BP Drops Below £3!

Cliff D'Arcy

By

Cliff D'Arcy

Published in Company Comment on 25 June 2010

BP shares drop to 296p before bouncing back. When will BP's crash end?

It's been 66 days since the Macondo oil spill, yet there seems no end in sight to the agony suffered by BP (LSE: BP) shareholders.

Oil's not well

The day before 20 April's tragic accident, BP's share price closed at 642.5p. At this level, the oil super-major was worth £120.7 billion. Since the environmental catastrophe in the Gulf of Mexico, BP's shares have headed steadily south, barring a few brief rallies along the way.

Alas, news that BP continues to struggle to contain leaks from the Macondo well sent its shares plumbing new depths this morning.

BP crashes through £3

Early on Friday morning, BP released the latest of its daily statements on the clean-up effort. So far, the firm has spent $2.35 billion (£1.58 billion) in an effort to limit oil-spill damage near the coast of Florida and Louisiana.

This latest update sparked another round of selling from BP shareholders worried about the ultimate cost of this nightmare. At one point, BP shares dropped below £3 to reach 296p, down 9%. At this level, BP was valued at a mere £55.6 billion, or less than half (46%) of its worth on 19 April.

As I write, BP shares have bounced back from their intra-day low and currently stand at 311p, down 4.4% on the day. Nevertheless, BP's share price is testing levels not seen since 1996, with its owners caught in a 'perfect storm' of a plunging share price and suspended dividends.

When will it end?

One worry is that BP will need to raise funds -- via an issue of corporate bonds -- in order to raise cash to help pay clean-up and litigation costs. Alas, credit-rating agencies have downgraded BP's debt, and five-year BP credit default swaps hit 5.55% early today, suggesting BP's creditworthiness continues to decline.

Then again, BP's market cap has crashed by an incredible £62.3 billion since this saga began, which must be more than the ultimate cost of this tragedy. To me, BP looks a blow-out bargain today, but I thought the same thing at £4, so what do I know?

That said, fear rules the waves at the moment and, with bad weather predicted for the days ahead, BP could fall yet further.

Finally, it seems madness for US legislators, regulators and pundits to continually savage BP. After all, with a quarter of BP shares owned by US institutions and a further 14% held by US individuals, nearly two-fifths (39%) of the company is owned by Americans. This is just 1% behind the 40% owned by British institutions and individuals.

Thus, Britain and the US are sharing this financial pain almost equally.

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Comments

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LastChip 25 Jun 2010 , 7:21pm

Some Fools ridicule technical analysis and as I've written before elsewhere, it is not some panacea to answer all your ills.

But use it in conjunction with fundamental analysis and it will provide another tool in your arsenal. In particular, ignore the trend at your peril.

I suggested before to get out on the bounce at around 350p. Now you see why.

I suspect they will settle sub 300p and then they may become interesting, depending on the outcome to stemming the flow and how much longer it takes.

Never has the saying; "Never catch a falling knife" been truer.

F958B 25 Jun 2010 , 8:25pm

Although I focus on fundamentals and value, I also use technical (and emotional) analysis to help time buying decisions.

Technical analysis is useful as part of the decision making process and markets or shares can remain illogical or panic-striken for longer that you expect. The technicals may give a guide of when to buy.

But so what if you don't buy BP at the lows?
Who cares? - there are many other great companies out there with the potential to give good returns.

Find something fundamentally undervalued, wait until the emotions and technicals signal a bottom and then make your move to scoop up quality assets at low prices just as the tide turns in their favour.

Is BP undervalued?
How can we tell if we don't know how much the spill will cost and how much assets BP will have left at the end of it.
BP's net asset value has declined from $100bn to $80bn as a result of the asset sales and new debt so far.
How much more erosion of assets will they suffer?
What if the hurricane season sucks up some of that ocean-surface oil and rains it down all over the Southern USA.

Nobody knows, so nobody can put a fair value on BP shares.

I have never made much money trying to catch these falling knives and I gave up trying long ago.
As novice investors, in our early years, we all can't resist and we all get burned by one or two that we keep chasing to the bottom!
Also as novice investors, we can't resist a share at a 12-month low, believing that it must shoot back up to the 12-month highs. Unfortunately, most new 12-month lows are part of a bigger downtrend and are usually followed by a multi-month downtrend as the shares continue to fall out of fashion to even lower lows - and it can take years to return to break-even.

Just as I would not try to catch a rapidly-falling share, I would also not buy a share at a new 12-month low.

Don't be distracted or deflected from your usual winning tactics in such hasty moves.

DrFfybes 28 Jun 2010 , 1:06pm

You can do all the analysis you like on BP, technical, fundamental, even psychoanalysis, but there is only one thing that is going to settle this and that is when they plug the leak.

Until that happens no-one knows what the cost is going to be, and that uncertainty is going to keep the price down. Once the leak is plugged, there'll be a sharp rise.

Remember when Shell overstated its reserves? - the shares were hammered until the management fell on their swords and things recovered sharply. Since then they've recovered to a point where you'd think the whole sorry episode never happened.

So what if you miss the 20% on the first day? - better to do that and catch the other 80% than to get them too soon and lose another 50%.

Falling knoves have a habit of ripping holes in the bottom of your pockets.

Better to wait until they've landed.

Netherwood 28 Jun 2010 , 1:21pm

Be greedy when others are fearful springs to mind

GrahamMiller0 28 Jun 2010 , 2:00pm

The two relief wells are targetted to be ready early to mid August (last I heard). I might be tempted just before then.

54Nick 28 Jun 2010 , 4:30pm

Personally I wouldn't have the nerve to venture anywhere near BP until that oil cap is in place and functioning 100% , and to add to that because of the bad press record on Safety etc, the risk factor has increased 10 fold and will remain there for a very long time, this will further hamper growth after the debacle has subsided. I expect this risk factor will now spread to all oil drilling & research stocks irrespective wether land or sea based.

RobinnBanks 29 Jun 2010 , 1:19pm

I'll risk buying a couple of thousand if they hit about £1 a share.
They could be a five-bagger in five years time - if they don't go bust!
They should recover quickly once the well is capped, and they can afford to pay for the clean-up. They need a new media/investor relations officer though - their CEO/geologist was useless at it.
He should stick to what he knows best - geology, and sailing!
Cue Rod Stewart....'We are sailing, across the sea, over oil on troubled waters.'

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