me.

An article written by Andrew Ross Sorkin and published in Monday's NY Times dealbook postulated that BP could go bankrupt due to the spill. Like most Sorkin articles it lacks any factual support other than rumors circulating on Wall Street. Since every banker seems to have 5-10 hare-brained schemes in the works at any point in time, it's not unreasonable to think that somewhere in Manhattan or London some poor analyst is slaving away building a pitch book to use for meeting with potential bidders for BP's possible carcass.

Sorkin has a bad habit of latching on to trends of the moment and pulling back from them later on. On April 16th, Dealbook, of which he is editor, broke the news of the SEC case against Goldman Sachs. If the chief investment officer of one the largest public employee investment firms in the country is to believed, Dealbook published a 1200 word article with 2 minutes of Goldman being served by the SEC, implying that the story was leaked ahead of time to Dealbook for obvious reasons (such as being gullible and sympathetic). Otherwise, the NY Times should be congratulated for employing the world's fastest readers and typists. Since April 16th a number of articles written by Sorkin have begun to analyze the case after realizing that some very savy finance professionals consider the entire case a farce. Most notable was the 180 he displayed in writing this after moderating the Berkshire Hathway annual meeting and listening to Warren Buffett.

I mention all this to say that no sane investor considers BP to be at risk of bankruptcy. Indeed, Sorkin's own article closes with a quote from Robert Bryce, "Yes, BP is a financially sound now. It is unlikely to go bust near term. Instead, BP will spend the coming decades circling the drain, mired in endless litigation, its reputation irreparably damaged, and its finances weakened." This is more than a little dramatic; the idea that the possibility of a bankruptcy decades from now warrants any attention seems over done. The product BP sells, oil, is indistinguishable from any other firm's, countries have yet to produce sensible energy policies that will wean their citizens from it, and it is not a consumer product. Unlike a case of poisoned food, this crisis will not change BP's revenue, only introduce a new cost that will be spread out, according to a number of analysts, over 5-10 years and total some $30-40 billion, far less than the decrease in shareholder value over the 60 days.

Yesterday during testimony before Congress, Ken Salazar stated that he thought BP should pay damages for oil workers laid off due to the administration's moratorium on new deep-water drilling. This was re-iterated by Robert Gibbs during a press briefing. Among other things, this sent BP's stock into a tailspin yesterday afternoon when it closed at $29.20. There's a slight problem with Gibbs and Salazar's assertion, namely the legal logic due to the absence of proximate cause. The moratorium was announced because the President felt that a thorough review needed to be completed of MMS' procedures since they were "obviously" not stringent enough. BP is required to pay damages for claims where its action are the proximate cause of the loss, but here the proximate cause of the laid off worker is the President's moratorium. The President evidently felt that the scandalous behavior of MMS was a contributing factor to the disaster, but now wants BP to make whole everyone affected by his decision to fix MMS. Nevermind the 15 months in which he let them continue in their old "corrupt" ways.

My guess is this won't hold up in court, but it has a nice ring to it when spouted by the media which is the real reason for making the statement. As with most recent news, BP will continue to take accusation after accusation on the chin until the well is capped so there's little reason for substantial improvement in the short-term (witness my belief this past weekend that the share price would pop up). But for an investor with a longer time horizon, say 12-18 months, BP shares should see significant appreciation.

This morning, BP opened at $31.35, up nearly 7.3% overnight. Absolutely nothing good for BP happened in the intervening 15 hours except that the relief well probably went 30 meters deeper. My suggestion is that investors went home and realized that the President had fully transitioned from being the rational, competent leader to Will Ferrell on the cowbell. Instead of trying to weather the temporary storm of frightful stupidity in the press over the past few weeks, he has become a full fledged participant, willing to say or do anything to make the Christopher Walken shut up.

Note: I've written 3-4 posts on the cheapness of BP and overall ridiculousness of the spill. Though I've not explicitly condemned BP or postulated that they be seized so all those poor Louisianans can feel better about their beaches, readers should not construe this as being supportive of the current state of US energy policy or as indicative of my personal views on the relative merits of a large oil company. The current situation is to me a clear cut case of the market severely mis-pricing an asset, and being a capitalist, I see no problem in profiting from another's fear by purchasing at a discount and holding until sanity prevails. When it returns to a fair valuation, I'll most likely sell my position, it wasn't all that well run to begin with.