No reason for Abu Dhabi to take a risk on BP
Posted on 08 July 2010 with 3 comments from readers
Two years ago the chairman of Citi arrived cap in hand in Abu Dhabi and walked away with a $7.5 billion investment. The argument then was that this giant had stumbled and would recover. Well, Citi ended up being partly nationalized and is worth a tenth of what Abu Dhabi paid today.
Why then risk making the same mistake with BP? For BP chief executive Tony Hayward was in Abu Dhabi yesterday looking for an investment in BP shares which have halved and lost more than $90 billion in value since an accident on April 20 causing a huge oil spill in the Gulf of Mexico.
Speculation not investment
Of course, BP shares may prove to be very cheap now. Or it could be like Citi and they actually have a long way further to fall. This is speculation not an investment. Many hedge funds have walked away from BP. This is too hot for them.
Nobody knows what the total liability from the oil spill in the Gulf of Mexico will be. What we do know is that BP’s public image has taken a serious battering and that the US President and Congress are baying for the company’s money. $20 billion in an escrow account increasingly looks like a down payment.
BP might be too big to fail but it is not too big to eat up all its shareholders’ equity. Why get involved and take this risk for the gambler’s hope of doubling your money or losing all of it?
Oil price outlook
It is exactly the same for smaller retail investors. Besides we do not know how the oil price is going to perform over the next few years if the world enters a double dip recession, as looks increasingly likely.
If the oil price falls, as it did in the big 2008-9 sell-off then the value of shares in oil giants like BP will take a pasting. That might be the right moment to buy, if BP is still around as an independent company and not broken up or sold to a rival.
It is simply not enough to go to Abu Dhabi with a begging bowl and expect to be bailed out on some open ended promise that back us now and we will recover. BP has lost too much public trust for anybody to believe its promises any longer.
3 Comments posted by readers:
If I had a few million that I wouldn’t miss, I would buy BP shares NOW and sell them after the relief well is successful in cutting off the oil flow. That will pop the price like the first day of theTesla electric car IPO. Then get out FAST, before a hurricane storm surge can float that oil inland and bankrupt BP with hundreds of billions of dollars of clean up costs. You might make a couple of hundred grand in a few days.
I almost did that with Apple, but someone talked me out of it. It then went from $120 a share, to my goal of making $20,000 profit in weeks. Just my luck. Oh well, I would have probably gotten killed in the new speedboat anyway.
As far as Citigroup, if the economy can avoid a double dip, you could tripple your money in four years with Vikram Pandit in charge of C. I think it is too great a risk to take with the problems in Europe right now.
Investing in BP shares today despite the sharp drop in it’s share price is a riskier investment than digging to find cheese on the moon!!!
The bad news for BP is still to come. The US Government will make an example out of BP and the 20 billion that they have set aside for the cleanup will look like loose change. With China slowing down fast and oil prices on the verge of a plunge, BP will look even more unattractive.
Like I said, you would probably get better returns mining for cheese on the moon
There are many funds which have a heavy exposure to BP, it appears that they neglected prudent risk management functions for regular dividends