Wednesday, June 9, 2010

Can BP go under? [Update!]... and a note

First: let's check on my investment advice from about a week ago:
... My bet is that BP continues to drop thru end of this week... then to rebound next week.

No - I wouldn't recommend BP as a secure long-term investment, but if you've got a few spare $$$, this may be an opportunity to cash in short-term.
The "next week" above has now arrived... what's happened to BP stock?

Yep - if you took my advice and bought BP on Monday of this week, so far you've lost about 22% of your investment!
[BUT: I am at least honest enough to check on my predictions/advice!
Jim Cramer isn't as honest as I!... in fact, I'm the only forecaster I know who routinely revisits his predictions to assess their accuracy.]

Okay - moving on: Can BP go under?
The following numbers are derived from NOAA Economic Statistics, published May 2002.
Contribution to U.S. Income,
Employment and Output
Fisheries Contributions
The economic value added to the national economy by the commercial fishing
industry was approximately $28 billion in 2000.

Total consumer expenditures for fisheries products are estimated at $54 billion
in 2000.

Approximately four million tons of fish are landed in the United States in
2000, representing an aggregate value of approximately $3.5 billion.

U.S. aquaculture sales total almost $1 billion per year, including both marine
and freshwater products.

More than 17 million Americans engage in marine fishing as a recreational
activity and spend approximately $20 billion per year on fishing related

U.S. exports of seafood products in 2000 were 2.2 billion pounds, valued at
$3 billion; the U.S. imported four billion pounds of seafood, valued at
$10.1 billion
Net contribution of Fisheries to U.S. economy: $109.5Bn.

Coastal Contributions:
Coastal and marine waters support 28.3 million jobs, generate $54 billion in
goods and services, contribute $30 billion to the U.S. economy through
recreational fishing, and provide a tourism destination for 89 million
Americans each year.

Travel and tourism is the Nation’s largest employer and second largest contributor
to the GDP, generating over $700 billion annually. Beaches are the
leading tourist destination, with coastal states earning 85 percent of all U.S.
tourism revenues. Approximately 89 million Americans visit U.S. coasts
each year.
Total Coastal contributions: $679Bn.
Total contribution to GDP: $788.5Bn.
Noting that the Gulf Coast is roughly 1/4 (25%) of the U.S. coastline (Gulf, Atlantic, Pacific, Alaska), let's estimate total contribution to GDP as 25% of the total: $197Bn.

Okay - the entire Gulf-related economy hasn't been doomed by BP's DeepWater Horizon disaster... but I'd be happy to say that for this year and next it's close to... maybe down by 30%... about $59Bn lost... THIS YEAR.
Everyone seems to agree the impact on the Gulf economy is a multi-year affair.
Let's assume next year's loss is half of this year's: $29.5Bn.
... and the year after that half again: $14.7Bn.
Okay - after that third year the Gulf is back to 90% of its pre-disaster $$$...
Making BP liable for $59Bn + $37Bn + $29.5Bn = $103.5Bn in losses.

BP's current market capitalization? $91.42Bn.
So - if BP is held financially responsible for the economic ruin it's caused - yep: BP is dead.

... and this would be a GOOD thing!
In an entirely different context:
"One of the great defects in our military establishment is the giving of weak sentences for military offenses. The purpose of military law is administrative rather than legal. As the French say, sentences are for the purpose of encouraging the others. I am convinced that, in justice to other men, soldiers who go to sleep on post, who go absent for a reasonable time during combat, or who shirk in battle should be executed..."
[General George S. Patton, Helpful Hints to Hopeful Heroes; emphasis added]
The purpose of harsh discipline in combat is NOT to correct the shirker, but to provide all others with an example!
BP's demise as a result of this human-caused catastrophe would perhaps inspire other oil companies to take somewhat more seriously safety, risk-assessment, and disaster-preparedness.
I believe the possibility that you - the oil company - might actually DIE provides much more, and much more effective, incentive to plan for disaster than any amount of government regulation - however well-enforced.
[Note: this is NOT the same as saying that government regulation is unnecessary!]

Update: BP stock crashes; oil giant trading below book value
Time for "Larry the Liquidator"!
(... a reference to Other People's Money, with Danny Devito as Lawrence Garfield, aka "Larry the Liquidator")

note: the analysis above is not quite right. The NOAA report, published in 2002, references 2000 numbers - I don't know if the $$$ are 2000 or 2002, but in either case they're worth MORE than 2010 $$$... so the analysis is conservative, in favor of BP. The true liability of BP, assuming 2002 dollars, would be closer to 1.21 x $103.5Bn = $125Bn
BP is very definitely BROKE!

... which makes the appearance of a "Larry the Liquidator" character all that more unlikely. Yes - the other Big Oil folks could pool their resources to buy BP (market capitalization less than assets)... but they'd be assuming a HUGE liability, exceeding 1.37 x price!... anybody want to buy this company???

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